Graco Inc (GGG) 2007 Q3 法說會逐字稿

Good morning and welcome to the third quarter 2007 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 the international callers is 303-590-3000. The conference ID number is 11099424. The replay will be available through October 28th, 2007.

At the request of the Company, we will open the conference up for question and answers after the opening remarks from management.

During this call, various remarks may be made by management about their expectation, 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 Item 1A of, and Exhibit 99 to, the Company's 2006 annual report on Form 10-K. This report is available on the Company's website, at www.graco.com, and the SEC's website at www.sec.gov.

Forward-looking statements reflect management's current views and speak only as of the time they are made. The Company undertakes no obligation to update these statements in light of new information or future events.

If anybody requires operator assistance during this conference, please press the star, followed by the zero.

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

Okay. Good morning. Thanks, Mike.

I'm here today with Pat McHale, our CEO, and Jim Graner, our CFO. I'll go through some of the highlights of yesterday afternoon's press release and then we'll open up the call for your questions.

From an overall perspective, our sales for the quarter were up 3%. Foreign currencies added 2 percentage points to the growth. The rest was organic.

On a geographic basis, our sales in both Europe and Asia were up nicely. Europe was up 23%. Asia was up 17%. And that more than offset the 7% decline that we saw in the Americas this quarter.

The decline in the Americas was due to a combination of lower Contractor and Industrial sales, which were both down. Contractor was down 11% and Industrial was down 5% in the North American region for the quarter.

Our gross profit margin was 53.4% for the quarter, and that compared to 52.7% last year. Our operating profit margin was at 28.2% for the third quarter, which was 100 basis points higher than what we had in last year's third quarter. Total operating expenses were up just slightly. They came in at $52.1 million versus $51.6 million last year.

On a net profit margin basis, our net margin was 18.9% for the third quarter, and that again compared favorably to last year at 18.4%.

Share repurchases totaled about 2.3 million in the third quarter. And year-to-date, as of the end of the third quarter, they totaled about 4.3 million shares or approximately $171 million. At the end of the quarter we still had about 7.8 million shares remaining under the Board's approved share repurchase authorizations.

The Lubrication Equipment division integration, again, is still on track. We did have some expenses there of $0.5 million that we broke out in the press release. We expect to have all of our Lubrication operations consolidated into the new Anoka factory by the end of this year.

I'll touch real briefly here on the three segments. First, we'll start with the Industrial. In the third quarter their sales were up 7%. They came in at $107.8 million. If they were translated at consistent exchange rates, their sales were up 5%. Geographically, in the Americas, sales were down 5%. And in Europe and in Asia, they were up 22% and 15%, respectively.

The third quarter operating margin in Industrial was 34.9%. And that was up significantly from last year's third quarter, where operating margins were 30.9%.

Next, looking at the Contractor segment. When compared to last year's third quarter, worldwide Contractor equipment sales of $76.6 million were down 3%. That was really driven by a decrease in the Americas, where the sales were down 11% as we saw, and continue to experience declines in both the Home Center and the Professional Paint Store channels. The housing conditions, as everyone knows, remain pretty weak in the United States, so we expect that to continue throughout the remainder of this year and into 2008.

Europe continues to be very strong for Contractor. Their sales were up 23% this quarter, and growth occurred really throughout the region. Similarly, in Asia-Pacific, sales were good for Contractor. They were up 30% over last year's third quarter.

The business did well on the operating margin side for the quarter, despite their lower sales. Their operating margin was 27.4%, which was up slightly from the 27% recorded last year in the third quarter.

Next, looking at the Lubrication segment. The sales for the third quarter in lube were $22.8 million. That was a 2% increase over last year. Operating margins were lower than a year ago, really driven by the consolidation and integration of the Lubrication operations, as we've discussed in the last several quarters' conference calls. Operating margin was 11.3% this quarter versus 21.2% last year. Again, we expect the consolidation to be done by the end of the year and see improvement in operating margins in Lubrication beginning in 2008.

Graco's effective tax rate for the quarter was 31.7%, which was slightly higher than last year, but it was lower than the 34.5% rate that we had experienced in the first half of this year. The lower effective rate in the third quarter resulted from some expiring statutes of limitations and a higher than expected benefit upon filing of our prior year tax returns.

Some other items. The unallocated corporate expenses for the quarter were $2.7 million, and that included a $500,000 contribution to the Graco Foundation.

Currency translation on an aggregate basis added about $3.5 million to sales in the quarter, and about $1.5 million to net earnings. On a year-to-date basis, currency continues to help us. Currency translation added about $11 million to our sales this year, and about $4.5 million to our net earnings.

Backlog at the end of the quarter was virtually flat with last year's third quarter. It came in at $38 million. Again, backlog's not a big indicator of our future business.

Inventories at the end of the quarter were flat with where they were at at the beginning of the year. And they're down about $4 million from the end of the second quarter.

Receivables were up about $11 million from the beginning of the year. And during the third quarter, our free cash flow, which we defined as cash from operations minus capital expenditures, was approximately $63 million. And that compared to $40 million in the third quarter of 2006, which is about a 58% increase.

Year-to-date capital expenditures were $28 million. They're projected to be somewhere in the $40 million to $45 million range by the end of this year.

To summarize, we continue to see slower than expected sales growth in the Americas, but our international business remains strong again this quarter. As we expected, our Contractor business remained soft in the Americas, but it's very healthy in Europe and in Asia.

We continue to make good progress with the acquisition integration activities with Lubriquip, and we're on track with our scheduled completion date, and the expenditures are in line with what we were expecting.

Mike, that concludes the opening remarks. If you'd like to open up the call for questions at this time, we'd be happy to take them.

Thank you, sir. (OPERATOR INSTRUCTIONS.) Robert Lagaipa with CIBC.

Thank you. Good morning.

Good morning.

I had a question about just the balance sheet and your further desire to lever up on the share repurchases. Obviously, you have well over 7 million shares left on the program. The leverage has increased from about 5% up to 27% as of the end of this quarter. I mean, how do you balance that moving forward? I mean, how much further should we expect you to lever up to buy back your shares versus potential acquisitions?

I mean, if we look at Lubriquip, of course, you're nearing the end of the consolidation, the integration, and should start seeing the benefits of that moving forward. And if we look at the acquisition environment we've heard from other companies, especially with the recent credit crunch, that maybe multiples are coming down and the quality and the quantity of potential acquisitions might be improving. I mean, how do you balance that? How should we think about that moving forward?

I'm going to let Jim Graner handle that one. He's our CFO, Bob. And I'm sure that if you've got any follow up questions, Pat and I can chime in, too.

Sure.

Bob, you saw the Board approved another 7 million in shares for us to buy back over the next 2 years during our September meeting. I think that should give you a good indication that we will be aggressive in our share buyback over that time period.

Again, our strategies here are, first, are for growth, product development and acquisitions. So, we are and we will continue to look at acquisitions, share buybacks and then dividends, in that priority.

We also completed our revolving credit line in July, $250 million with an accordion feature up to $400 million. I think we're comfortable in using the majority of that for both acquisitions and share buybacks.

And what does you pipeline look like in terms of acquisitions?

We don't talk about our acquisition pipeline. But, I think in general you can assume that it's been consistent with what we've seen in the past and that -- we're hearing the same things that you are in terms of multiples coming down. But really, the kind of acquisitions, the size that we look at, typically we're not competing really with the private equity guys. And we haven't seen much change in terms of the multiple desires on the deals that we're looking at now.

Right. Okay. Second question is just what are the costs that we should expect in the fourth quarter from Lubriquip? I mean, you had $0.5 million in the third quarter. I'm sure it probably steps down a bit. I mean, how much does it step down and then, are we complete as we enter into 2008?

Bob, we've looked at the fourth quarter and the total for that quarter will be about the same if you include our move of our factory here Minneapolis. We're down to a few hundred thousand left with respect to Lubriquip. We're expecting about $300,000 in equipment move costs here. And that should basically complete the integration of that factory, the two operations.

Okay. And the last question, if I could before I pass the baton, if we look at your Industrial markets, obviously there's a number of different markets and different types of equipment that you provide to the market. How does that look by equipment type and also by region?

Sure. I mean, our Industrial business outside of North America has been really strong across all of our application segments. It's within North America that we're seeing quite a bit of variability. Certainly, anything that's been associated with the housing market, like our Hot Melt Window and Door business, or our Fine Finish business for cabinetry has been severely impacted by the housing downturn.

And we've also seen some negative impact on stuff that we sell into the automotive side of the business. But, our Process business is still growing in North America and our Foam business and our Protective Coatings business looks good. So, we've really got a mixed bag in terms of North America.

Terrific. Thanks very much.

Thank you, sir. Charlie Brady with BMO Capital Markets.

Hi. Thanks. Good morning, guys.

Hi, Charlie.

Good morning.

On the Contractor segment, can you just speak to your comments regarding the Home Center channel and the new sprayer lines that have come out in terms of -- I guess the language was along the lines of there will be less stores selling this equipment, which is the reason of the revenue shortfall. Is that a function of store reductions at Depot, or just not all the stores carrying that new line?

Our relationship with Home Depot since 2000 has been -- we've had exclusivity within a certain price point. And after running tests with the Graco equipment and with some competitive equipment, they gave a certain number of stores to the competition. So, that's really what's driving the reduced store count.

What is the price point of the new line versus the old line?

The price -- the end user price point of our new line is going to be higher than our old line. We've added features and performance improvements to our product category.

Can you quantify -- ballpark how much higher?

Yes. On the end user price is looking to be about 10% higher on average across the product selection.

Okay. And should the -- that $5 million, if it happens it hits in Q4, the remaining $4.5 million, is it spread evenly throughout '08 or is it front-end loaded?

No, that will be front-end loaded. In fact, the launch of this product line was scheduled for February. And Home Depot is now asking us to move that up into January. And so -- but, we're not exactly sure of the timing, but it will be definitely front-end loaded.

Okay. That's my questions. Thanks.

Thanks, Charlie.

Thank you, sir. John Franzreb with Sidoti and Company.

Good morning, guys.

Hey, John.

Good morning.

First question is, could you talk a little bit about the Contractor business and its relative strength in Europe, what's driving that?

Well, the big driver for our Contractor business in Europe is end user conversion. That's the conversion of the people from brush and roller to spray. The spray rate in Europe we peg at around 20%. The spray rate here in terms of gallonage is more in the 70% to 80% range. And so, we've been working hard over the course of the last 8 to 10 years to convert people from bush and roller to spray. So, we do have competitive dynamics in Europe where we're still selling against Wagner. But, typically, the driver there is our ability to get out and to convert painters to using the equipment.

Okay. A couple follow up questions to some previous questions. Having lost the exclusivity with Home Depot, what's the probability that you'd now be selling into Lowe's as a channel?

Well, we're going to obviously look at every opportunity we can to take that product line and to expand it into other home centers. We think our chances are decent but, that's a wild card. I wouldn't try to build that into any model at this point.

But, is it or is it not something you're exploring?

Absolutely.

Okay. Great. Secondly, again about the willingness to aggressively repurchase stock. Why not be more aggressive in trying to make acquisitions and diversify some of the end market concentration? Is it the multiples out there? Or what is it that you're -- that's making you not want to go after some kind of a tack-on acquisition that would diversify your end markets?

I mean, we continue to look at acquisitions on a regular basis. If you take a look at our history, really only in the last 5 years or so have we started to do more on the acquisition side. And we need to make sure that we build the capability within the organization to make smart acquisitions and to be able to integrate those. I think we're learning and we're getting better at it.

But certainly, I don't think we've got the capacity or capability to go out now and go crazy doing deals. We have to build that. We do have the financial capability to do deals and to buy our stock back, and that's really where we're headed.

Okay. Great. And one last question. Regarding the tax rate, what should we be thinking about a tax rate in the fourth quarter?

Again, our tax rate I think you should use in your models is 34% going forward. And quarter to quarter, it's going to be higher or lower than that given specific events that have happened. So, it's tough for me to forecast a tax rate by quarter because of those events that are unknown.

Okay, great. Thank you very much, guys.

Thank you, sir. Ned Armstrong with FBR.

Great. Thank you. Good morning.

Good morning.

Just a follow up on the question about the Industrial business. I mean, you've said before and you said again this quarter that you're seeing weakness in the automotive as well as residential related products, the mill work, etc. But, that the other parts of your business remain strong. With regard to those other parts of the business, is there anything that you see that might make you think that that strength won't last, or are there any particular segments that you're worried about, just given your general knowledge of that particular customer business?

No. I think we've seen a pretty consistent performance in the segments over the course of this slowdown. And I would expect the six segments that have been doing well are going to continue to do well and we'll probably continue to see softness, for sure on the housing into 2008 and probably through most of it. On the automotive side, the number, the production numbers are looking a little better for North America next year, as you probably know. So, we're hoping for some pick up on the automotive side.

And then what are some of the other businesses that you're -- Industrial customer businesses that you're feeling pretty good about?

Well, we do a lot of stuff for infrastructure. So, our high-performance coatings group sells equipment that does bridges and water towers and containers and ships and train. So, that who segment of the industry has been strong. We expect that to continue to be strong.

Our Foam business, even though we've got some challenges on the housing side, our Foam business continues to do good. And the transfer of people from using that Owens Corning pink fiberglass to a sprayed in foam, that trend seems to continue. So, we're optimistic about that. And then our Process industries continue to do well, which is really, for us, is the diaphragm pumps business.

Okay. And on Contractor, you mentioned that the margin was up due to a product mix. Is that something that just happened to occur during this quarter, or is that a general shift that you're seeing?

I think that generally relates to the fact of our international business growing and our North America business declining.

Okay. So, it's a geographic-driven as opposed to product-driven?

Well, I think it's both the geographic and the fact that the higher end units sell better outside the U.S. versus the lower featured units.

Yes. We really don't have any home center business in Europe, for example, and we do in North America. So, the types of equipment we sell in Europe and Asia is really more of the pro stuff, which is higher margin.

Okay. Thank you.

Yes.

Thank you, sir. Matt Summerville with KeyBanc.

Good morning. A couple questions. First, can you just comment maybe, Pat, on when you look at the North American Industrial business how order tempo looked as you progressed throughout the quarter? And then I guess what you've seen thus far in October that's obviously supportive of your comments that, outside of auto and housing, you still feel pretty good about what you're seeing in North America.

Yes. I mean, I don't feel good about having a North American Industrial number decline, so I don't want you to get that impression. But, in terms of the order rate, it's been fairly consistent through the quarter in the different segments of our business. So, I'm not expecting that dramatic shift form one segment to another.

In the past, you've quantified how much auto exposure you thought you had in the Industrial business. Is there any quantification you can put behind your housing related exposure there?

Of course, everybody asks that question and we have a rough estimate internally. But, we can't really break that out with enough definition to be able to share that. And when you think about how we go to market, we're selling through distribution. So, we'll sell a sprayer into Sherwin Williams, the contractor will buy that. We don't know if he's going to use that on a new home, a repaint, a commercial job, a church. So, we're selling equipment through distribution. We don't get point of sale feedback back in terms of exactly where that equipment goes. And so, we can't really give you a good number on that.

And maybe that contrasts out with auto. Auto's a little different because those tend to be a little bit bigger jobs so the visibility may be better for us on those. So, in the past we may have broken some of that stuff out just because those jobs are little more visible than just the general ma and pa industrial type business.

Okay. With respect to the new sprayer launch at Home Depot, how should we think about that playing out? Will it impact the fourth quarter in the sense that, will there be any initial stock-up then, or will that not occur until the first quarter of '08?

And will the potential for Home Depot to, I guess ship back to you any of the inventory of the older product, will that offset the stock-up, I guess? How should we think about how that launch is going to impact Contractor the next few quarter, based on your past experience?

Matt, this is Jim Graner again. I spent some time on the Foam yesterday with our manager. And he is at Home Depot today and tomorrow working out the details of how we're going to roll this out. What we understand today is that this will be a few stores at a time. A few stores being 50 to 100 at a time.

So, it'll probably happen over the first four months of '08. We're talking about what they're going to do with the returns of the existing units as we replace them with the new units. And the details there are not specific at this point enough for us to give you an answer to that question.

And then I guess with respect to the new sprayer line, initially it probably -- and I think you've mentioned this -- it probably won't be as profitable as what you're selling to Home Depot now. But, as we think out a year or two, how do the profitability dynamics of this new sprayer line look compared to what you're selling in there now?

Well, we've got some work to do, obviously, on that business. We ran the test on temporary tooling, so we've got to get into permanent tooling. We've got to do the launch. And then we've got to dig down and do our normal cost reduction efforts. And I think our culture is, is to drive cost out of product and to achieve good margins. And that objective is not going to change on this new line versus anything else that we sell. So, over time, we'll be working to get a reasonable level of gross margin and operating margin on that product line.

And then just one final question. With respect to Lubriquip, what was the revenue contribution during the quarter?

About $5.6 million.

Okay. Thank you.

Thank you, sir. Michael Schneider with Robert W. Baird.

Good morning, guys.

Hi, Mike.

Morning.

Maybe just sticking with lubrication for a second. The expensed amount or disruptive amount that hit the P&L in Q3 was roughly what? And then, did I hear you correctly, that Q4 you only expect about $300,000 in out-of-pocket expenses?

Mike, I think that number as we're measuring it was about $500,000 in the third quarter and we're expecting the same in the fourth quarter when you include the relocation of equipment from our Minneapolis factory to our Anoka factory.

Okay. Well, in giving those dollar amounts, obviously the operating income is down over $2 million year-over-year just for the last two quarters. Is the balance of that just the disruptive effects? The intangibles and the productivity loss? Or what accounts for the balance of it?

I think your summary is right on. It's all three of those things, the loss of productivity, the integration of people, and the intangible part that we're working to fix. And we expect profitability in '08 to return to the levels it was before.

We ran duplicate headcount. As you can imagine, we had to hire customer service here and get them up to speed before we took customer service out on the other end. We hired all new factory people for both Cleveland and Madison and those folks have been going through he learning curve. So, that doesn't -- that's not reflected in those -- the hard costs and those are things that get better day and those will be part of our improvement going forward.

And where are you in the process of the duplicate headcount? Are you through that?

We're mostly through that. I think we've got a few left that are going to go here at the end of the year, into the first quarter. But, the vast majority of that is complete.

But as you ramp in 2008 in lube, and presumably the new production employees get more skilled as the year unfolds, there's no magic stair step that occurs in Q1 once the expenses and the equipment roll through the P&L. Presumably it's then just a learning curve and you ramp through 2008?

That's correct.

Is that fair?

Yes.

Jim, when you say you return to the profitability levels, and this business had basically consistently run at 23%, is that a run rate you expect to hit at some point in '08, or is that the average you expect to hit in '08?

That's an average for '08.

Okay. So, you actually then expect to achieve by year-end, presumably, higher margins than that 23% rate?

Yes.

Wow. Okay. And then, in Contractor, the expenses of the rollout, the $4.5 million or $5 million, that's just starting in '08, or do you start to absorb those expenses in Q4 already?

Well, again, that's what I was trying to figure out when we were talking to the manager of that business as he goes through his conversations with Home Depot in the next week. As Pat mentioned, they've accelerated the rollout from mid-March to January, January 15th. And we're trying to figure out precisely how that will work. So, at one time we had estimated about a $500,000 impact in the fourth quarter. That's -- that has some probability of being higher than that. But, I can't quantify today how much higher.

Okay. And then the $5 million in rollout expenses, does that -- is that just physical expenses for getting the product on the shelf, or does that include the initial inefficiencies on the manufacturing floor?

No, I think it's the cost of getting it on the shelf, it's the cost of the new displays, it's an estimated cost for tooling, it's an estimated cost for the final product development push. Because we are making a few modifications here in the fourth quarter. And also, it's the estimated cost for the buyback of the existing inventory that's in the stores. And we've taken a fairly conservative estimate on that, contemplating the ultimate disposition of those units.

Okay. So, when we look at the Magnum line, that's been underway, I think, for five years now. And you have taken costs out every year. So, presumably the profitability of that product line has ramped for five years. Is it a case -- again, owing to the productivity loss up front, that we take -- in effect, take a couple steps back on profitability on that product line and then you work over several years to restore it?

Exactly.

Okay. So, the impact on the business is more than just the $5 million rollout expenses, it's also the lower profitability up front of the product line itself.

Again, we're finalizing our tooling and finalizing the costs on those products. So, for sure that'll be true in the first half. Where we'll be in the second half, it's too early to quantify. But, we're confident in the long run that, by the end of '08 or '09, that we'll be back to the same level.

Okay. And can you at least speak qualitatively about the pricing in this new product line? Because, presumably, Home Depot was putting pressure on you as they do all suppliers. What does the profitability of the business look like -- or product line look like ultimately versus what you were enjoying under the Magnum line?

Well, I think -- I mean, in terms of talking specifically about what our pricing strategy out of Home Depot, certainly we don't want to get into that. But, the end user pricing is going to be higher. The units are going to be more fully featured than the units that we have today. And our manufacturing people are going to work hard on the cost side. So, I think our comments up until now in terms of our expectation that we'd drive that business back to a reasonable level of productivity are what you ought to go with.

And do you believe you lost a third of the stores on price, feature, functionality, quality? I mean, can you give us some sense as to what changed this year versus the last five?

Sure. They started that Wagner Titan test back in the fall of last year. And we started our test in May. And we had some objectives to try to achieve on the test in terms of improvements in same store sales, profitability to Home Depot, product line growth. And we actually exceeded all those targets. So, the new line looks good from Home Depot's perspective and from our perspective.

Wagner took a different approach. Instead of going with a 10% higher price unit and more features, they kind of went with a very similar to performance and features of the existing Magnum line. And we understand that they gave pricing concessions to the Home Depot. So really, we were kind of fighting with two different strategies.

We're happy with what we did. We think the product line reflects what the Graco brand stands for in the marketplace. Obviously, the timing might not have been great for us with a downturn in the market. We do see people buying down to lower priced units. And that could have aided the Wagner Titan test during that timeframe.

But ultimately, we ended up where we ended up and hopefully, going forward into better market conditions, we're going to out-compete their results at the stores that they've got. And we look forward for opportunities not only to go into existing home center customers, but also to try to regain some of that business that we lost.

Then, in the professional channel, does this call into question pricing in that channel as well?

No, I don't really see any connection really whatsoever.

But, presumably contractors know the products exist in both channels. Doesn't pricing pressure in one and lower--.

No. We don't -- we really don't sell this product line in any kind of a measureable extent to the professional paint channel. You've got to remember, these units are the $899 or less price point units. And that would be -- an $899 unit would be a very lowest unit that would be sold through the professional channel. So, there's not a lot of overlap.

These units that are sold through Home Depot are more for the tradesmen, the part-time painter, property maintenance. Not as much for the professional painting contractor that's out there everyday. So, again, we've been able to keep these two product lines segmented over the course of the last six or seven year pretty well from a performance and durability standpoint. And I don't expect that that's going to change going forward.

And again, Mike, you have to recognize that the end user prices in the Home Depot stores are going up 10%. So, they're going to be closer to the prices in the paint channel than they were before.

Right--.

--Which will have a few extra features but, again, as Pat said, they're differentiated. And so, I think marketwise we're okay.

I guess I was speaking more to just the fact that Wagner serves both channels and they've clearly taken price as weapon in the retail side. Have you seen any indication that they -- the same force will unfold in '08 in the Contractor -- or in the Professional side?

That's always been the case. I mean, we've always competed with Wagner in the professional point side and they've always competed with us at lower price points. So, of course, business has been tough and so there's an opportunity for them to be aggressive in terms of pricing in 2007. But, historically, 2006 and going back as many years as I can remember, Wagner's sold on less price than we have through the paint channel. And we typically win with product and we typically win with the contractor.

Okay. Then in Industrial in Europe, the residential trends that are hitting you in the Industrial segment in North America seem to be unfolding on about a six to nine month delay over in Europe, with housing down in Spain, France, the UK, etc. Have you seen the early signs of that within the Industrial portion of your business in Europe?

We've not seen that yet.

Okay. Would -- is there anything different about your mix in Europe that would prevent that same trend from unfolding over there, or product breadth over in Europe?

Well, I can't speak to the detail on the Industrial side. I know that on the Contractor side, even though we are seeing softness in some of the housing segments over there, our folks in Europe are optimistic regarding our odds of continuing strong growth in that business. Because really, the driver there is the end user conversion. But, I don't think I can give you a good answer on those segments of Industrial we sell into the specific housing related markets in Europe. We're not seeing anything at this point.

Okay. And on the Contractor side, it is a case that the conversion rate is simply overwhelming the presumed softness in Europe housing?

That's correct.

Okay. And then final question. Just on the revolver. You mentioned you've got the accordion feature up to $400 million and you're willing to go there. How much is drawn on the revolver today?

At the end of September it was about $90 million.

Okay. Okay. Thank you again, guys.

You bet.

Thank you, sir. [A.J. Kidrowell] with Goldman Sachs.

Good morning, gentlemen.

Good morning.

It sounds like customer trends were good in the quarter despite housing. Was wondering if you could comment on margins in that business? I know that you've been doing cost and margin initiatives there. So, are you near the segment average, or -- and if you're not, when do you think you'll get to that level?

Yes. We're near the segment average on that. The manufacturing group has done a nice job over the last 12 or 18 months of upgrading the processes that we use to produce that equipment. And so, that's a nice profitable line for us like the rest of our Industrial business.

And could you comment on the revenue trends in Europe? Have you been able to achieve some traction there in the Foam business?

We're seeing Foam in Europe and we're seeing good growth in Foam in Europe, just like we are in North America.

Great. And the Industrial group overall has seen very strong growth in the past several quarters. And was wondering if you could comment on the underlying drivers. Is it shift in the manufacturing based in Eastern Europe or is it increased penetration of your products, or is it more linked to the general economic upswing that we have seen?

It's really all of those. When you take a look at our opportunities, as people move factories to low cost geographies, they typically don't move the equipment. So, that's an opportunity for us to go in and sell that factory Graco again. We've added 190 distributors in Asia and in Europe over the course of the last 12 months.

We're continuing to invest in additional people. We've approved quite a number of adds for 2008 so that we can get out and set up more distribution in '08. Of course, the overall economic conditions have been good. Global automotive production has been decent. So, there's a lot of factors that are driving that. But, most of those trends are -- look to be fairly positive for us going forward.

Very helpful. Thank you.

Thank you, sir. (OPERATOR INSTRUCTIONS.) At this time there are no further questions, gentlemen. Please go ahead.

All right. Thanks for attending the call. A couple of comments here before we wrap up. First of all, despite the softness in North America, we are managing the business for growth. We have not hunkered down in terms of our new product development. And in fact, we've been working hard over the course of the last three or four months to identify more new product opportunities for the organization. And you can expect going forward to see an increase in the investment and an increase in our aggressiveness in developing new products for new markets.

We're also working very hard to make sure that we're maximizing our opportunities on the international side. And, to that end, as I said a minute earlier, we have added quite a number of people into our plans for 2008, particularly in Asia and Eastern Europe where we're seeing good growth.

So, our intention is to go after both new product and the international opportunities very aggressively and do the best we can here in North America to have good performance during the housing downturn.

So, thanks again for your call today. Have a good day.

Thank you very much, ladies and gentlemen. This does conclude our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.