Graco Inc (GGG) 2007 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter year-end 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 international callers is 303-590-3000. The conference ID number is 11105822. The replay will be available through February 1, 2008.

At the request of the Company, we will open the conference up for questions and answers after the opening remarks from management. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Tuesday, January 29, 2008.

During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constituted forward-looking statements for the purpose of the Safe Harbor provision 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 1-A of and Exhibit 99 to the Company's 2006 annual report on Form 10-K. This report is available on the Company's web site at www.Graco.com and the SEC's web site at www.SEC.gov.

Forward-looking statements reflect management's current views and speak only as the time they are made. The Company undertakes an obligation to update these statements in light of new information or future events.

I will now turn the conference over to Mike Sheehan, Chief Administrative Officer.

Good morning, this is Mark Sheahan, welcome. I am here with Pat McHale and Jim Graner this morning. I will open up the call with just a few comments about yesterday's press release, and then we will take your questions.

First of all on an overall basis we did experience a 1% revenue growth in the fourth quarter. Our reported sales were $205.2 million. Included in that number was favorable exchange rate translations which added about 3 percentage points of growth for us in the quarter. By segment, the industrial sales were up 6% in the quarter, or 3% with consistent translation rates. Our contractor sales were down 7%, or down 9% with consistent currencies, and lubrication sales were down 1% or down 3% with consistent translation rates.

By region, the sales this quarter were in the Americas down 9%, in Europe sales were up 15%. That's 5% with consistent exchange rates and Asia was up 19% or 17% with consistent exchange rates. For the quarter, our net earnings were flat but our diluted earnings per share were up 8%. On a full-year basis, our cash flow from operations were $177 million, that's up 14% from 2006. Also for the year, our consolidated net revenue was up 3% and our full-year net earnings and earnings per share were up 2% and 7%, respectively, and this marks our sixth consecutive year of growth.

Next, I will touch briefly on the three operating segments and how they performed in the quarter. First of all, the Industrial segment reported sales of $117.6 million in the fourth quarter. That is a 6% increase. With consistent exchange rates, that is up 3%. Our Industrial sales in the Americas, Europe and Asia were down 1%, up 11% and up 17%, respectively. The operating margins in the quarter were strong. They came in at 34.6% of sales versus 29.5% last year, and again that reflects the improvements that have been made in that segment, particularly at some of the acquired businesses that were in the results last year. We continued to experience nice growth in our Industrial segment outside of the Americas and despite the sequential improvement from the third quarter where sales in the Americas were down 5%, some of the North American markets still remain a bit sluggish, particularly those related to the housing industry.

Next looking at the Contractor segment. Our fourth quarter sales of $66.1 million were down 7%. Again, the results were pretty mixed depending on the geography that you looked at. In the Americas, our sales were down 20%. We continue to see the impact of lower residential housing business in several regions across the US. We expect as we've said in the past that these conditions will continue into 2008. However, we were somewhat encouraged here in the month of January where our bookings were relatively flat in North America compared to last year's January bookings.

Our sales in Europe for the quarter in the Contractor segment were again up nicely. They were up 24%, and that was really characterized by increases across several of the product categories in most of the regions in Europe. Similar story in Asia. Sales were up 21% and we're continuing to build our presence in that marketplace and seeing nice growth there. On an overall basis, the lower sales in Contractor higher spending on the new Home Center product line that we called out in the press release took the operating margins to 22.5%, and that was down from 24.4% last year during the same period.

Next, looking at the Lubrication segment. Our fourth quarter sales for Lube were $21.5 million, that is down about a percent from last year. The operating profit margin was at 6.5% for the quarter compared to 21.9% last year. The decline in operating profit margin in the fourth quarter of this year was really due to a lot of different factors, including lower efficiency and manufacturing, some excess in discontinued inventory charges related to the Lubriquip integration and factory move costs and increased warranty expense. We are pretty well consolidated now on the lube side for Lubriquip and expect that the margins will increase as we move into 2008 as we've talked out about in previous calls.

Looking at the overall results on the gross profit margin side when compared to last year, our gross margin was 53.5% which improved about 80 basis points. That was really the result of the favorable currency translation impact that we continue to see. Our 12-month gross profit margin of 53.2% was flat with last year as the favorable impact of foreign currency translation offset some higher spending in material costs that we experienced in the factories.

Our operating profits were good. The operating profit margin for the year was 26 -- or for the quarter was 26.4%. That's a 60-basis-point improvement over last year. And for the year, the operating margin of 27.6% matched the 2006 results.

Our overall operating expenses were about 3% higher than last year with higher spending in the three product categories -- or the three categories that we break out on the P&L.

Our cost of goods sold and operating expenses as we said in the release include about $0.5 million of cost and expenses that were related to the consolidation and integration of lubrication ops in the fourth quarter and they also include about $1 million of incremental expenses related to the home center launch of new products.

Looking next at the tax rate, our effective tax rate was 32% for the fourth quarter and 33.2% for the full year. The fourth quarter effective tax rate was 90 basis points higher than last year's fourth quarter and the overall rate for the full year matched last year's results.

Other items to note in the press release and the financials were that, again, the cash from operations was good, it was up about 14%. We used that cash for some of the significant items, including dividends of $43 million, PP&E of $37 million and of course $230 million of share repurchases. We do expect to spend about $35 million on CapEx in 2008.

To summarize, Graco had another year of Graco had another year of growth in '07. Conditions do remain challenging in the U.S. market, particularly anything related to housing. Our sales activity outside of the Americas is very good. It continues to be solid and we are cautiously optimistic that that's going to continue in 2008. When you put the aggregate together, we are planning for growth in both sales and net earnings over the next 12 months.

With that, that concludes the prepared remarks in the call. I would ask you to open up the lines for questions.

(OPERATOR INSTRUCTIONS). Robert LaGaipa, Oppenheimer.

A few questions, one just to start out with the Lubrication segment. Obviously, I think most of us were aware of the $0.5 million related to the integration costs. Could you maybe just talk about what was the magnitude of the charges related to all of the other issues that you mentioned -- you know, the factory efficiencies, the warranty costs, the inventory charges, etc.? What kind of ramp should we expect starting in the first quarter and moving on throughout the year in terms of the margin?

Bob this is Jim Greener. If you take the items that were mentioned in the press release and Mark's comments and you add those back to the actual operating earnings, you get an equivalent number to the fourth quarter of 2006. So they really reconcile all of the differences. They are about equal in magnitude, all those identified. So hopefully, that helps you understand the 6% margin.

So your margin would have been closer to 22% excluding all of these different items?

Right.

And all of these items are now behind you, so are we expecting to get to that type of level as of the first quarter?

We expect to have some head wind from efficiency. We moved two factories. We have new people in place running the machines, new factory layouts. So the efficiency will take some time during 2008 to get back to that level. We're not expecting any of the other costs to reoccur. So our plans are in place. We are optimistic by the end of the year that we'll be back to or slightly exceeding previous operating margins.

Terrific. Along a similar line is the new product launch costs. I think you're originally looking for $0.5 million in the fourth quarter, ended up being $1 million. Does this now mean that the costs should be a little bit less in 2008? Because I think you were looking for $4.5 million in 2008.

Yes, I think we were looking for $4.5 million with $0.5 million in 2007, and now we would be looking for about $4 million in '08 with $1 million in '07. So the total being $5 million.

Yes, we're still confident in the $5 million in aggregate.

Okay, terrific. Last question if I could, and this one relates to the share repurchases. Obviously, this last year or so the housing market has been in significant decline. It's certainly having an impact on your operations and your results. What was the rationale behind levering up the Company to repurchase shares over the course of the last year? And now that you are levered up to 34% total debt to cap, what is your thoughts on share repurchases and any use of cash on a go-forward basis?

Well, Bob, we look at our leverage a little bit different than you look at it. We look at it as a multiple of free cash flow or a multiple of EBITDA. As Mark mentioned, our cash from operations increased 14% last year to $177 million. So we see our debt level still at the current total amount of $126 million to be quite manageable. It's less than one year's free cash flow, even after accounting for the dividend. So we see the leverage as not really being as significant as you do. We are comfortable with our outstanding authorization of 6 million shares remaining. We will be buying those, and again, we'll be moving through this cycle at some point in time, and whether that's six or 18 months, we're not sure. But stock is a value in our minds.

Andrea Wirth, Robert W. Baird.

I just want to dig a little bit into the margins, just of the overall business. It still continues to be very impressive. Essentially if you try to come up with an incremental margin, scrubbing it of currency and even giving kind of a more normalized margin for lubrication, essentially adjusting for Lubriquip, you're still posting some very impressive incremental margins despite some tougher volumes. Just wondering if you could walk through essentially what are the levers that you're pulling right now in order to really continue to generate these impressive operating margins?

We have some good metrics and some good culture in place here that allow us to continue to make improvements in that metric year-over-year. Of course, often we hear, well when are you going to run out of headroom there? But we don't really see that happening. We have pricing power in most of our channels of distribution and we continue to do that. We will do that again here in 2008. In February, we have a price increase that goes through. Our factory people are driven year-over-year to do cost reductions and get us actually net cost reductions, and so we spend a lot of time focusing on the factory operations side. We're going to even put more spotlight on that here in 2008 as we recognize that that's going to be very important to having a good year in 2008. And really, through our distribution model, our ability to generate incremental margins that are very attractive are because we sell through third-party distribution. And as we expand our distribution base, they put in place in the engineering and some of the other costs and allow us to do have less of an expense increased on the operating side than we see on the revenue side.

So all those things really contribute to the opportunity for us to improve our margins. We are continuing to work all of those things.

I guess maybe just to drill down a little bit more just specifically. This year, would you say a lot of more the easier work has been done; for instance, letting go of temporary workers, taking down shifts, things like that? Or, has that already been done in '06? I' just trying to get an idea of really what's left in '08. I know a lot of easier stuff was already completed in '07. You look at the '08, it actually may be a little bit tougher. And say we do get into a scenario where you see even tougher margins, or tougher volumes, I should say. Do we start seeing [decrimental] margins when we get into '08, or is there still a lot more that you can do, even in that type of environment?

You know our factory are pretty centralized here in the Twin Cities. We went to great pains over the years to make sure that we have flexible work force and we have the same machines in our different factories. We really have not had a lot of volume pressure in our factories. If you look at overall, our actual volume going through the factories is fairly flat. We have incorporated a couple of acquisitions up here as well that has given us some incremental hours. So we have not had a big challenge on the burden side in our factories. And in fact, most of the year, we did continue to run with a temporary work force and I anticipate that we will have some temporary employees working, particularly in our seasonal businesses here, in the first half of the year. So I would not look at 2007 as being particularly challenging from managing the activity in our factories. Based upon our plans in 2008, I think we're going to be okay. Of course, we have contingency plans if things change, but that is not a major concern of ours at this point.

And then just the industrial businesses, in North America specifically you had mentioned obviously there was more residential related businesses that are being served there kind of secondarily that are going to experience some toughness. Have you seen any softening yet in the basic industrial businesses that you serve? I'm just trying to get a sense of where things are there and honestly what is your outlook for that going forward? Because most out there are assuming the industrial North America at least continues to soften or soften fairly significantly next year.

I think what we have seen going through the year has been pretty consistent in terms of a mixed bag. We've had some segments that we've seen nice growth. Our protective coatings business, our possess business, our foam business, we have seen pretty consistent growth in those categories and we continue to struggle on some of our sealant and adhesives business as it relates to automotive and window and door industry. So I haven't really seen a significant change there. And we had some segments strengthen a little in the fourth quarter and some weaken a little. But overall, I would say our business is still looking fairly consistent in the industrial side.

When you look into '08, or into I guess as '08 progresses, are you expecting to essentially stay as is, or are you generally planning for more of a softening in the industrial?

In terms of the end markets, I think that we're going to see some stability there. I'm not a believer that we're going to go into an actual technical recession. So I think our opportunities on the growth side, although they're going to be small from a market standpoint, are going to be there. Plus, we have a lot of new product coming out in 2008. We have good programs. We're getting really getting some traction with some of the things we're doing on the acquired businesses. So from our standpoint, we are pretty optimistic that we're going to be able to generate some good, positive head wind in North America here in industrial in 2008.

A couple of quick questions on the share repurchase. How would essentially potential acquisitions feed into the share repurchase plan? Are they mutually exclusive, or if you do find some fairly attractive deals, would that eat into the potential share repurchase pot? I'm just trying to get an idea of how much that could play into potential repurchases.

We see that our capability of doing both. We have our revolver in place before the credit. (inaudible) cycle changed on us. It's available up to $450 million. As you know, today, our after-tax costs of borrowing are about 2.5%. Our dividend rate is in excess of 2%, so we still think it's a fantastic use of capital to buy shares back at these prices, and we are looking at acquisitions and we feel the credit line will be able to handle both.

Just looking at your -- you had mentioned the debt levels before. What is your comfortability level as far as how far up you would leverage your debt balance?

We've talked about it the past and I think we still all agree that we can easily manage the Company with two to three times debt to EBITDA on the balance sheet and our EBITDA's over $250 million. So we have a lot of room to go there.

Ajay Kejriwal, Goldman, Sachs & Co.

I am wondering if you could provide some more color on the 20% decline in Contractor in the U.S. How much of that was related to Home Depot, and if any of the decline at Home Depot related to the loss of the Wagner contract? I know that contract kicks in some time this year, but wondering if there was some impact from inventory liquidation as a result of that contract.

This is Pat. I will take a crack at it, and then maybe Jim can follow up with some detail. Most of our decline in Q4 was on the paint channel side, not actually on the home center side. Our decline was larger in the paint channel. One of the dynamics that we saw in the fourth quarter that has been significantly different in years past is we didn't get typical year-end buys for most of our large accounts that we have in the past. I think part of that was driven by continuing discipline on their end in terms of managing their inventories. Part of that was also driven by our typical rebate programs where we rebate distribution for growth over prior year. And with the current market conditions, most distribution was not going to see growth over prior year and so a year-end buy didn't make sense from a financial perspective and also from inventory discipline. So that was something different that we saw in the fourth quarter that may not carry over here into the first quarter. Obviously, we're watching market conditions carefully. Certainly I think housing starts on average will be lower in 2008 than they were in 2007. But helping us on the upside is the fact that I think the channel has already done a pretty good job on inventory reductions. So hopefully, we're going to see our sales distribution more line up with their sales out the door.

So I think we're looking at a mixed bag, but we think there's some possibilities for us.

So just so I understand this correctly, the sell-through was higher than your sell-in, in the Professional channel?

That is correct.

Okay. And you also mentioned that January you saw flat order trends. I'm wondering if you could elaborate on that a little bit. Are you seeing a pickup, or is it just easier comps?

I think we are probably seeing easier comps from -- of course, as the year wore on last year, things got tougher. But we are definitely seeing a little bit of a pickup from the fourth quarter. I think it's really too early to read a whole lot into that, but I think it's encouraging that we have seen a slight change in the run rate from Q4 into the first few weeks of January here.

Lastly on Europe, growth remains healthy, but it looks like it slowed a little bit in the fourth quarter versus third. I'm wondering if you could provide any color on what you're seeing in Western Europe versus Eastern Europe?

We did see a little bit of slowing in Q4. We have done our first-quarter promotional planning with all of our key accounts over in Europe, which is really an annual process that we go through. And both Western and Eastern Europe, our distribution channel is pretty optimistic about what our growth targets are and have been working well for us to put together plans. So I still feel like we're going to see good growth in Europe, and I think certainly Eastern Europe is going to be much hotter from a percentage standpoint. But I don't think that we're at risk right now of a backslide in Western Europe where we would actually see declines year-over-year. I think we are still going to see growth. It would probably be more reasonable from a historical perspective than we saw in the first half of last year in Western Europe, but I think it's going to be pretty decent conditions over there nonetheless.

Ned Borland, Next Generation Equity Research.

I had a question about the top line in Lube. It seems to have fallen off a bit here. It was down. Is this really a debt economically cyclical of a business, or is this something you see maybe accelerating a little bit here in '08?

It's primarily a North American business today. I think that some of the things that we're seeing in North America, some of the pressures we're seeing in general, are impacting our Lube business as well. One of the things that has been a nice growth driver in Lube for a few years has been car dealership projects. Usually when they put in a nice new car dealership, Graco gets a nice chunk of that business on the equipment side. And we have seen some pushing back of projects from the second half of '07 into 2008, and I think probably driven by the concerns everybody has about what is happening in the marketplace.

So I don't think there's any fundamental shift. I don't think there's any market share change but there has been a little bit of impact here in North America just on a project basis.

And then you said that basically your bookings were flat in January for Contractor. I remember last year in the first quarter, you had to issues with some of your housing related and Industrial businesses. How are the bookings shaking out there in January?

We don't have that level of detail split out on our Industrial numbers in terms of by segment at this point in the year, so I don't think I can give you a good answer on that.

Okay. Finally, on the latest acquisition, GlasCraft, what kind of a timetable are we looking at for that versus what you had to go through for Lubriquip?

In terms of the closing, Ned, we are looking at hopefully getting the deal closed by the end of February. We obviously have to get through some regulatory approvals and they need to get a proxy in front of their shareholders and that proxy needs to get voted. But hopefully by the end of the February time frame, we will be able to say that we own it.

Ned Armstrong, FBR Capital Markets.

Again with regard to the acquisition front, one, have you seen any change in the market with regard to the willingness of the potential sellers that you track to sell? And two, have you thought anymore as to expanding the businesses that you will look in for acquisition candidates?

I will take the first part, and maybe Pat can take the second part. But in terms of what we have seen, we have not really seen any kind of a meaningful pickup in the level of deals that are being put in front of us. Anecdotally, we have a lot of people coming through here telling us that we can expect to see that and that prices should also expect to come down because the financial sponsor money is pretty much dried up. But realistically, most of the deals that we have looked at in the past, there has not been a tremendous amount of financial sponsor pressure in there. We tend to look at smaller deals based on the opportunities that the Company has in front of it right now. We are hopeful that the market is better for us in '08, but in terms of specifics, I would have to say the pipeline is pretty consistent with what we have seen in the past.

I will let Pat handle the second part about what we might be looking for going forward.

We really have not changed our strategy or our focus in terms of the kind of companies we would be interested in acquiring. We have a fairly substantial list of both companies and industries that we're interested in. Typically we're going to be looking at things that are going to be more bolt-on in nature. That may change some point down the road, but not here in the shorter, medium term, I don't think. We're going to be looking for companies that are either competitive to Graco or in markets that we understand that are pretty close to our core business. Fluid handling where we think we can bring something to the table from an engineering standpoint, manufacturing standpoint, and a sales channel management standpoint.

Matt Summerville, McDonald Investments, Inc.

I was wondering, just to revisit the $4 million of Home Depot expense you expect to encounter in 2008, what is the timing of those expenses? Is it pretty level loaded, or is it front end?

It will be front end, I would say evenly split between the first and second quarters. Might be a little bit more in the first quarter than the second quarter.

With the new sprayer line, have you begun to sell those units into Home Depot, or could you reminder us on the timing on that?

We have done our first store sets here in January, and they will be continuing on through into April and May. So we don't know how many of them are in the hands of the end-users yet.

We did sell that through our test stores. If you recall, we started our test back in May. So in the test stores, we had been selling basically the same models that we're going to be selling here as we roll out forward. So we have some experience at a smaller store scale, what is happening there.

So I guess the fact that your bookings are pretty level in January compared to 2007, does that relate at all do you think to this new product launch? And then I guess in the same context, what happens with the unsold units of the prior generation?

The unsold units of the prior generation -- as you recall, we're doing this rollout in waves, and so we have a pretty good process in place to make sure, and we have already done this of course, that we have necked back our production. And then, units that get returned that are unboxed and in salable condition from the stores that are being reset now, we're still getting orders of course for stores that aren't going to be reset until March or April or May. So we are circulating those back out. But the $4 million that Jim talks about being remaining, we have included what we think will be the impact of the leftover old units in that calculation.

I guess with respect to any other home center opportunities you are looking at or might be looking at, can you update us on that?

I don't have anything specific to share, other than that we would be very interested to have additional customers, and our sales team is working hard to try to make that happen.

With respect to the Contractor business in Europe, are you seeing any housing-related softness there, and is that a concern in 2008?

It's not really a concern for our business in 2008 from over there from a CED growth strategy. Our strategy in Europe has consistently been to convert people from brush and roller to airless sprayers. And the conversion rates are still really low. So our guys go out there every day and they're really training contractors how to use sprayers, and that is what sprayers and that is what drives our business. It's not really a market share fight or a channel fight like it is here domestically. We are seeing some softness in housing in certain areas of Europe, as I'm sure you're aware. But we don't think that that's going to have a material impact on our ability to continue to grow Contractor in that region.

Within Contractor for all of 2007, do you know what the geographic breakdown was in Americas, Europe, Asia-Pac, as far as a percent of revenue?

For the full year?

Sure.

Yes, let me give them to you here. In terms of percentages, the Americas was about 68%, Europe was about 23%.

And then the rest Asia? Perfect, thank you. That's all I have.

Charlie Brady, BMO Capital Markets.

This is actually Tom Brinkmann standing in for Charlie Brady. I just wanted to ask you a couple of things. First of all, I know you went through some of these items quickly in previous questions. But the Contractor segment, I don't if you can quantify how much the sales were down, splitting it between the home center division and the professional paint stores division.

We typically, for competitive reasons, don't break those apart.

Okay. And you mentioned -- the answer to the last gentlemen's question you said was evenly split between Q1 and Q2. What was that question?

The question was, the remaining $4 million in cost for the Home Depot rollout, and that's as we look forward, we looked at costs to be evenly split between the first quarter and second quarter.

And then the other thing was, has Home Depot allocated any additional stores to Wagner, or is there any update on that in terms of exclusivity situation?

No, just the 20% that we had talked about before.

And I guess which line of business will see that February 2008 price hike you mentioned earlier in the call?

That's all divisions. I think in Europe, we actually went January 1, if I'm not mistaken. But here in North America, all divisions implementing their price increase on February 1. That ranges -- that's not an across the board. It ranges by product line or even part number within product line.

Terry Darling, Goldman, Sachs & Co.

On the price increases, can you give us the range that we're talking about that?

I think we are probably going to realize somewhere in that 1.5% to maybe 2%. Our list price increases may be different than that, but I think that is what we will probably end up realizing.

And I'm wondering if you can give us the geographic breakout on Industrial and maybe talk about your Asia business there broadly in terms of growth rate expectations, '08 versus '07.

Sure. Mark will run the numbers for you here on the percentages on Industrial.

The Americas was about 48%, Europe was about 31% and Asia was the rest.

In terms of growth prospects in Asia, we had a good fourth quarter and we expect that environment to remain strong. We have really done well in most of the geographies across most of our product lines and I think -- the GDP numbers that they are projecting are slightly less I think for 2008 than 2007, just from a market conditions perspective. But I think we're going to do well. We've added distribution in that region in 2007 that will deliver incremental sales in 2008. We have put additional salespeople on the ground. Quite a number in the second half of 2007. And as those folks come up to speed, they will be doing a good job growing the business for us. Then we have the new product that we launched through all divisions in there. So I think we are in pretty good shape for Asia going into 2008.

Just to clarify there, I think I was under impression you were growing in the 15, 20% range on a full year basis '07. If you're putting in more heads, is it reasonable to assume you have a potential for an acceleration of growth in Asia in that business, just the industrial side?

That's hard to say. I don't think I could take a stab at that one for you.

We certainly feel that the market opportunity is there. It takes time to get these people trained and up to speed. So we believe it's a positive return on investment.

On the North American contractor '08 outlook, is it reasonable to assume that the decline ought to be greater in percentage terms than what you saw in '07, given the way the residential fixed investment numbers look across the board, or are you thinking that the inventory adjustment process that you have seen suggests that you're going to see some improvement? It would obviously be down, but not as bad as in '07.

You know, it's hard to call at this point, even for us, and obviously our backlog is extremely short, especially in that business where most of the things we ship out pretty quickly. In our view, commercial is still going to be good for us in 2008. Even if, as some predict, there is going to be a slowdown coming in the second half of '08, we really lag that because the cement truck guys are going to see it way before we see it as selling painting equipment. So I think commercial is going to still give us a good opportunity.

Remodeling is probably going to be in the neighborhood of 2007 in terms of the overall expenditures. That is assuming that we don't go into an actual technical recession. On the housing starts front, I think the number that they're looking at for 2008 is in that million housing start range, which is going to be less than, significantly less than we finish up in 2007. But we also did have some channel inventory reduction. So I think it's a pretty uncertain time for us and we're really going to work on controlling the things that we can control, our new product launch, our programs, our end-user call on commercial, and we're going to have to let it play out a little bit.

I wonder if you can be a little bit more specific about your expectations for the path of recovery on the lubrication equipment margin. Do we see the first quarter getting back into the teens? I know you mentioned a longer-term target of being above where you were prior to the integration and back in the mid 20s. But I'm trying to get a better understanding of what your expectations are for timing there.

I would expect that they will be in the teens in the first quarter. We would like to see them get up into that 20, 21% for the year by the end of the year. In order to do that, we need to be in the teens here in the first quarter and we need to continue to accelerate through the year. We have good plans. It's really a matter of executing to those on schedule.

Just to be clear, exiting '08 in the low 20s with that mid-20s target further down the road?

That would be correct.

And lastly, can you give us the foreign currency impact on net income fourth quarter and 2007 in total?

For the fourth quarter, roughly about $3 million, Jim, does that sound right?

Correct.

And for full year, about $7 million.

John Franzreb, Sidoti & Company.

Just one question. Could you talk a little bit about your total distributors, how many you added in 2007, and what are your expectations of increasing your distribution count in 2008?

I cannot give you number. I know that in Europe, and I did recently look at both Europe and Asia where I track it more closely, and I think we were 194 in Europe and Asia that had significant sales over the last 12-month period. Of course in North America, we get distributor growth when Sherwin-Williams opens up new stores, and same thing with Home Depot. It tends to get a little bit different focus from it. But we're going to try to accelerate in Asia our activity over there, and I think with the additional headcount that we have been putting in in the second half, that we should continue to see good activity hopefully on the plus side in 2008. I would say Europe probably for 2008 would be similar. We have added headcount, focusing on Eastern Europe and the Middle East to some extent, but I would think that the distribution expansion in Europe would be similar to this year.

Similar in magnitude, or --?

Yes. So I would say Asia, I'm hoping to see more; Europe I would say would be similar. And I cannot give you the North American numbers.

(OPERATOR INSTRUCTIONS). And there are no further questions. I would like to turn the call over to Pat McHale.

Alright. Thanks for your participation on the phone call today. Obviously we have our work cut out for us in 2008, but I think we have good plans and we're going to work hard to make sure that we execute to those and hopefully we'll give you an upside surprise some time here. Thank you.

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