Graco Inc (GGG) 2005 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter, year-end 2005 earnings conference call for Graco Inc. If you wish to access a 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 11050783. The replay will be available through February 3rd of 2006.

At the request of the Company, we will open the conference up for questions and answers after the opening remarks from management. 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 purposes of the Safe Harbor provisions 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 Exhibit 99 to the Company's 2004 annual report on Form 10-K and its most recent 10-Q. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Mark Sheahan, Chief Administrative Officer. Please go ahead, sir.

Thanks, Mary. Good morning, everybody. I am here this morning with Dave Roberts and Jim Graner, our Chief Financial Officer.

I am going to start off by running through some of the quarterly results and then we will open up the call for your questions.

First of all, some overall comments. Again, we have experienced underlying growth in all three of our business segments this quarter. This marked our 15th consecutive quarter of revenue growth over the prior year's quarter and the tenth consecutive quarter where all three segments reported revenue gains.

Sales were up 15% in the fourth quarter. They came in at a record $185.6 million. Acquisitions contributed to 11 percentage points of that 15 percentage point increase. The 15% increase in the fourth quarter can be summarized as growth in Industrial/Automotive sales, which were up 26% in the quarter. 24 percentage points of that increase was from acquisitions; growth in the Contractor Equipment segment -- sales were up 4% in the fourth quarter; and growth in Lubrication -- sales were up 13% in the fourth quarter.

It was noted in the press release that last year's fourth quarter included 14 weeks of activity versus this year's fourth quarter, which only had 13 weeks. If you compare the two periods on an equivalent basis, i.e. if you adjust for the extra week last year, currencies and acquisitions, fourth quarter sales for the three divisions were higher than last year by approximately the following percentages. Industrial/Automotive was up more than 10%, Contractor was up more than 10%, and Lubrication was up more than 20%. So, again, very strong underlying organic growth for all three segments here in the fourth quarter.

For the quarter, our net earnings and diluted earnings per share were also up nicely. Diluted earnings per share was up 17% -- I'm sorry -- was up 18% and net earnings were up 17% in the fourth quarter.

Next, I will touch briefly on the three segments and how they performed in the quarter. First of all, the Industrial/Automotive Equipment Division reported sales of $97.4 million, up 26% versus last year. Again, (technical difficulty) acquisition sales were up 2%. Growth was experienced both in Europe and the Americas.

On a global basis without acquisitions, three of the four major product categories -- processed, protective coatings and finishing -- are up on a year-to-date basis. Sealants and adhesives is down slightly due to lower automotive sales, particularly in the Asia-Pacific region.

Fourth-quarter operating margins for Industrial/Automotive was 28.8% of sales versus 31.1% last year. Year-to-date operating profit margin was 26.8% versus 31.7% last year. Excluding the impact of acquired businesses, fourth quarter and year-to-date profitability in the Industrial/Automotive Division was higher than last year. Year-to-date operating profit dollars were up 13% on an absolute basis.

In summary, we continue to see solid demand in the Industrial/Automotive Equipment Division this quarter across the major product categories and geographic regions. Business tempo remains good heading into 2006.

Next, I will touch briefly on our Contractor segment. Fourth-quarter sales of $72.6 million were up 4%. In the Americas, sales were up 3%, driven by growth in the home center channel. New product sales on the professional contractor side continued to do well. They were led by the GMax Sprayers, our new 390 and the Mark V texture unit.

Sales in Europe were also very pleasing, were up 9%, with increases in all the product categories throughout most of the major regions in Europe. Sales were up 16% on a constant currency basis. The team in Europe is focused on end-user conversion, new distribution and new products, and these efforts are paying off.

Operating profit margin in Contractor in the fourth quarter was 23.9%; compares favorably to last year's fourth quarter, which was 20.3%. On an absolute basis, operating profit dollars grew [23%] versus last year's fourth quarter. Year-to-date operating margin for the Contractor division is 25.4%. That is up 100 basis points from last year. On a year-to-date basis, the operating profit dollars were up 14%.

Next, looking our Lubrication segment, fourth-quarter sales for the Lubrication Equipment Division were $15.5 million. That is up 13% from the same period last year. Year-to-date sales are up 15% from last year. The business continues to experience sales growth in all product categories, particularly in North America.

Fourth-quarter operating margins for Lubrication were 26.4% versus 19.7% last year. Year-to-date operating margins were 26.4% versus [22.8%] last year. And operating profit dollars were up 32% from last year. Very strong results.

Next, looking at the Company's overall gross profit margin. Fourth-quarter gross profit margin was 52%. That compares to 54.6% last year. Approximately 160 basis points of the difference from last year can be attributed to the impact of acquired businesses. The remaining difference is due to the unfavorable impact of currency translations and higher manufacturing project spending that is expected to improve our factories' efficiencies in the coming year.

For the year, Graco's gross profit margin was 51.8% versus 54.3% last year. Approximately 200 basis points of the difference from last year can be attributed to the impact of acquired businesses, with the remaining portion due to the aforementioned higher material costs and spending initiatives.

Reviewing operating expenses in the fourth quarter, the operating profit margin was 26.2% versus 24.8% last year. The 2005 operating profit margin was decreased by 240 basis points as a result of acquired businesses. For the year, operating profit margin was 26.1% versus 26.7% last year.

The 2005 full-year operating profit margin was decreased by approximately 300 basis points as a result of the acquisitions. The operating profitability of the acquired businesses has improved throughout the year and they actually contributed to net earnings in the fourth quarter and have been contributing to our cash flow for some time.

Operating expenses for the year were $188.3 million versus $166.9 million last year. Acquired businesses contributed $24 million of incremental operating expenses in 2005. Despite higher product development spending, operating expenses without acquisitions were lower than last year, driven by a reduction in selling, marketing and distribution expenses primarily.

Our tax rate for the quarter was 33.6%, which is similar to what was experienced for the first nine months of the year. It should be noted that for 2006, we are expecting a tax rate to be somewhere around 75 to 100 basis points higher than next year, driven by lower business credits.

Some other items worth noting, year-to-date cash flow from operations was strong at $153.2 million; that's up 25% from the same period last year. The significant uses of cash in 2005 included acquisitions, dividends, share repurchases, property, plant and equipment additions.

At the end of the year, we were in a net cash position of about $10 million. Our free cash flow, which is defined as cash flow from operations less capital expenditures, was $132.5 million versus $103.6 million last year, or a 28% increase.

In summary, Graco had another record quarter. It was our 15th consecutive quarter of sales growth versus the prior year and our 16th consecutive quarter of net earnings growth. The business was generally strong across all segments and geographies again this quarter, with good tempo as we head into the first quarter of 2006. The businesses that we acquired began contributing to earnings this quarter and continue to contribute to our cash flow.

This concludes the opening remarks. I would now ask Mary to open up the call for your questions.

(OPERATOR INSTRUCTIONS). Your first question comes from John Franzreb. Please state your company name followed by your question.

Sidoti & Company. The operating margin in the industrial side of this was fairly impressive. Have you been able to pull out the cost from the acquisitions faster than you previously expected, or what else could be going on there?

I think we had just strong growth across all of the business, John, plus the fact that we are seeing some efficiencies as a result of the integration of the acquisitions. Now, it's still going to take us probably another year or so to get the acquisitions performing at Graco-like margin levels.

But I think we said in previous calls it was a 24- to 36-month process, and we are probably looking at about that still. But we will see some increase in the acquisitions this year as well.

And secondly, the Contractor side of the business, I'm sure there's a little bit of concern given what the recent housing numbers are. What are your expectations for that, Dave, in the year ahead? What are your customers telling you?

I think that our customers are still optimistic. In fact, I was with a couple of our contractor customers yesterday and they are still optimistic about growth. They are picking up and reading the same things we are and they are being -- I don't want to say they are being cautious, but they are watching it to make sure it doesn't sneak up on us.

But, you know, I think the forecast is for 1.8 million housing starts. I think we were at 2 million last year. It is still a healthy market for us, but I think we will watch it and monitor it as we go. But I have seen nothing that indicates that there is going to be a dramatic change in the volumes that come out of the Contractor business.

Great. Thanks a lot. Good quarter, guys.

Charles Brady.

Harris Nesbitt. Just so I heard right -- when you were talking about the apples-to-apples basis adjusting for the extra week, did you say that up 10%, up 10% plus and up 20% for the three segments?

Yes, up more than 10, more than 10 and more than 20. The problem we have, Charlie, is when you do those calculations, you never really know where the extra week was. So those are estimates, but we feel pretty confident that double-digit underlying growth in the three segments without that extra week is appropriate.

I think the issue is if it's 9 or 11 or whatever the number is, it was still very strong growth in our existing business, when you put that extra week in -- or factor for the extra week.

Was there any -- as far as the pace of business across the three months in the quarter -- was it sequentially getting better, was it even across the months?

I think, Charlie, if you look at it, it was even. I don't think we saw spikes anywhere, either up or down. And I think it is relatively even during the quarter. In other words, we didn't start strongly and slow down toward the end of the year and so on.

Okay. Can you just give an update on what is going on with the plant consolidation from the acquisition you did in '05?

Sure. Well, the first thing -- in the quarter, we finalized the acquisition of PBL. We actually moved that during the Thanksgiving week holiday week, and that is up and running. So we are completely manufacturing all the product for PBL in our Riverside facility in Minneapolis.

The high-volume Facet foam pumps are being manufactured in Minneapolis today as compared to Lakewood, New Jersey. And the high-volume Facet foam sprayguns are being manufactured in Sioux Falls today. There is still some integration process that is underway for the lower-volume units, (indiscernible) with New Jersey back into Minneapolis and Sioux Falls. And that should take us, as I said, probably 12 months to do that.

Mike Schneider.

Robert W. Baird. I guess first, maybe, the European growth rate seems stellar in light of the economic indicators over there. And while things seem better, can you give us a sense of what the organic growth was in that region and maybe what is driving it?

Well, let me just give you a sense of the business tempo there, as compared to the growth, and I will let Mark talk to you about the growth itself.

But we are about 10% up, and really it is coming out of, surprisingly, Germany and France in the Industrial business as well as our Contractor business, as well as the growing areas in southern Europe for us from the Contractor side. Then if you look into Eastern Europe, we're getting some nice growth coming out of Eastern Europe from the Industrial side of the business as well.

So it is surprising to us that both Germany and France have been growing and have been growing both in Industrial and Contractor. And frankly, both of them were very strong in the fourth quarter -- both countries were very strong in the fourth quarter.

I would think Dave said it pretty well. The actual growth rate on a volume basis is correct. It is up about 10%. We lost some of that due to exchange; the actual results are up about 3%. And then if you cut in and you look at it by business segment, it was really driven by both the Industrial business, up on a volume basis, as well as the Lubrication business, which is up on a volume basis as well double-digit. So, pretty good. I'm sorry -- the Contractor was up double digits. Lubrication was actually down slightly, but it's a real small number in Europe.

Again, that is not adjusted for the extra week?

That is not adjusted for the extra week, so you can add onto that if you want.

So things are very strong there. Can you give us a sense -- is it a new product introduction in particular on the Industrial side or are you gaining share, new distributors? What is driving the growth? Because that is probably 3X or 4X the market growth.

Right. You know, I think that what is happening on the Industrial side of the business that we are gaining share in that area -- like I said, it is very surprising to us what the growth was in the fourth quarter in both Germany and France.

On the Contractor side, Mike, I think it is conversion of the painters to spray equipment, what is really driving the growth there. We have got two very aggressive sales forces that have done a great job, both industrially and in the Contractor business. And I think their aggression has caused -- particularly in the Contractor business -- caused the conversion rate to occur.

And then just on some of the SG&A expenses, I was impressed with the absolute dollar level. Did you pay out full bonuses this year, given the growth you experienced?

Well, we paid our normal bonuses. But if you remember last year, we did pay a special bonus to all employees. We did not pay that this year. We did pay our normal incentive bonuses.

And then the Graco Foundation for the quarter and the year.

Graco Foundation was $1 million for both. So in other words, we made a $1 million contribution in the fourth quarter and that was the total for the year.

And then just domestically on the Contractor business, Home Depot said in their analyst days indicated slower store count growth going forward. Does that change your plans at all or your retail strategy at all?

No, not really. I think that we'll continue to be aggressive with Home Depot. We haven't seen any indications there is slowing, I guess you'd call it same-store sales. That still looks very strong for us. You know, certainly we have heard the same thing you have about the number of stores that will be opening, but I don't think that is going to have a major impact on us.

And inventory adjustments -- I apologize -- I jumped on late if you addressed this. But have you seen any renewed indications of an inventory bleed on a same-store basis?

You know, Mike, I can't predict that honestly. I mean it goes in ebbs and tides -- it just flows that way and you never really know what the heck they are going to do. But we have seen nothing that would indicate that there are any changes to the normal patterns. Let's put it that way.

Do you think you actually benefited from a restocking in the fourth quarter?

Well, it could have been. I think there was some restocking based on what happened in the third quarter. But I think if you also look at the out-the-door sales, it was still very strong. We also had some texture units that flowed through there that were reasonably strong. So I think it was a combination of both, but I think the activity in the stores is still very strong.

You know, it's kind of a -- it's a tough business to try to gauge on a quarterly basis. When you look on a yearly basis, it's up nicely -- it's a double-digit, almost, growth there. So in terms of their inventory practices, it's hard for us to predict what they are going to do at any given quarter, but on a long-term basis, it is still a pretty good place to be.

And then new products, if I remember correctly, you guys are targeting almost a three-year refresh in Contractor. Is that year 2006 and can you give us some preview of what types of products at least are in-store?

Well, the three-year renewal actually occurs every year. It depends on the product family. And we did introduce a new kind of product this year in the Contractor business. You know, it is no different than any other year. So Contractor -- the amount of revenue generated in Contractor by new product this year should be fairly equal to what it has been in the previous years.

Now what we have done, though, is stepped up our spending over the last two years to bring out additional new products in the Industrial side of the business, and we have a number of new products that will be appearing this year and next in Industrial and also in Lubrication.

Ned Armstrong.

Ned Armstrong with FBR. Your press release noted that Asian sales were flat, and I think you alluded in your comments to a weak automotive market there. Was there any other contributing factor to that flatness or was it bad automotive market?

Well, automotive China is where the flatness was in automotive. We had very, very strong growth in Korea, in Japan. And India is starting to pick up from an automotive investment standpoint. But they had overbuilt capacity in China a few years ago, and basically they were adjusting to that.

Now we had some nice pickup in the fourth quarter in the China business. So we think that was a short-term adjustments, primarily, in what was going on with automotive there.

The Contractor business in China was up nicely in the fourth quarter. It had been, I think, flat for the year, and it grew nicely in the fourth quarter, basically due to some sales initiatives we took there.

The other thing to point out there, too, Ned, is that it was flat; but again, it's a 13-week versus a 14-week basis. And if you were to adjust for that and compare apples-to-apples, it was actually up, say, 7% type range.

So is it fair to make the characterization that really the only weak point in your Asian business was the Chinese automotive business?

I think that's fair.

And then on a more detailed basis, do you have the FX numbers on a consolidated and segment basis as to how FX affected the segments and consolidated results?

We don't give it on a consolidated basis, and the numbers that we put into the release are really not the numbers that we disclose publicly. So suffice it to say that it was a negative impact for us here a little bit in the fourth quarter, and we will probably see some of that here in the first quarter of 2006. It's really until we get into the second half of the year that we will -- if we stay at this same level -- we should be pretty consistent with where we are at.

But I can give you the effect year-to-date on operating income was about $1.7 million pretax -- or after-tax, I should say. And for the quarter, it was a negative impact of about $1.2 million.

So plus $1.7 million for the year and a negative $1.2 million for the fourth quarter?

Right.

Great. I'll get back in line. Thank you.

(indiscernible)

I just had quick question on the acquisitions. As far as the integration goes, are there any unusual expenses we should kind of look out for in coming quarters? I know in Q3 of 2005, you guys took some pretty radical action there in terms of integrating facilities and things. So can you give us some color on that?

I think that what you will see is what we have defined as choppy expenses throughout the year. There will be a given quarter that we will end up having some action that we have to take as a result of the integration. I can't even forecast or even think about what it is going to be. We generally run those through the divisional P&Ls, so we don't separate them as onetime expenses. But it will be choppy this year. But I don't think it is going to be significant more or less than what we had done in the past.

And just as a follow-up, we have seen raw materials going up a lot here in the last six to nine months, and a number of your other competitors or companies in the housing-related sector have been raising prices, and I'm curious as to what Graco has got planned for 2006 on the pricing front.

We are implementing our normal price increase, as we had in years past. We haven't put any surcharges on as a result of material or cost increases. And frankly, we're seeing in some areas -- obviously copper, we use in electric motors, and tungsten, which is the not only used in our own equipment, but also on our cutting tools in our machine shops, has gone up significantly this year. It is our plan to absorb those through cost reductions and not have to pass them along other than normal price increase.

Jim Foung.

Good morning. Regarding pricing, Mark, are you caught up with either cost reduction or price increases to your higher material costs?

We actually -- like Dave said -- we try to offset most of those with our manufacturing efficiencies, which would include purchasing initiatives and factory [rearrangements] and bringing in machine tools and equipment into the factory, those type of things. And then we also look to increase our prices, not so much surcharges, but just our normal annual price increases each year, which again, we will expect to do here in 2006.

Okay. So you are in a good situation right now, then?

Correct.

And then regarding the Contractor business, could you give us an idea how much rebates the Home Depot was in 2005? You know, as business improved at Home Depot towards the latter half of this year, you had to give some rebates. And then what do you expect in 2006?

Now there's the difference between -- rebates and all of our customers, there are different ways of accounting those. We don't disclose those, primarily for competitive reasons. But there is -- the normal level of rebate or volume discounts that occur in all of our channels have not changed.

And you don't expect that to change in '06, right?

We do not.

And what is the leadtime between, I guess, when you begin to see softness in housing starts versus what your customers would do on the Contractor side? I mean is there a lag, like a six-month lag (multiple speakers)?

No.

No?

I don't think you would see anything that great. I mean, if you look at the Home Depot, effectively we are building this week what they ordered last week and that will be out of the plant this week. If you look at our Contractor business, that basically follows the same format. So we will very quickly see a slowdown in incoming order rate based on what the market looks like it is going to be doing.

So it's pretty quick.

It's very quick. Yes.

And then lastly, on further acquisitions, it seems like you have been doing quite well in integrating the two that you did last year. What is your plan for more acquisitions as things become kind of folded in?

Well, our plan is that we have said all along is that we would love to be in a position to make, on average, one or two acquisitions a year. Now, last year was unusual in that we made three. Frankly, we continue to look at the market. We are constantly staying in contact with businesses that we would like to acquire. And unfortunately, you can ever predict those -- how they are going to occur.

And we will make acquisitions this year if the right company presents itself and the pricing is right.

Anything in the pipeline [that] kind of mid-term, that kind of --?

I really can't speak to that. I mean, all I can tell you it is we continue to work the pipeline.

Ned Borland.

Ned Borland, Next Generation Equity Research. Two quick ones here. If you could just give us a sense of what is going on in the professional paint channel -- what the conditions are there within contractor.

Well, as I had said earlier, it appears to be a still very strong marketplace. Again, the prediction of slowdown of housing down to $1.8 million, 1.850 units is still very strong for us. You know, I have seen nothing yet that indicates that there is a major slowing with the major contractors.

And also, on the Lubrication side, it looks like sales have picked up after kind of a pause in the third quarter. Is there anything behind that?

I think it is still the activity primarily in the Southwest and Southeast, with new auto dealerships that are being built that are driving the success of Lubrication, along with a reintroduction of the Matrix product that we brought back onstream earlier this year. I think both of those have had an influence on the sales of Lubrication.

Andrea Wirth.

Robert W. Baird. A quick question on the incremental margins. If I look at the Contractor Division and the Industrial/Automotive Division, Contractor incremental margins on a year-over-year basis were about 100%. (indiscernible) they were about 100% in Industrial, when you X out the acquisitions.

Just wondering if there's anything special going on in the quarter, with possibly expenses, especially when you look at the prior quarter in the Contractor Division, there were only 10% incremental margins. Was there maybe some pull forward of expenses last quarter that possibly benefited this quarter? Just trying to reconcile the differences.

There is really nothing unusual that has gone on in the business. I think, you know, we continue to focus on cost reduction, and I think that has had an impact on our margins. There was nothing that we did pull forward or so on and so forth. I think it is just the normal activity that we see in our business each year -- or each quarter.

[Steve McNeil].

Jennison Associates. Dave, I just wanted to kind of get your sense of the business here. I looked back at your press release that you put out at the end of '04 talking about '05, and you had said in there you felt cautiously optimistic about '05.

And I just wanted to kind of get your sense for the business as you enter '06. How do feel about the business entering '06 versus how you felt about the business entering '05?

Steve, I am still a bit cautiously optimistic, I guess.

We're one month into it.

The Industrial business still looks very strong globally. We have some nice growth that is occurring in the Industrial business. Lubrication I think is going to continue to be a strong business for us. As I said earlier, we even have some new products coming in in Lube (indiscernible), plus along with the PBL product -- or the acquisition that we made.

I still think Contractor will be a good business. Unfortunately, I keep reading everything you guys keep reading about housing slowdowns and remodeling slowing and so on, and I think we want to watch that to see what happens there. But we have seen no indication to this point that would indicate that business would weaken. So I remain cautiously optimistic.

Mark just forgot to put that in the press release, I guess.

We are planning for growth.

Cautious. Okay. Fair enough.

[Satish Katawil].

Satish Katawil, (indiscernible) Capital. Dave, I have a question on your comment on your pricing. Can you elaborate as to what exactly is your normal pricing for the year?

I'm sorry about that. When I said normal pricing -- what we do is we competitively price to the marketplace. We will have price increases that will occur across all of our divisions usually within the first month of the new year. And those really vary by division and actually by product in the division itself.

So when I say our normal pricing, what we do is go through and do an analysis what we think the market prices are for those products, and we take adjustments accordingly. You could have price increases that are significant in some product areas and actually have price reductions in others. So it really varies by the product itself and also by the division.

But on an average basis, is it a few percentage points or how do you view that?

If you look at our effective price increase over the last few years, our effective price increase is anywhere between 1 and 2%.

For the year. Okay. And can you comment on whether it is stronger outside the U.S. or within the U.S.?

It really varies by region. There are some areas that we can get more price, and we do that by region, by market and by division. So again, it varies by the specific region of the country -- or of the world and specific product offerings. So it really varies.

(OPERATOR INSTRUCTIONS). Stewart Scharf.

Standard & Poor's Equity Group. I just wanted to know if you have an estimate for stock option expense. Is $0.05 to $0.06 in the fair range?

We are actually working through the details of the calculation right now. It should be relatively close to our pro forma expense which is in our quarterly filings. I would put the number probably somewhere at the $0.06 to $0.07 range, would be a good estimate for now. But again, we haven't crunched through all the details yet.

And also, your use of cash, do you have a priority focusing on buybacks, acquisitions, dividends? How would you --?

Yes to all three of those. Basically what we have done is we said we would use our cash for acquisition, dividend and share repurchases. We are going back to the Board to get approval for our share repurchase plan here in a few weeks. We will be able to announce that once we get approval from the Board. But we have allocated about 30% of earnings to dividends and the remainder would go into share repurchases or acquisitions.

Ned Armstrong.

Ned Armstrong, FBR. I just had a question regarding some of the inventory step-up cost that you have encountered from the acquisitions. Are you through with those, Mark, or can we expect more?

Well, I mean, I guess we are through from the standpoint of the initial write-up of the inventory when we bought the businesses, where you assign fair market value. Those are definitely behind us.

But there still may be more costs from integration and similar type expenses.

Ned, what could possibly happen is as you start to move product around the facilities, you could end up with some inventory problems in those areas. Frankly, we have been very cautious about what we have done. Our accounting people have spent a lot of time looking at inventory. We don't at this point see any major inventory issue on the horizon.

I think we are in good shape right now with the inventory levels that we have.

(indiscernible)

Dave, can you just give us some color on the commercial end markets? I know we have spent a fair amount of time on residential, and whether it is flowing or not. And I'm curious as to what you are seeing on the commercial side. And everyone has been talking about recovery; I'm curious to see does that recovery have any legs or is it a short-term --?

The only thing I can tell you is we think it remains strong. We have seen nothing to indicate that commercial is slowing from what it was last year. Again, it is very difficult for us to define where the equipment is going, other than our higher volume sprayers generally go into the commercial real estate market; I have seen nothing that would indicate that the marketplace is slowing at all.

Do you guys make higher margins on the commercial side or the residential side?

If there is any higher margin on the commercial side, it is slight. So there is no significant difference between the medium-range sprayers and the high-range sprayers from a margin standpoint, other than the margin dollars are higher.

Mike Schneider. Mr. Schneider, your line is open. Please go ahead.

If there are no further questions, I will turn the conference back to Dave Roberts. Please go ahead.

Well, I would like to thank everybody for participating in the conference call today. Obviously, we're very pleased with the performance in 2005. Frankly, as we said earlier, we are cautiously optimistic about 2006.

I would like to take this opportunity to thank all of our employees as well for their contribution they made during the 2005, another year of record earnings and record sales growth. So we are very pleased with that. Again, thank everybody for attending.

Thank you. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.