Graco Inc (GGG) 2005 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2005 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. To dial a number for international callers it's 303-590-3000. The conference ID number is 11028325. The replay will be available through April 24, 2005. At the request of the Company we will open the conference up for questions and answers after the presentation. During this call, various remarks may be made by management about their expectations, plans and prospects of the future. These remarks constitute forward looking statements for the purposes of the Safe Harbor provisions of the Private Security Litigation Reformat. 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 2004 Annual Report on Form 10K and it's most recent 10Q. As a reminder today's conference is being recorded, Thursday April 21, 2005.

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

Good morning, welcome to everyone. Dave Roberts and I are here this morning to review the first quarter results and take your questions. I'll start out just by giving a couple of the highlights and then we'll open up the call. First of all, in the quarter we had again, pretty strong, underlying growth in all three of our business segments. This was our twelfth consecutive quarter where we had revenue growth, and it was also the seventh consecutive quarter where all three of the segments reported revenue gains.

Our total sales were up 70 - - or 27% in the first quarter. They came in at a record $170.9 million, and without acquisitions our sales were up 16%, really as the result of pretty strong organic underlying growth. The revenue associated with the acquisitions was about $15 million in the first quarter. To take a quick look at the - - where the 27% growth came from, by segment in the Industrial/Automotive segment, their sales were up 39%, or 15% without acquisitions. The Contractor business was up a very solid 15% and Lubrication was also up a very strong 20% in in the first quarter. For the quarter, the earnings were up 21% and that includes the additional expenses that we noted in the release that were associated with the acquisitions.

I will just talk briefly about each of the segments here in the quarter. First of all, in the Industrial /Automotive segment, again sales were $87.9 million, which was a 39% increase over last year. Demands remained very strong throughout all of the regions and across all of the major product categories in this business. In fact, all four product categories experienced revenue increases in the first quarter, without giving affect to the acquisitions.

In the Americas, Europe, and Asia, sales were up 17%, 15%, and 11% respectively before acquisitions, so again good double-digit growth in all three of the geographies. Our operating margin in Industrial/Automotive was 25% of sales in the first quarter, compared to 32% last year. And this decline was entirely due to the impact of the acquisitions in that business. Operating profits were up 8%, versus last year's first quarter; again reflecting the impact of the acquisitions. And finally, in summary, in this business, we did continue to see very strong demands, throughout the quarter - - throughout the quarter in its entirety, across all the categories of the products and all the geographic regions.

We next look at our Contractors' segment. The sales there were $67.8 million. They were up 15%. In the Americas, they were up 14%, and we experienced growth in both the Home Center channel, which was up about 18%, and the Paint Store channel, with was up about 13%. In the Pearled[ph] Paint channel, sales were strong particularly in the southern regions of the United States, and in the home center, sales were also strong in the Southern regions of the U.S. The home center was also aided by our rolling out of texture spray units in over 600 Home Depot stores in the first quarter.

In Contractor in the Europe market their sales were also higher. They were up about 27%, with strong increases in really all of the product categories throughout all regions, but especially in the Middle East, Eastern Europe, the Netherlands, Spain, Portugal, Germany, and France. The team is focused on end-user conversions and adding new distributors for the Contractor products in Europe. As you would expect, operating profit margin in the first quarter was also up 22.3% versus 20.2%, and operating profit dollars grew 27% last - - versus last year's first quarter.

Next, looking at our lubrication segment, the sales there were also very good, $15.3 million, up 20%. The business, again, experienced strong growth in all the categories, all the product categories, with double-digit increases from last year's first quarter. In particular, our new Mini Fire-Ball Pump added sales and profits in the quarter. And also worth noting, we mentioned in the release, that our Matrix product was released right at the end of the first quarter. There really was no revenue impact for Matrix in the first quarter, but it is available for sale. And we're looking for that to contribute to sales in the coming quarters. The operating margins and lube were very good at 27.5 percent, up from 23.5 percent last year, and that really reflects the higher sales and flat spending versus last year. This led to, also, an increase in operating profit dollars of about 40% versus last year's first quarter.

Taking a look at the business as a whole, the gross profit margin for the first quarter expressed as a percentage of sales was 50.2%. That compares to 54.4% in the same period last year. As we discussed in the press release, about 300 basis points of the decline here was the direct result of the acquisitions, and that's made up of adjusting the acquired inventory upward from its cost to fair market value, as well as the impact of the lower gross profit margins of these acquired businesses. Also, as we said in the release, it's anticipated that the gross profits of these businesses will improve in the second half of the year. In addition to the impact of the acquisitions, the remaining difference in the gross margin from last year was really a combination of a lot of different factors, including the mixture of the products that we sold, with higher Magnum-type sales in the Home Center channel, and slightly higher manufacturing costs.

If we look at the operating expenses in the first quarter, our operating expenses, as a percentage sales were 26.1% in the first quarter versus 29.6% last year. Despite the fact that the acquired businesses have higher expenses as a percentage of sales, then the traditional Graco businesses we were able to get leverage on the rest of our businesses and experienced good progress on the operating margin as a result. Operating expenses in the businesses, excluding acquisitions, were virtually flat, while revenues increased 16%. So, after giving affect to the acquisitions, operating expenses were up 12% on a 27% sales increase. Our tax rate in the first quarter was 33.5%, that's up from the 32.4% last year. This is really due to the fact that we have some tax credits that are having a lower impact with our higher earnings, as well as we're paying a little bit more in state taxes as a result of the acquisitions.

Some other items, first quarter cash flow from operations was $25.8 million. Some of the significant cash uses in the quarter include acquisitions of about $103 million, dividends of $9 million, share repurchases of 7 million, and plant property and equipment additions of about $4 million. It's also worth noting that our accounts receivable are higher then at year-end. They're at $121 million versus 109. Virtually all of this increase is due to the acquisitions. Similarly, with inventory, their inventories are higher than at year-end. They're at 63 million versus 40 million. And about three quarters of that increase was due to acquisitions, with the rest just the result of higher stocking levels to meet our higher sales demand.

So, in summary, Graco had a good first quarter. 27% increase in sales, 21% increase in net earnings. Again, the business really was strong across all segments in geographies. We have not seen any apparent signs of weaknesses. The businesses that we acquired, we expect to begin to contribute to earnings in the second half of the year. These businesses are currently contributing to cash flow, and we're excited about the prospects of being able to improve their profitability as we move forward in the coming quarters. This concludes the prepared remarks.

So, at time I'd like to open up the call for your questions .

Thank you, and ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] One moment. And our first question comes from Ned Armstrong. Please state your company name followed by your question.

This is Ned Armstron with FBR. Good morning gentlemen.

Hi, Ned.

A couple questions; one, you mentioned, in your press release that you see opportunities to improve the profitability of the companies that you've acquired.

Right.

Do you think that you can ultimately get those margins up to traditional or current Graco levels, or is there something about the businesses that might prevent that?

Ned, I think the Gusmar acquisition, there's no question that that can be eventually be running at Graco-like margins. Liquid Control I think they - - they will have very good margins. I don't know yet if they will be running at Graco-like margins, though. We're still working on that. But, our experience certainly in that the fast-set foam business in the other Gusmar businesses, I think tells us that we've got a real good opportunity there to improve profitability of that business.

And what time type of time frame do you see it taking to get the margins up to the levels that you anticipate?

I think we're probably looking at 18 to 24 months or so before we would start to see that.

Okay, and I'm - - I'm estimating that they're operating margins now are somewhere in the low to mid-teens. Is that in the ballpark?

Yes, I think so. I haven't looked at it time from that standpoint. But, it - - that's probable.

Okay. And then, another question I had, regarded the borrowings that you made to, I - - I guess help finance these acquisitions. What rate were those borrowings at?

The LN[ph] rate, Ned, is right around 3%.

Is that something that you had anticipated terming out, or you just going to carry it as a current liability.

It's a current liability under revolving credit, so it's a floating rate. And it's, something that we'll probably be paying off relatively quickly, I would expect, with our cash flow.

Okay, thank you.

Yes.

Thank you. And our next question comes from Mike Schneider. Please state your company name, followed by your question.

Hi. It's Mike Schneider from Robert Baird. Good morning, guys.

Good morning, Michael.

Well, first congratulations. Amazing strength globally and across each of your sectors. It certainly bucks the trend right now.

Thanks..

I guess, first, on amount gross margins, understandable about the purchase accounting adjustment. The 120 basis point reduction in gross margins [inaudible] acquisitions, I guess somewhat of a new element in the Graco story, because we don't see declines in gross margins. Can you dig in a little deeper and tell us basically, what the unfavorable mix is? Is it all Home Depo Magnum business? Or is there anything else going on in some of the other segments?

Mike, - - I'm - - let me just give you some color, and then Mark can probably take you maybe through with some numbers. Certainly the higher value of Magnum had an impact on us this year. But, there are two other elements that impacted gross margins in the quarter, that frankly, I think that once we get out to mid part of the year, we won't see those. First was the building of a new plant in China. There's some expenses that flowed through cost-of-goods-sold, that had a negative impact on us. Obviously, we're not producing anything out of that facility yet. So they won't - - it won't be able to help us until we get it up and running.

And the other is, we're moving one of the focus factories out of Riverside facility here in Minneapolis and moving it to Sioux Falls. And that, you know, there's expense associated with that that had a negative impact on our - - our gross margins. Now once it gets moved into Sioux Falls, it certainly will be operating - - at probably a higher efficiency from a margin standpoint eventually, than what it was here in Minneapolis.

I don't have anything to add.

What about the manufacturing side, though, Mark? I've never heard you cite higher manufacturing costs - - I shouldn't say never, but certainly not in many years - - cite higher manufacturing costs as a source of pressure. What was it specifically this quarter.?

Well, you know, Mike, we did a great job managing those costs. As everyone knows last year, however, as we went through the year, our costs, from things that we buy on the outside were going up. And we were really offsetting those with a lot of the productivity improvements and the volumes through the factories. And as you start to anniversary some of that stuff, it becomes, you know, you start to see the-full year impact in the first quart is pretty - - it's probably more significant because in the first quarter of last year, we really weren't seeing a whole lot of increases yet. So, I would expect that as we kind of work through the year, here, those comparisons will get a little bit easier for us. We did do a lot of things in the factory to offset a number of those costs. But they are still there, and they they are causing our manufacturing people to have to work harder to try to offset them, and generally speaking they're doing a pretty good job with that.

With regard to the total decline in gross margin, and the manufacturing cost impact of it, is the lowest element of the things that we talked about in the release. Probably the biggest items are just the overall mix in the products that we sold, both in the Contractor and the Industrial division.

So, gross margins for the year now, when you look out, do you expect gross margins? I don't know if you can do the math in your head, but X the acquisitions, will gross margins be up for the year?

Gross margins, X the acquisitions, I would feel pretty comfortable that they shouldn't deteriorate, which is sort of what we saw here in this quarter. Whether they will actually go up, I'm not prepared at this point to really give any kind kind of guidance on that. The acquisitions will have an impact on the numbers that you see, because the businesses that we bought have lower gross margins, obviously, than the Graco.

Right. Right. Okay. And the purchase accounting write-up was 3 million. That will be a equivalent amount in the second quarter?

Correct. As we work off the inventory, that should - - we think it will be completely flushed through by the end of the second quarter.

So, thereafter, in the second half you're relieved of that pressure entirely.

Yes. Yes. And the only thing left then, you know, in terms of purchase accounting related items are the amortization, which again, it should be about a $4 million expense on a 12-month basis, so roughly $2 million in the second half of year.

And on pricing then, on the flip side of this discussion, we had talked in past quarters about the fact that you really hadn't been aggressive on price, if at all, in 2004, and you were going to go out in 2005. What have you done so far and what's yet to roll through?

We did increase prices, primarily effective February 1st. You know, there were some agreements that, allowed the customers to buy ahead. But, actually, we didn't see a lot of that. So we started to see the price increase at the latter part of the quarter and we'll see it really take hold, the start of this quarter and through the rest of the year.

Okay. And, any quantity or figures that you can put around that?

You know, unfortunately, it varies by division. I mean.

Variance by division.

It would be difficult for me to tell you will exactly what the effective price increase is going to be.

I think we'll have better data probably at the end of Q2, Mike, in terms of how much of this is actually going to thick.

Presumably, though, they are low single digit?

Yes.. That's correct. But, again, at this point we don't have enough data really to say how much of it is actually going to be realized.

Okay. And can you update me on the mix of Contractor revenue between what you think is residential versus commercial at this point?

You know, again, that's a tough one for us. As you know, because we sell through these third parties. And when we sell a paint sprayer to Sherwin-Williams, we're not really sure where it winds up. It could be residential and it could be commercial. , our sales guys tell us that they think the commercial piece is somewhere in the 15% range.

Okay.

The total. But, again, I don't have hard data to back that up. But that's probably the best data that I can give you.

And, Commercial signs are abundant that that market is picking up, and you guys, apparently have seen it as as well. What does it mean if residential begins to plateau and commercial begins - - continues to accelerate? Given that it is a small portion of the mix, do you see a gross margin benefit over all, or is it a case where it probably just gets lost in the wash.

Mike, I think, as you said, it's a relatively small component of a total, but certainly those units we sell into commercial have higher margins on them.

Yes.

I think you would see a small positive impact if commercial picked up, and residential plateaued, but I don't think you would see a dramatic change in the margin or the mix. Final question, I'll get back in the line. It's just the texture sprayer rollout, do you have any idea what that contributed in the quarter in terms of revenue, and maybe what upfront costs, that that actually imbedded in the quarter as well. Mike, it actually started that the - - in the third - - or I'm sorry, in the fourth quarter of last year. We rolled out to 400 stores last year and then 600 this year. Now, there will only be 1,000 stories. So the rollout is complete. I really can't tell you the incremental cost associated with it, or the percent of mix in what we had done in the Home Depot.

It's not big numbers though.

Right.

It's not big numbers, though. It's not like when we rolled out our Magnum line, because in a lot of cases the departments are only going to pick up one of these units Okay.

Versus stalking a lot of inventory.

But the channel fill is complete, and the rollout expenses are, presumably, done?

Yes. And it's good business for us too. It gives us another aisle to be in at Home Depot, which we like.

Okay, thanks again. Thank you. Our next question comes from John Franzreb. Please state your company name followed by your question

Well, a lot of my questions have already been asked. But, can we dig in a little bit to the Lubrication side of the business, Dave. And what's your confidence in the current revenue trends that is sustainable for the balance of the year.

Hi John. I mean we're growing at 20%. Frankly, I feel like kissing Pat Mccould[ph] because they have done a phenomenal job in the growth of that business. What really has happened is that these new dealerships, and they continue to build dealerships at high rate, and they're putting in Graco equipment in those new facilities. We think that trend will continue throughout this year. And we think that Matrix, which we didn't have in the first quarter, will actually end up, you know, helping us as we go forward. I think 20% is high. Like I said, they just did a phenomenal job in the first quarter, but I would hope that we would be somewhere in the area where we were last year.

And regarding Europe, we see an awful lot of weakness coming out of there. Can you kind of discuss why you are having such favorable results on the continent?

What we did, during the downturn in 2001 and 2002, we were actually adding sales people in the developing areas of Europe, primarily from the contractor's side of the business, and, you know, our growth continues - - Spain, I think - - and I'm trying to remember the number here - - was up 28 or 29%, from a contractors' standpoint this quarter. You know, and the other areas of southern Europe continue to grow. We've had good success, also in Germany, this quarter. Germany was actually up for the first time in a number of quarters, on the contractors' side. So we're seeing some positive signs coming out of - - out of Germany, as well.

France is our biggest country from a contractor - - from the contractor business side. And, they continue to do well. We see no signs that it's a - - that it was just a one-time spike. We have got some real momentum going there, and I think the people are the - - the investment that we made in sales over the last couple of years are really starting to pay off. The Industrial business continues to be strong, in most areas of Europe.

You know, Eastern Europe is certainly doing well. The Middle East continues to do well for us. We've seen nothing that indicates that Europe will slow down from either our Contractors' side of our business or our Industrial side of our business going forward.

Now, Dave, is this broad-based strength. Is this the reason that you, you - - In your press release you said business remained at record levels, heading into the second quarter with no apparent signs of weakness. That's almost an unusually bullish statement coming out you guys.

It is.

Keep in mind, though, one of the things that you have to be concerned about with Graco, not so much concerned, but our visibility into the future is only about a month. Our backlog generally runs at less than a month of sales. But you know our information primarily comes back in from distribution. And I can tell you will that most of our distributors are very upbeat on what they see going forward from a project standpoint.

Okay, good job. Thank you very much guys.

Thank you, and our next question comes from Charles Brady. Please state your company name followed by your question.

Hi Bernie[ph], it's Southcoast Capital. Good morning, guys.

High Charlie.

Can you just on the Contractor side of the business, back to Mike's question, on the mix between reved and nonreved[ph], has the percentage of residential increased and would you expect that the commercial side to - - with the acquisitions you've done is to start making more of a meaningful impact into that? I always thought that residential construction was about roughly two-thirds of that business, with commercial around a third. But, it sounds like maybe it's - - residential is a little bit higher than that. Is that just - - it's increased because of strength in residential market in recently.

Well, I think - - I think it's a number of things. I think the residential market continues to be very strong. I think our people have done a great missionary work, not only in north America, but outside of North America in growing that business. We've got a - - in fact, we've got a team this week in India, trying to create the market for spray in India. China we have been working on. Obviously, Asia, we've had tremendous success outside of China itself in Asia, particularly in Australia, where the contractor business continues to grow. As Mark said earlier, it's very difficult for us to determine where a sprayer goes, primarily if the - - the reason is is that the contractor isn't doing a residential project, he's bidding on a commercial project. So, they really don't differentiate themselves by marketplace, being, either the commercial marketplace or the residential marketplace. The only thing that we use, Charlie, when we said about 15% going into commercial, we know that, our gas hydraulic units are generally used for high volume jobs. And that's what we are looking at when we about 15% going to commercial.

Okay. Thank you very much. Can you just talk about deal pipeline out there, and sort of what you are seeing and, what are the prices looking like? Have you seen a ramp up in prices so the kind of companies that you are looking for?

I think we talked about it last year and weep haven't seen any change. Is that certainly the financial buyers are more aggressive - - and they're, in fact, from what we can tell, they are paying prices for businesses far above what a strategic buyer would pay. But there are still businesses out there that are available at reasonable prices, and we will continue to pursue those.

Okay. Thank you very much.

Thank you and our next question comes from Matt Summerville. Please state your company name followed by your question.

Matt Summerville, McDonald Investments. Couple questions. Mark, what were the effects benefits in each of the businesses, net and total for the quarter?

I don't have them by business. But the top line was about 2%. And in terms of net earnings, it was about a million bucks.

And then, Dave, if you could comment a little more with just in Industrial Automotive, similar to the way you did, in Contractor, in terms of what you're seeing in Western Europe. I mean, are you starting to see any strength in the IA business in either France or Germany at this point.

No, I think France and Germany are still relatively weak industrial markets. You know, my take is there's not a lot of investment that's going on, in certainly new capacity in those two countries. That's primarily occurring in Eastern Europe. What we are seeing in France and Germany are primarily replacement parts or pieces of equipment that are going in, it's worn out, they have to replace it and just to maintain the capacity they have today. We don't see any strength at all or any indication that the German Industrial market or the French Industrial market has turned the corner and is getting any better.

Are you seeing it getting any worse in those areas.

No, not really. If you look at the business we've had a little bit of growth in our Industrial business in those two areas, and I think that, you know, it really is an indicator that it hasn't, it's not slowing anymore, but I don't think it's growing very fast.

Okay. And then maybe, Dave, can you talk about with respect to both liquid and Gusmar, where you are with respect to acquisition integration and what exactly is involved in folding these businesses into Graco, over the, you know, in year one, your're '05, and then in year two '06 keeping in mind that 18-24 month horizon.

Right. We haven't really - - I mean we have got plans on the books. We haven't really announced them to our employees yet. So, I think that we would be remiss, on a conference call talking about what we are doing there. I can tell you that we have some activities underway that will help us with some of what we call our heated hoses. We think we have got an opportunity there to save a significant amount of money by having Gusmar manufacture our heated hose product. There's some spray gun manufacturing synergies that we can do between the two businesses. And when I say that Gusmar and Graco, there are obviously pumps that Gusmar was buying on the outside from a competitor that will be able to put Graco pumps in those applications. There are a variety of things that, frankly, make us very excited about the Gusmar acquisition. There's - - we think there's tremendous synergy there as you go forward. It's going to take us a couple of years to get there.

And on a pro forma basis, what did the revenue growth look like for both Gusmar and Liquid during the quarter?

They were in line with our expectations, Mat. And we're not going to break them out separately.

I guess what I'm trying to understand, Mark, is if those businesses are growing as fast as your core business. I mean you're up 15.

No, yeah, again, I don't feel like we should should be breaking those out. It's way to early in the game to be tracking percentages and growth rates of those businesses. We've only owned them for a few weeks. We've had Gusmar for, what is it, seven weeks now. And then Liquid Control for 11 weeks, so- -

If you loop at the contractor business, and that 15%; how sustainable is that as you move through the year? And then also, you didn't mention the in-store service initiative, which you obviously paid a million bucks for in the fourth quarter. Where is Home Depot with the rollout? Are you benefiting from that? Are you not benefiting from that? What does that mean to Graco, right now? Yes, SSI I think is still too early, but frankly, I'm, I'm very positive on that change. I think that we have spent a lot of time, when I say we, our sales force has spent a lot of time training the new associates that will be doing, or conducting the ISSI initiative in the stores.

So, we haven't seen anything that would indicate that it has hurt our business, let's put it that way. In fact, if you look at the overall sales out of Home Depot, you have to suggest that perhaps it's helped the business. You have got somebody in stocking shelves, cleaning shelves, and they only have responsibility for two stores. So, I think it - - long-term I think it will actually help us. What was the other part of the question? ? You know you grew 50 - - you know, you were up 17 in Q4, and 15 in Q1. I mean, how sustainable is this double-digit growth in this business this year?

I, I mean, obviously we don't project what the businesses are, but it's still been all indications are that it is still a very strong business, and I truly believe that some, as I said earlier, our missionary activities really will help us grow this business outside of North America.

How much of the growth do you think you're seeing in Industrial/Automotive, or Lubrication, for that matter, just given that they're all kind of 15 plus. Do you think it's market share related versus market related, and versus growing your distributor ships.

You know, I honestly don't have a good feel for that. A lot of it has to do with placing distributors in developing areas of the world. We've got some very good distributors selling our product, and in North America and Western Europe, today I think they're having some good success. I really can't answer that question any other way.

Okay, great, thank you.

And our next question comes from Mike Snyder; please go ahead.

Hey guys, just to follow up on Asia. Ironically, Asia is actually the laggard of the three regions this quarter. I realize comparisons are getting tougher there. Any unusual activity out of Asia?

I think really what - - what really has surprised us, Mike, is that, I guess it really isn't a surprise, if you pick up the newspapers and read it; but the slowest grower in Asia today is China. Now, obviously the comparisons have gotten more difficult. They have grown that that thing at 50% two years ago. 33% the following year and then I think it was 20% last year. So the comparisons are tougher. But what is happening is that the Chinese automotive market has really slowed down significantly, from capacity expansion.

I was - - I had read an article the other day that, the automotive companies last year, on average, had a gross margin of 22% in cars being sold, today it's 7%. So they're battling each other from a price standpoint to really capitalize on what vehicles are being sold. And, also, which I didn't realize, is that 90% of the cars in China, I was reading the other day, is that they go into either taxicab fleets or into the China - - or the Communist government. And what they do is, when they want to low down growth they just stop buying cars. And I think that really is what's impacted that, that marketplace. I think it's short-term. You know there's still a lot of people that want cars. And I think that's really what's happened in Asia.

If you look at the rest of the companies in Asia, we have got great growth. Coming out of all of them, including Japan, which really over the past number of years has not been a great market for us. You know, the guys there have done another great job in being able to grow that business.

So, in terms of the Chinese automotive though, those are long lead-time products that you're spec'ed[ph] quite aways in advance. Did you anticipate this slowdown? Or- -

Well, we started to see some signs late last year that they were going to start postponing. But, really, we really started to see stronger signs or cancellations of projects as we got into the first quarter.

Okay. And is that the only part of Asia you're really concerned about?

At this point yes. Everything else, as I said, is up double-digit and I think China is the one that has really, has slowed more than we really anticipated.

Has Contractor held up in China?

It has, but it's such a small component of the sales, Mike. We're still missionary work, trying to grow that business. I was in Beijing a week ago. We had another painter event. A lot of interest in spray equipment. And, but, still a very small component of our total business in Contractor.

Okay. Thank you.

Thank you. And our next question comes from Charles Brady, please go ahead.

On the home center growth of 18%, can you quantify how much of that was due to the texture rollout?

I think somebody asked that, or at least asked how much of the sales were texture related. We don't - - we can't give you the number. But as I said before, it's a pretty small component , because even though we rolled out to 600 stores, they are basically, each store takes about one spray or something like that. So it's not a huge piece of it.

Just on a housekeeping standpoint, Cap-Ex, do you have any expectations for the rest of the year? Any changes there.

No changes other then we will have this additional amortization associated with the acquisition which I think we broke out in the release.

Yes, okay. Thanks.

Thank you. Our next question comes from Matt Summerville. Please go ahead.

Hey Mark, corporate expense is down pretty significantly versus last year. Can you talk about that, and then what you would expect that number to be for the full year? And then whether we should continue to use that 33.5 tax rate for the balance of the year too

The Corporate expense line in the quarter was really impacted by a couple of things. One, last year we had a foundation contribution of about a million dollars that was in that line. And this quarter we didn't have any. Secondly, last year we had some costs associated with demolishing our main plant facility here and some IF costs that really made up the remainder of the expenses there, and of course this quarter we really didn't have any of that stuff. The other thing that we did is we reclassified the amortization expense associated with acquisitions out of the corporate expense line and up into the division so they have better visibility on what the impact is to their P&L. And that was about, you know, you see that in our numbers. I think it was about $600,000 that got moved up into the business units. In terms of going forward, you know, the corporate - - the corporate - - unallocated corporate expense line, I think, with the reclassification of intangibles will really include what I would call corporate initiatives, that if we decide we're going to make some incremental spending, we'll break those out and talk about them separately, including things like the charitable foundation.

Right. And then on the tax rate, Mark.

On the tax rate, I think that, at this point, that's probably a decent rate to be looking at. There may be some potential for some benefits there as we go through the year here. But, for planning purposes, I think somewhere in that, in that 33.5 range is probably decent.

Okay. Thank you.

Thank you. Ladies and gentlemen, if you have an additional question please press the star followed by the one . At this time I show no further questions. I will now turn the conference over to Dave Roberts.

Okay, gentlemen, I would just like to thank you for attending the conference call, and actually we look forward to the next one.

Thank you. Ladies and gentlemen, this concludes the Graco Incorporated first quarter 2005 conference call. If you would like to listen to the replay of today's conference, you may dial 303-590-3000 or 1800-405-2236 and you will need to enter the access code of 11028325 followed by the pound sign. Once again, thank you for participating in today's conference and at this time you may now disconnect.