Graco Inc (GGG) 2008 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter and year-end 2008 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 is 11124982#. The replay will be available through January 30, 2009.

Graco has additional information available in the PowerPoint presentation slide, which is available as part of the webcast player.

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 perspectives for the future. These remarks constitute forward-looking statements for the prospectus of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ from those indicated as the result of various risk factors, including those identified in Item 1A of Exhibit 99 to the Company's 2000 (sic) 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 of the time they are made. The Company undertakes no obligation to update these statements in light of new information or future events.

During this presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to Caroline Chambers, Vice President and Controller. Please go ahead, ma'am.

Good morning and welcome to everyone. I am here this morning with Pat McHale, President and CEO, and Jim Graner, our CFO. I will briefly review our fourth-quarter results and then note some of the business highlights for the segment. Pat will then provide some additional comments. Following these opening remarks, we will open up the call for your questions.

Sales declined in the fourth quarter as compared to the same quarter last year. The strong sales growth in Europe and Asia seen earlier in the year did not continue into the fourth quarter. The weakness in the Contractor and Lubrication segments in North America seen earlier in the year continued in the fourth quarter and the Industrial segment also slowed.

The gross profit margin as a percentage of sales was about 49% this quarter as compared to last year's rate 53%. Declines in production volumes affected absorption of factory overhead and a reduction in workforce was made in December.

Operating expenses in the fourth quarter include $3 million related to a workforce reduction, $4 million for the write-off of certain intangible assets, and $6 million related to expenses in the Contractor for the launch of the entry-level sprayer (inaudible) additional paint and home center outlets.

Net earnings are down 21% on a year-to-date basis and down 72% for the quarter as compared to last year. Earnings per share decreased by 70% in the quarter. Included in that net earnings was interest expense that was approximately $1 million as compared to this quarter last year, though this amount is consistent with the prior quarter.

The effective tax rate was 21% this quarter as compared to the fourth quarter of last year.

Legislation renewing our R&D tax credits occurred in the fourth quarter. This benefit decreased both the fourth-quarter and the full-year tax rate.

A couple of comments concerning cash flows -- cash flows for operations were $162 million in 2008. The primary uses the cash included capital expenditures of $30 million, acquisitions of $55 million, dividends of $45 million.

Share repurchases totaled $115 million during 2008. As we noted last quarter, the share repurchase program is currently suspended.

At year end, we have drawn down about $180 million on our long-term credit line. Available unused credit lines totaled $87 million at year-end.

We also made a brief comment regarding pension. We do not believe that we have a requirement to make a cash pension -- a cash contribution to the pension plan in 2009, though we may choose to make a contribution later in the year.

A few brief comments about the segments -- a reconciliation of the change in operating earnings as compared to the prior year is included for each of the segments in the slides provided for the webcast. Overall, the segments were affected by unfavorable currency and lower order rates and sales volumes in the fourth quarter. The affect of unfavorable exchange impacted fourth-quarter operating earnings for the Industrial and Contractor segments by approximately 3 percentage points each. As a result of the lower production volume, unabsorbed manufacturing costs affected operating earnings by about 2 percentage points in each of the segments as well. The charge for workforce reduction in December affected each of these segments by about 2 percentage points for the quarter.

The Industrial segment operating earnings in the fourth quarter were affected by about 1 percentage point related to the GlasCraft acquisition and the integration costs. The Industrial segment was also affected by the write-off of trade names and other intangibles of about $3.5 million, which affected operating earnings by about 3 percentage points in the quarter.

In the Contractor segment, the impact of the Airlessco acquisition in the fourth quarter was about 2 percentage points in operating earnings and, as mentioned earlier, costs associated with the rollout of the entry-level sprayer and additional paint and home center stores was $6 million in the fourth quarter and affected operating earnings by 8 percentage points as well.

We also would like to note that we continue to make investments in new product development, and the increased rate of investment for the quarter and the year has also affected operating earnings to some degree in each of the segments in the quarter and certainly for the year.

With these comments, I will turn it over to Pat.

Good morning.

Business conditions in Q4 were obviously difficult for us. Although we are disappointed with our short-term results, we continue to take actions and make investments that strengthen our business model and our competitive position.

The recent quarter was negatively impacted by several items that I'm confident will deliver strong long-term returns for us. For example, while it hurt us during the quarter, the entry-level program in Contractor was a nice win for us. The Contractor team really throughout the year of 2008 did a great job expanding our presence and taking market share in this product category. We also continued full ahead with our incremental investment in new product development and selling and marketing for Europe and Asia and to execute our plans for recently acquired businesses. Our strong cash flow, balance sheet, and leading product position will allow us to be aggressive during this downturn.

Our cash flow for the year and for the quarter remains strong. We have access to adequate credit at favorable terms to execute to our strategic plans.

We are of course managing headcount and discretionary expenses closely. During the course of 2008, we reduced our headcount by approximately 15%, primarily in North America and, I'm happy to say, without a serious impact to our long-term growth strategies.

On the topic of new product development, during 2008, we achieved our goal of ramping up our investment in new product development. I've talked about our initiative there for quite some time.

We have increased our engineering headcount and launched additional design projects. We now have the most robust new product development program in the history of the Company, and we should begin to see the first fruits of the incredible investment in the second half of 2009. In 2008, we invested $37 million in new product development, which is a 21% increase.

During the past year, we launched 34 significant products and platforms. Last year, 26% of our revenues came from products introduced within the last three years.

This year, in 2009, we plan to interest launch 40 significant products and platforms, and we will begin to see the positive impact of the incremental spending. In 2010, we will achieve the full impact of the 2008 incremental investment decisions.

We also continue to be extremely positive on the long-term growth opportunities we see internationally. We see tremendous opportunities for long-term growth, both in the developed and especially in the developed economies.

Our go-to market model permits us to expand geographically with what I will call an asset-light approach. So we just put salespeople in, they set up distribution, and we only need to add infrastructure later when critical mass is achieved.

During 2008, we increased our capabilities with significant additions to our international sales and marketing efforts. For example, in Asia, we increased sales and marketing people by one-third, a substantial increase. In Europe, we increased our sales and marketing people by 15%. In Mexico and Latin America, off a small base, we increased by 70%.

We also believe our distribution channel is a major competitive advantage. Our channel is a major barrier to new entrants into our market. It really allows us to focus on what we do best, provide a fast, scalable way for us to enter new geographies and new segments, and provides our customers with local engineering, training and service support.

We worked diligently during 2008 to expand our distribution coverage around the world. Adding new outlets is really like planting seeds. Over time, they generate substantial new revenue for us. In 2008, we added 1300 distributor locations, which is a 5% increase. 350 of those were Europe, and about 280 of those were in Asia.

On the acquisition front, we continue to look for opportunities to acquire businesses where we can add value. During 2008, we made four acquisitions. Two in our Contractor space provided some new branding opportunities for us, as well as consolidation of some smaller players in the market. In our Industrial segment, the GlasCraft acquisition strengthens our position in what we think is a very attractive spray foam and protective coatings markets, while it also gives us some additional capabilities in new markets to pursue in composites. The acquisition of Lubrication Scientific builds our position in the Industrial loop segment, which we've targeted as an attractive market for long-term investment for our Lubrication division.

Excellence in operations remains a key priority. For the sake of time, I won't go through those details now but you can remain assured that our zest and zeal for improving operationally continues.

In terms of outlook, near term, we expect our business to remain challenged. Our incoming order rate for January is lower than Q4, partly driven by a very soft week of January week one, which was the holiday week.

We're down about 25% to 30% compared to January of 2008 with North America declining the most and Asia and Europe flat. I can't project these kind of numbers out through the quarter, but at least you have the most up-to-date information regarding what we are seeing right now.

In North America, we expect residential construction to be weak through 2009 and commercial construction and remodeling expenditures to decline. We expect automotive and automotive theater to remain under pressure for 2009, although we are still seeing some project activity. In Industrial and Lubrication, really few segments or geographies show any signs of strength short-term. We see customers reducing capital spending and we see inventory coming out of the channel at all levels, both at the end-user level and with our channel partners.

Certainly, stabilization of inventory levels should help our incoming order rate. We expect the developing markets will outperform the developed markets in general, and we do have opportunities to grow the pie as well as take market share.

Our competitor base is stable, no irrational behavior has been observed. This downturn could put some pressure on some of the smaller niche players, which might be good for us over the long term.

Our long-term business model and strategic plan is sound. We continue to diversify our business geographically and with the addition of new market niches. Industrial production and the emergence of major developing countries as consumers will drive demand for our products.

We have detailed growth plans for each business segment, and we're funding those plans even through this downturn. We invest heavily in technology and we have number one or number two market share positions in most of the niches we serve. We have an incredible global channel developed over decades that is a huge barrier to entry, and our channel partners are profitable. The Graco brand and value proposition to the end-user is strong.

While we do have substantial short-term challenges facing us, we also have some short-term opportunities. We've implemented a 2009 price increase and we expect to realize at least 3%. We also will have the elimination of one-time costs associated with the 2008 entry-level programs of about $12 million. We will also have elimination of one-time costs associated with the 2008 acquisitions, and we will have improvements implemented due to the integration activities. We are working hard to recoup the material cost increases we experienced in 2008, and we've got a solid new product launch program for this year.

In closing, I'd like to reinforce that although not reflected in our short-term financial performance, we built a stronger company in 2008 and we intend to do so again in 2009. We are managing the business thoughtfully, mindful of the current environment but not simply slashing expenses to achieve cost-reduction targets. We will monitor and make adjustments as conditions warrant. We will continue to invest when others may not, and we expect our shareholders will be rewarded when the current storm has passed.

With that, I would like to turn the call back over to the operator and open it up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Matt Summerville.

Good morning. Matt Summerville with KeyBanc.

You mentioned that incoming order rates in January were down 25% to 30%. Are there any particular trends across the business segments or the three major geographies?

Yes, I would say, from an incoming order rate perspective, we are seeing the biggest declines in North America, where we are seeing Europe and Asia more or less flat.

You mentioned that incoming order rates in January were down 25% to 30%. Are there any particular trends across the business segments or the three major geographies?

Yes, I would say from an incoming order rate perspective we are seeing the biggest declines in North America, where we are seeing Europe and Asia more or less flat.

Flat with fourth-quarter levels, or flat on a year-over-year basis?

Flat on a year-over-year basis.

Okay. Restructuring costs in the fourth quarter I think were a little bit less than what you originally were looking for. Does that mean we have some spillover into '09 or did it just turn out to be less expensive than what you thought?

Hello, Matt, this is Jim. They were pretty much right on line with what we shared with the world. There was about $1.5 million that went into cost of goods sold and $3.5 million that went into operating expenses plus -- so a total of $5 million, plus the $4 million in impairment charges on our intangibles.

Okay, yes, it was the $1.5 million I didn't see then.

What would be your tax rate for 2009 you anticipate right now?

Around 33.5% to 34%.

Then I guess, given where raw material costs are now, when would you anticipate being in parity or better than that from an average selling price standpoint versus, again, the input costs?

Well, from an input costs perspective, most of the spike in material costs came in the second and third quarter of 2008. So the first quarter here, we are looking at about flat to the first quarter of 2008, and we should see a benefit in the second and third quarter. We believe, overall, that, with the exception of our unabsorbed costs because of volume, our price increases should be realized to the gross margin line.

Great, thanks a lot.

Ned Borland.

Next Generation Equity Research. Just talking about product-development spending for 2009, are we looking at sort of the same run rate that we saw in the fourth quarter?

Yes. I think, on a year-over-year basis, we might be slightly up, but we are not going to see a 20% kind of increase again in 2009. We should have achieved, really, our basic run rate. Projects of course, the expenses come in different times, and sometimes they stack up a little more in one quarter than another, but I think, overall, we will maybe see a slight increase.

Okay. Do you have sort of a ballpark for the opportunity for the entry-level sprayers for 2009?

You know, that's kind of a wildcard. I think I probably won't take a stab at that in this environment. You know, in a normal environment, we would see an opportunity in the paint channel, probably in that $10 million-plus range. Kind of all bets are off right now.

Okay. Then Contractor on Europe, in years past, has been kind of a market-penetration story, but of course the housing market is probably worse over there. Has penetration in Europe run its course or are you still seeing signs of market penetration over there?

No, I think really we are in about the third inning of a nine-inning game there. We made a lot of progress in the last five years, really tripling that Contractor business over there. But the spray rates are still pretty low. In places like Germany and France they might be in that 35% to 40% range, but as you move east, that drops pretty dramatically. So despite the fact that the market conditions are bad, which does hurt us significantly because distributors don't want to stock inventory and the other dynamics that are going on, we will be working probably harder than ever in 2009 to do market share growth through conversion.

Okay, great. Thanks.

Matt Summerville.

Yes, just one follow-up question -- with regards to the anticipated $18 million increase in pension expense, how would that look if you distributed it across the segments? Does any of that go into corporate expense?

In the way we report our segment results, all of it will go into the segment expense lines, none of it into the -- but you see after segments, and it's really as a percent of salaries in those segments. So, it will really hit all segments equally.

So I guess if I wanted to allocate the $18 million between the three segments, if I do it on a percent of sales basis, will I get pretty close?

Yes.

Okay, that's all I had. Thank you.

Charles Brady.

BMO Capital Markets. Just in reference to the new product development, can you give us a little more detail kind of where those -- what those products might be, just in broad terms, and kind of the allocation across the three segments, kind of when you really might start seeing recognition of some of the benefit of the pickup of new products in '09?

Yes. I don't want to talk specifically about the 2009 new products, but in general, as we did this ramp-up in our product-development spending, we caught all divisions. So, we shouldn't have any laggards in terms of seeing an incremental increase in the output from any of the groups. As I talked about when we started this initiative about a year ago, a big piece is getting people hired, getting them trained and getting the projects going, and we've successfully done that. Typically, projects have that 12 to 18-month time kind of time from when we get it off the ground to when we launch the product, and so we should see, in the first half of 2009, what I would call sort of a normal run rate for product launches for Graco. In the second half of 2009, we will start to see the incremental products launch that would not have launched had we not made the runoff. Then really in 2010, you should see a step-function increase in the product-development launches that we do. They really range the gamut from being upgrades and gap fillers to being new technologies out there.

We did -- I think there's some slides out on the Web somewhere where we talk in general in terms of our product-development growth strategies at a conference that we did last August that I would refer you to.

Thanks. I don't know if you covered this in the opening remarks -- just in terms of declines in home center and the paint center channel?

We did not, and we are seeing double-digit declines in both.

Thanks.

Terry Darling.

Goldman Sachs. Pat, I'm wondering if you could just clarify on their commentary on the January orders -- north America down substantially, Asia-Europe flat year-over-year. That sounds like a pretty substantial change in kind of the mix of what's going on in the geographic markets versus December. Maybe I've got that wrong, but I wonder if you could talk about what might be the drivers of that change profile, or is it just we've got a couple of weeks of data and so don't get too carried away there?

Yes, I think the latter, and that's the way I'm really looking at it. You know, our business was fairly consistent through the fourth quarter in terms of the weakness that we saw across the board. There are a couple of things that are happening. In Asia, we've got a price increase that's going through here on February 1 versus January 1 for the rest of the world, so we may be seeing some bookings activity ahead of that price increase that might skew the data a little bit.

Europe, we generally start the year strong with promotional programs, nothing new versus last year, but there's always some timing of when our guys get out to the key accounts. So I think I would not expect that the big disparity that we're seeing between North America and the rest of the world would last through Q1. Also, we only do have probably three weeks worth of good data under our belts here, so extending the 25% to 30% out and saying that's what the first quarter is going to look like is probably a stretch as well.

Okay. I'm wondering if we could talk a little bit about a little more detail on the raw material benefits potentially in the second quarter and third quarter, Jim. You know, how big of a head wind was that in Q2 and Q3? It sounds like, just to be clear, we should assume that you do have some kind of a tailwind from raw mats easing here on a full-year basis.

I think you are right, Terry, that we will have some tailwind throughout the year. Last year was about a $5 million impact versus our expectations of the higher costs. Again specifically in the third quarter was some smaller amounts than the second and fourth. We are looking at roughly $500,000-plus positive in the first quarter, so again as you round it off, it doesn't get significant to our percentage returns.

Okay. The $5 million was mainly concentrated in the second quarter and third quarter, to your point earlier, right?

Yes, the highest amount was the third quarter with smaller amounts in the second and fourth.

Okay. Just running through kind of the puts and takes from the fourth quarter to the first quarter, I just want to make sure I'm not missing any of the pieces. So we had $0.17, add back the $0.08 of charges, the $0.06 of new product, we are going to start to see some cost savings, and we've got a little pension hit as well. That sort of rounds up to about $0.29, $0.30 or so as that run rate. Then maybe we've got some seasonality, and then you've got the order issue that's still obviously unclear how that's going to play out.

Are there any other major pieces in terms of that sort of fourth-quarter to first-quarter walk that I might be missing?

Well, the wildcard of course is the exchange rates on the euro right now. I think this morning, it was 1.33, so that's fairly consistent with the fourth quarter, where we averaged 1.32, so right now that should be a non-event. Then of course we've got the absorbed costs.

On our segment reconciliations, we gave you an idea of what their impacts were in the fourth quarter. Of course, our December actions should reduce that somewhat, but again that's a wildcard, should we take production down a little bit more here in the first part of March, again depending on our order rate.

Okay. Then, Jim, maybe you could step us through the cash flow profile on a full-year basis. I mean, the earnings are the earnings. The questions would be should we assume some working capital improvement given the volume decline? Then, where is your current thought process on capital spending?

All right. For sure we are planning to take inventories down. We've got actions in place to bring them down from their current levels. We believe we will even be able to achieve that in our first quarter, which generally is a seasonal build of inventory for us.

Receivables -- you'll see a little spike in the days of sales in the fourth quarter, Days of Sales Outstanding. A couple of things going on there -- one is the large Contractor customers that we have in North America deferred a couple of December payments into January as they were working through their year-end. That's back on track and they are back on the payment schedule.

We are not seeing any more difficulties with respect to our North American channel partners. They are generally quite good.

We are seeing some delays in payment coming from South America, East Europe and a little bit from India. We have plans in place to get those accounts back to current, but that won't happen right away.

Overall, we are confident in our channel and our channel partners and see no need to increase our allowance for doubtful accounts. You may see a couple days slowing in receivables.

With respect to CapEx, we've increased our hurdle rate for our internal decision-making. We are going to fund what our management team brings forward that exceeds that and has positive ROI for the shareholders. But I would generally expect to end the year in the $20 million range on CapEx.

Jim, could you tell us what that hurdle rate has increased from and to?

Yes, we increased it from the teens closer to 20%. Again, we may approve CapEx at lower than the 20% if we see the risk profile as being small.

Okay. Then lastly, kind of a longer-term strategic question maybe, Pat, for you -- back to this analogy of your penetration in Europe, it's kind of in the third inning. I guess the question is, if we assume the world decides to grow again at some point, what inning would we need to be in before you would think about putting some manufacturing assembly into those European markets versus continuing to produce in the US and export it over?

Yes, you know, we do have difficulty taking and breaking our current production volumes up into smaller pieces and moving those around cost-effectively. By the time you buy new machines and hire new people and double up on your tooling and increase your inventory, it washes out a lot of the freight savings. So there's nothing imminent that's happening on that front.

Possibly, if the Contractor business in Europe triples again -- which I think it should and it could at some point in the future -- we get up over $200 million, there may be enough critical mass there to have its own factory. But we are pretty careful in terms of making those decisions so that we take the best long-term ROI and not just kind of a standard cost-type decision.

Very helpful, thanks.

Christopher Glynn.

Oppenheimer. Thank you.

Just on the restructuring savings and headcount reductions, do you anticipate being at that run rate right out of the gate here in '09?

There are a couple of decisions that were executed in late January. People were notified but didn't leave until late January, so I would say about 90% of it will be right out of the starting gates.

Okay. You know, a lot of different pieces with the savings and the pricing and the pension and so forth, you know, blocking all of that out, is there kind of a core detrimental margin that you think about related to your production that is kind of fundamental at all?

I think we tried to get to that point in the reconciliations we provided you on the segments, so I would rather not forecast. I would like you to use your own judgment on going through those line by line.

Okay. Then just lastly on inventory liquidation, it didn't look like inventories were down a whole lot but, you know, how much more would the under-absorbed impact be if you were to reduce inventories more aggressively? Or another way of saying that, would that be a pretty direct relationship?

Yes. Again, as we look at our cost structures, our cost of goods sold, we have about $90 million that I will call in the category of fixed and semi-fixed. With every 10% reduction in production, we will have another $9 million of unabsorbed costs.

Okay, great. Thank you, Jim.

(Operator Instructions). Michael Schneider.

It's Mike Schneider from Robert Baird. Good morning. If we could just spend a minute, Pat, on the approach to the restructuring and headcount reduction, can you walk us through just basically how you arrived at the size of the program and just I guess as that relates to what you are sizing the business for in 2009?

Sure. You know, first of all, you'll recall that we did a small restructuring program in June. We started to see things getting soft, softer I would say, in the beginning of the third quarter and we did about a 50 person headcount reduction in June. I would say that reduction was very selective. We went through -- we didn't target it into any one particular business segment. We really asked all the of businesses and all of the functional areas to participate. From about the late May timeframe through let's call it the end of the third quarter, we additionally reduced nearly 200 temporary and contract workers that is a normal amount of people for us to have here at Graco on the temporary and contract front.

So we did 50 full-time people in June, and then as the production volumes continued to decline, we were taking our Contractor and temporary workers, permanently out of our direct labor and our warehouse pool. When the bottom fell out at the end of September, then we had a need to go deeper.

Really, in terms of the thought process behind it, to the extent possible, I'm going to hang on until my last breath to our growth initiatives that I think have got great long-term potential for us. That's the increased investment in new product development and our investments that we've made internationally. Those are really people-driven organizations, and we worked hard to find the right people and get them on board and get them trained. So, we really kind of had those, for the most part, off-limits as we went through our cuts here in the summer.

In terms of what we did for December, we did execute to a contingency plan that we had developed earlier. That was what drove us to take the 150 out in December.

I would prefer not to give you a view in terms of what revenue that expectation caused us to trigger that contingency plan, but I will tell you that we have additional contingency plans that we can execute to if business conditions look like they are going to be worse than what we planned when we did the December decision.

Looking at the same question a different way, Pat, if you size the business based on Q4 when revenue was down, what, 19%, and orders today are running at 25% to 30%, does that mean there is another contingency plan that is needed or indeed is that the run rate you are sized to?

We did the cuts based upon a view for 2009, not strictly what we saw in Q4 but really kind of a view for the year, looking at our different business segments and geographies.

I would say it's too early to say that we need to execute our next level of contingency plan, based upon what we've seen in January. You know, certainly at a 25% or a 30% kind of run rate, if that looks like a long-term problem, it's very likely that we would be taking a look at what we need to do there.

Okay. Then in Q4, it strikes me that your channel generally doesn't carry a lot of inventory. I think you and I have discussed this in the past. Are you able to determine how much of this was true demand collapse? Or, I should say, can you differentiate between the actual level of (technical difficulty) demand and then how much was actually just inventory correction in your distribution channel?

Yes, in general, no, we can't determine that with any real clarity. We get reports from some of our large retail-type channel partners that indicate what's going on with out-the-door sales so that we can compare that to purchases, so certainly we get some good data there. We did do some kind of sales guys going to the big distributors in Europe and Asia and doing some kind of informal surveying in terms of what they were doing with their inventories across other channel partners in our Industrial segment. We are seeing de-stocking, both at the distributor level but also really at the end-user level. You know, factories out there that have carried X number of dollars of spare parts are tightening their belt and they are not carrying as much as they were, not altogether different than we are doing internal to our own factory operations here.

To quantify that, really, is impossible. The dynamic is definitely out there. How long it is going to take to play through? I don't know. My guess is it's not a huge chunk of our decline and that the biggest part of our decline is really the tightening of CapEx spending.

Again, knowing on the level of inventory that are distributors ordinarily carry, do you think that, based on their inventory turns, they can resolve this yet in the first quarter, or does it even spill into the second quarter for completion?

You know, we've been in kind of a cycle where we've seen distributors adjust their inventory and then things get worse, so they adjust their inventory again and things get worse, not altogether different than we've experienced here on this end. You know, really, it depends. I think they are trying to achieve turns objectives. As the business conditions soften, you have to take further inventory to be able to even maintain the same kind of turns. So there's that dynamic that's out there.

In general, with some exceptions, most of our distribution channels should be able to get their inventories squared away in a three to six-month timeframe. I believe they started that process a while back.

Sure. Then, we are all looking for a ray of hope here in January, the fact that North America is down substantially more and Europe and Asia are actually flat. Can you just spend another minute digging deeper into that? Was the price increase that was issued only in North America, and that's maybe what caused I guess pre-buying in Q4?

We didn't see any significant pre-buying in Q4. Our North American and European price increases went into effect January 1, but we really didn't see anybody willing to trade inventory dollars for pricing. But normally, we would.

The Asia price increase, if you will recall, we did one September 1 in Asia, and now we did another one in Asia February 1. So we could be seeing some pre-buying here in January for Asia in anticipation of their February 1 price increase. Again, the European -- Europe being flat through a few weeks here, it's a little hard to sort out because of the fact that they've got promotional programs running.

Is it also -- is North America down more principally because of contracted business? Because most of your retail customers are on a January year-end, so I suspect they are scrambling here in January. Is that what's pressuring the North American number more?

Interestingly enough, all of the segments are being hit by reasonably similar kind of declines.

Then just in Contractor, the rollout expenses at Lowe's -- was $6 million higher than you anticipated? I guess why, if it was? Then how much is left here in Q1 and Q2 for rollout expenses?

The rollout costs that we've had for the year, you know, we had a couple of different home center partners and a professional paint channel partner. In aggregate and in the fourth quarter, those were exactly what our expectations were.

Are there any more coming in the first quarter or first half?

We don't have every store out there yet, so we're going to keep working on it. There's nothing big that I think we should flag for you, but you can be confident that our sales guys are out there working hard to get every store we can get with every channel partner we can get.

Okay. Jim, just two specifics -- the actual amount of the impairment charge, what acquisition did that relate to? Then what was the precise dollar amount, if you could? I know it rounded to $4 million but it sounds like it was $3.5 million something.

Yes, the precise amount was $3.5 million and they came in -- or $3.6 million. They came in the Industrial segment. They related to brand names that were not amortized.

Okay. Then the restructuring expenses? I'm just curious what those were after-tax.

Well, they were $5.5 million pretax, so they were $4 million after tax. You know, that's related to actual cash payments and enhanced retirement benefits that will be paid out in the future. So cash flow is a little bit different than the operating expense, but not significant.

Okay. Then the final question -- I apologize -- within Industrial, we've talked in the past about the different subdivisions within Industrial. I'm curious if you've seen any major disparities in performance between high performance and sealants and adhesives, etc.

You know, earlier in the year, we had some more disparity, but really when things fell off the map, everybody was impacted. We didn't really have anybody flying through with stars and stripes.

Okay. Thank you again, guys.

If there are no further questions, I will turn the conference over to Pat McHale. Please go ahead.

All right, thank you very much for your time this morning. We are going to continue to work hard on this end and this, too, shall pass. Thanks.

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