Jan 29, 2008
Executives
Mark W. Sheahan - Chief Administrative Officer James A.
Graner - CFO and Treasurer Patrick J. McHale - President and CEO
Analysts
Robert Lagaipa - Oppenheimer &Co Andrea Wirth - Robert W. Baird Ajay Kejriwal - Goldman Sachs Ned Borland - Next Generation Equity Research Ned Armstrong - FBR Capital Markets Matt Summerville - McDonald Investments Inc.
Tom Brinkmann - BMO Capital Markets Terry Darling - Goldman Sachs John Franzreb - Sidoti & Company John Emerick - Ironworks Capital
Operator
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 1800-405-2236 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 till February 1st, 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 opened for questions.
[Operator Instructions]. This conference is being recorded today Tuesday, January 29th, 2008.
During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purpose of the Safe Harbor provision of the Private Sectors...
Securities Litigation Reform Act. Actual results may differ material 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.
I will now turn the conference over to Mark Sheahan, Chief Administrative Officer. Please go ahead, sir.
Mark W. Sheahan - Chief Administrative Officer
Good morning. This is Mark W.
Sheahan, welcome. I am here with Pat McHale and Jim Graner this morning.
I'll open up the call with just a few comments about yesterday's press release and then we'll 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 between $205.2 million. Included in that number, was favorable exchange rate translations which add 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 was 5% with consistent exchange rates; and Asia was up 19% or 17% with consistent exchange rate. 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 6th 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's a 6% increase. With consistent exchange rates, that's 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. Again that reflects the improvements that have been made in that segment particularly some of the acquired businesses that were in the results last year.
We continue 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% and we continue to see the impact of lower residential housing business in several regions across the U.S.
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 the 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 are 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 are continuing to build our presence in that marketplace and seeing nice growth there. On an overall basis, the lower sales in Contractor and 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 Lub were $21.5 million, that's down about 1% from last year. The operating profit margin was at 6.6% 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 and discontinued inventory charges related to the Lubriquip Integration and factory move cost and increased warranty expense. We are pretty well consolidated now on the Lub side for Lubriquip and expect the margins will increase as we move into 2008 as we've talked 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 cost that we experienced in the factories. Our operating profits were good.
The operating profit margin for the year was 26... 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...
the three categories that we break out on the P&L. Our cost of good sold and operating expenses, as we said in the release, include about $0.5 million of costs 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 a bit. Again, the cash from operations was good, was up about 14%.
We used that cash for some of the significant items, included 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 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 and continues to be solid and we're cautiously optimistic that that's going to continue in 2008. And 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 prepared remarks in the call, I would ask you to open up the lines for questions.
Question And Answer
Operator
Thank you. [Operator Instructions].
Our first question comes from the line of Robert Lagaipa with Oppenheimer. Please go ahead.
Robert Lagaipa - Oppenheimer &Co
Thank you. Good morning.
Mark W. Sheahan - Chief Administrative Officer
Good morning.
Robert Lagaipa - Oppenheimer &Co
Few questions, I guess, one just to start off with Lubrication segment. Obviously, I think most of us are aware that $0.5 million related to the integration cost.
Can you may be just talk about what was the magnitude of the charges related to all the other issues that you mentioned? Factory efficiency, the warranty cost, the inventory charges et cetera and what kind of ramp should we expect, starting in the first quarter and moving on throughout the year in terms of margin?
James A. Graner - Chief Financial Officer and Treasurer
Rob, this is Jim Graner.
.
Robert Lagaipa - Oppenheimer &Co
Hi Jim.
James A. Graner - Chief Financial Officer and Treasurer
If you take the items that were mentioned in 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 the differences, they are about equal in magnitude, all the items identified, so hopefully that helps you understand the 6% margin.
Robert Lagaipa - Oppenheimer &Co
So your margin would have been closer to 22% excluding all these different item?
James A. Graner - Chief Financial Officer and Treasurer
Correct.
Robert Lagaipa - Oppenheimer &Co
Okay. And the majority...
all these items are now behind you so, I mean are we expecting to get to that type of level as of the first quarter?
James A. Graner - Chief Financial Officer and Treasurer
We expect that have some headwind from efficiency, we moved two factories, we've got new people in place, running machines, new factory layout, so the efficiency will take some time during 2008 to get back to that level. We are not expecting any of the other costs to reoccur.
So plans are in place, we are optimistic by the end of the year that we would back to or slightly exceeding previous operating margins.
Robert Lagaipa - Oppenheimer &Co
Terrific. And then I guess along similar line is the...
new product launch cost. I mean, I think you were originally looking for $0.5 million in the fourth quarter ended up being $1 million.
Does this now mean that the cost should be a little bit less in 2008 because I think you are looking for $4.5 million in 2008?
Mark W. Sheahan - Chief Administrative Officer
Yes. I think we are looking for $4.5 million with a $0.5 million in 2007 and now we will be looking for about $4 million in '08 with a $1 million in '07, so the total being $5 million.
James A. Graner - Chief Financial Officer and Treasurer
But we are still confident in the $5 million in aggregate.
Robert Lagaipa - Oppenheimer &Co
Okay, terrific. And then last question if I could, and this one relates to the share repurchases.
Now, obviously that the last year or so I mean housing market has been in significant decline. It certainly have an impact on your operations and your result.
What was the rational behind levering up the company to repurchase shares over the course of last year? And now that you are levered up 34% total dept to cap, what's your thoughts on share repurchases and use of cash on a go forward basis?
James A. Graner - Chief Financial Officer and Treasurer
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 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 dividends.
So we see the leverage is 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, again we will be moving through this cycle at some point in time and whether that's six or 18 months, we are not sure, but stock is the value in our minds.
Robert Lagaipa - Oppenheimer &Co
Okay, terrific. Thank you very much.
Operator
Thank you. Our next question comes from the line of Andrea Wirth with Robert Baird.
Please go ahead.
Andrea Wirth - Robert W. Baird
Good morning guys.
Patrick J. McHale - President and Chief Executive Officer
Good morning.
Mark W. Sheahan - Chief Administrative Officer
Good morning.
Andrea Wirth - Robert W. Baird
I just want dig a little bit into the margins just the overall business, 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 wonder if you could walk through essentially what are the leverage that you are pulling right now in order to really to continue to generate these impressive operating margins?
Patrick J. McHale - President and Chief Executive Officer
We've got... this is Pat.
We've got some good metrics, 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.
So, we've got 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've got 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 spent a lot of time focusing on the factory operation side and we are 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 a year in 2008.
And really, so 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 the engineering and some of the other costs that allow us to have lesser than expense increase 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 those things.
Andrea Wirth - Robert W. Baird
And I guess maybe just to drill down a little bit more just specifically... this year would you say a lot of kind of more the easier work has been done for instance, letting go temporary workers, taking down shifts, things like that or has that already been done fixed?
I'm just trying to get an idea of really what's left in '08 and lot of the easier stuff was already completed in '07 you look to '08 and actually maybe a little bit tougher and say, we do get into scenario where we see even tougher margins, do we start or a tougher volumes, I should say, do we start seeing detrimental margin when we get into '08 or is there still lot more that you can do even in that type of environment?
Patrick J. McHale - President and Chief Executive Officer
Our factories are pretty centralized between the twin cities and we've went to great pains over the years to make sure that we've got flexible workforce. And we've got the same machines in our different factories, and we really haven't 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.
And so we haven't 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 workforce and I anticipate that we will have some temporary employees working particularly on our seasonal businesses here in the first half of the year. So I wouldn't look at 2007 as being particularly challenging from managing the activity in our factories and based upon our plans in 2008 I think we are going to be okay.
Of course, we have contingency plans if things change, but that's not a major concern of ours at this point.
Andrea Wirth - Robert W. Baird
Okay, great. And then just on the Industrial business in North America specifically, you had mentioned obviously there is a more kind of residential related business that are being served there kind of secondarily that are going to experience some toughness.
Have you seen any softening yet in kind of the basic industrial businesses that you serve? You just try to get of sense of where thing are there and honestly what's your outlook for that going forward because most up there assuming the Industrial North America at least continues to soften or soften very significantly next year?
Patrick J. McHale - President and Chief Executive Officer
Yes, I think what we've seen going through the year has been pretty consistent in terms of mix bag. We've had some segments, we have seen nice growth.
Our coating... our protective coatings business, process business, our foam business, we've seen pretty consistent growth in those categories and we continue to struggle on some of our sealants and adhesive business that's related to automotive and window and door industry.
So I haven't really seen a significant change there and we had some segment strengthen a little in fourth quarter and some weaken a little bit. Overall, I would say our businesses still looking fairly consistent in the Industrial side.
Andrea Wirth - Robert W. Baird
And when you look in '08 into I guess as '08 progresses, are you expecting it to essentially stay as is or you generally planning for more of a softening in the Industrial?
Patrick J. McHale - President and Chief Executive Officer
Well, in terms of the end markets, I think that we are going to see some stability there. I am not a believer that we are go into actual technical recessions or I think our opportunities on the growth side, although they are going be small from market standpoint, are going to be there, plus we've got a lot of new products coming out in 2008.
We've got good programs, we're really getting some traction with some of things we are doing on the acquired businesses and so from our standpoint, we are pretty optimistic that we are going to be able to generate some good positive headwind North America in industrial in 2008.
Andrea Wirth - Robert W. Baird
Okay. And then just quick question...
couple of quick questions on share repurchase. How would essentially potential acquisitions feed into this year repurchase plan?
Are they mutually exclusive or if you do find some fairly attractive deals, would that eat into the potential share repurchase part. Just to try and get an idea of how much that could play into potential repurchases?
James A. Graner - Chief Financial Officer and Treasurer
Yes Andrea, this is Jim Graner again. We see there are capability of doing both.
We've got our revolver in place before the credit cycle chased on us; it's available up to $450 million. As you know, today our after-tax cost 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.
Andrea Wirth - Robert W. Baird
Okay. And then just looking at your...
you had mentioned the debt levels before. What is your comfortability level on as far as how far out you would leverage your debt balance?
Mark W. Sheahan - Chief Administrative Officer
Yes. We've talked about it in 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 is over $250 million.
So, we've got a lot of room to go there.
Andrea Wirth - Robert W. Baird
Okay, great. Thanks guys.
Mark W. Sheahan - Chief Administrative Officer
Yes.
Operator
Thank you. Our next question comes from the line of Ajay Kejriwal with Goldman Sachs.
Please go ahead.
Ajay Kejriwal - Goldman Sachs
Good morning gentlemen. 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 sometime this year but, wondering if there was some impact from inventory liquidation as a result of that contract?
Patrick J. McHale - President and Chief Executive Officer
Now, this is Pat, I'll take a crack at it and then maybe Jim could follow up with some detail, but most of our decline in Q4 was on the pay channel side not actually on the home center side. Our decline was larger in the pay channel.
One of the dynamics that we saw in the fourth quarter that's been significantly different at year's path is we didn't get the 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, a part of that was also driven by our typical rebate programs where we rebate that 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 our year-end buy didn't make sense from our financial perspective and also from the inventory discipline.
Now, that was something different that we saw in the fourth quarter. The main activity over here into first quarter, obviously we're watching market conditions carefully.
Certainly, I think housing starts on average will be lower in 2007 than they were in 2007. But, helping us on the upside is the fact that I think, the channels 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 are looking at a mixed bag, but we think there is some possibilities for us.
Ajay Kejriwal - Goldman Sachs
So if I... I mean just so I understand this correctly, the sell-through was higher than your sell-in in the professional channel?
Patrick J. McHale - President and Chief Executive Officer
That's correct.
Ajay Kejriwal - Goldman Sachs
Okay. You also mentioned that January you saw a flat order trends, I wonder if you could elaborate on that a little bit.
Are you seeing a pick up or is it just easier comps?
Patrick J. McHale - President and Chief Executive Officer
No, it's... I think, we are probably seeing easier comps from, of course as the year got...
as the year wore on, last year things got tougher, but we are definitely seeing a little bit of a pick up from the fourth quarter. I think it's really too early to read a whole light into that, but I think it's encouraging that we have seen a slight change in the run rate from Q4 until the first two weeks of January here.
Ajay Kejriwal - Goldman Sachs
Great. Lastly, on Europe, growth remains healthy, but looks like slowed a little bit in fourth quarter versus third.
Wondering if you could provide any color on what you are seeing in Western Europe versus Eastern Europe?
Patrick J. McHale - President and Chief Executive Officer
Yes, we did see a little bit of slowing in Q4. We've 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 channels are pretty optimistic about what our growth targets are and have been working well for us to put together plan.
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 higher from a percentage standpoint but, I don't think that we are at risk right now, but backslide in Western Europe where we would actually see declines year-over-year. I think we're still going to see growth.
It probably will be more reasonable from a historical perspective than we saw on the first half of last year in Western Europe. But, I think it's going to be pretty decent conditions over there nonetheless.
Ajay Kejriwal - Goldman Sachs
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Ned Borland with Next Generation Equity Research.
Please go ahead.
Ned Borland - Next Generation Equity Research
Hi, good morning guys. I have a question about the top line in Lub.
It seems to have fallen off a bit here. I mean it was...
it was down. Is this really a dead economically cyclical of business or is this...
some of you see maybe accelerating a little bit here in '08?
Patrick J. McHale - President and Chief Executive Officer
That's primarily a North American business today, and I think that some of the things that we are seeing in North America, some of pressures we are seeing in general are impacting our Lub businesses as well. One of the things that has been a nice growth driver in Lub for a few years has been our car dealership projects.
Usually when they put in a nice new car dealership, Graco gets a nice chunk of that business on the equipments 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's happening in the marketplace. So I don't think there is any fundamental shift, I don't think there is any market share change but, there has been a little bit of impact here in North America just on a project basis.
Ned Borland - Next Generation Equity Research
Okay. And then you said that basically your bookings were flat in January for contract.
I remember, last year in the first quarter you had some issues with some of your housing related Industrial businesses, how are the booking shaking out there in January?
Patrick J. McHale - President and Chief Executive Officer
We don t have that level of detail split out on a Industrial members in terms of buy segment at this point in the year. So I don't think I can give you good answer on that.
Ned Borland - Next Generation Equity Research
Okay. And then finally on the latest acquisition GlasCraft, what kind of timetable we are looking at for that versus what you had to go through for Lubriquip?
Mark W. Sheahan - Chief Administrative Officer
In terms of the closing of that, 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 need to get voted.
Ned Borland - Next Generation Equity Research
Okay
Patrick J. McHale - President and Chief Executive Officer
And hopefully by the end of the February timeframe we will able to say that we own it.
Ned Borland - Next Generation Equity Research
Okay, all right, thanks
Operator
Thank you. Our next question comes from the line of Ned Armstrong with FBR Capital Markets.
Please go ahead
Ned Armstrong - FBR Capital Markets
Thank you, good morning.
James A. Graner - Chief Financial Officer and Treasurer
Good morning
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 any more is to expanding the businesses that would you looking for acquisition candidates?
Mark W. Sheahan - Chief Administrative Officer
You know I'll take the first part maybe Pat can take the second part. But in terms of what we've seen, we haven't really seen any kind of a meaningful pick up in the level of deals that are being put in front of us.
Anecdotally, we've got lot of people coming through here, telling us that we can expect to see that and the 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've looked at in the past are hasn't 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.
And we are hopeful that the market is better for us in '08 but in terms of specifics, I would have to say that the pipeline is pretty consistent with what we've seen in the past. But let Pat handle the second part about what we might be look in for going forward.
Patrick J. McHale - President and Chief Executive Officer
Yes, we really haven't changed our strategy or our focus in terms of the kind of companies we will be interested in acquiring. We've a fairly substantial list of both companies and industry that we are interested in.
Typically, we are 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 short or medium term; I don't think. We are going to be looking for companies that are either competitive to Graco or in our markets that are...
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 sales channel management standpoint.
Ned Armstrong - FBR Capital Markets
Okay. Thank you.
Operator
Thank you. Our next comes from the line of Matt Summerville with McDonald Investments Inc.
Please go ahead.
Matt Summerville - McDonald Investments Inc.
Thanks. I was wondering just to revisit the $4 million of Home Depot expense, you expect to encounter in 2008.
What's the timing of those expenses? Is it pretty level loaded or is it front end?
James A. Graner - Chief Financial Officer and Treasurer
It will be front end, I would say evenly split between the first and second quarters, maybe a little bit more in the first quarter than second quarter.
Matt Summerville - McDonald Investments Inc.
With the new sprayer line, have you begun to sell those units into Home Depot or could you remind us on the timing on that?
James A. Graner - Chief Financial Officer and Treasurer
We've 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.
Patrick J. McHale - President and Chief Executive Officer
We did sell that through our test stores and if you recall we started our test back in May and so in the test stores we had been selling basically the same models that we are going to be selling here as we roll out forward to get some experience at our smaller store scale what's happening there.
Matt Summerville - McDonald Investments Inc.
Okay, 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?
Patrick J. McHale - President and Chief Executive Officer
Yes, the unsold units of the prior generation, as you recall we are doing this roll out in waves and so we've got a pretty good process in place to make sure and we've already done this of course that we've net back our production and then units that get returned that are unboxed in a saleable conditions from the stores that are being reset now. We are still getting orders of course for stores that are not going to be reset until March or April and May and so we're circulating those back up.
But the $4 million that Jim talks about being remaining, we've included what we think will be the impact of the left over old units in that calculation.
Matt Summerville - McDonald Investments Inc.
Okay. And then 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.
Patrick J. McHale - President and Chief Executive Officer
Yes, I don't have anything specific to share other than we will be very interested to have additional customers and our sales team is working hard to try to make that happen.
Matt Summerville - McDonald Investments Inc.
With respect to the Contractor business in Europe, are you seeing any housing related softness there and is that a concern in 2008?
Patrick J. McHale - President and Chief Executive Officer
It's not really a concern for our business in 2008 over there from a CED growth strategy. Our strategy in Europe has consistently been to convert people from Russian roller to aerial sprayers and conversion rates are still really low.
So our guys go out there everyday and they really training contractors how to use sprayers and that's 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 and certain areas of Europe, and I am sure you are 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.
Matt Summerville - McDonald Investments Inc.
Within Contractor for all of 2007, do you know what the geographic breakdown was, Americas, Europe, Asia Pac as far as percent of revenue?
Patrick J. McHale - President and Chief Executive Officer
For the full year?
Matt Summerville - McDonald Investments Inc.
Yes. Sure.
Mark W. Sheahan - Chief Administrative Officer
Let me give them to you in terms of percentages, the Americas was about 68%
Matt Summerville - McDonald Investments Inc.
Okay.
Mark W. Sheahan - Chief Administrative Officer
Europe was about 23.
Matt Summerville - McDonald Investments Inc.
Okay, and then the rest Asia. Perfect.
Thank you.
Mark W. Sheahan - Chief Administrative Officer
Yes.
Matt Summerville - McDonald Investments Inc.
That's all I have.
Operator
Thank you. Our next question comes from the line of Charlie Brady with BMO Capital Markets.
Please go ahead.
Tom Brinkmann - BMO Capital Markets
Yes. Good morning.
This is actually Tom Brinkmann standing in for Charlie Brady.
Mark W. Sheahan - Chief Administrative Officer
Good morning.
Patrick J. McHale - President and Chief Executive Officer
Good morning.
Tom Brinkmann - BMO Capital Markets
Just wanted to ask you a couple of things. First of all, I know you went through some of these items quickly, previous questions.
But the Contractor segment, I don't know if you can quantify how much sales were down just putting it between the home center division and the professional paint stores division?
Patrick J. McHale - President and Chief Executive Officer
Yes. We typically for competitive reasons don't break those apart.
Tom Brinkmann - BMO Capital Markets
Okay. And you mentioned, the answer in the last gentlemen's question was you said even when split between Q1 and Q2 what was that question?
Was he referring --?
James A. Graner - Chief Financial Officer and Treasurer
The question was the remaining 4 million in cost--
Tom Brinkmann - BMO Capital Markets
Okay.
James A. Graner - Chief Financial Officer and Treasurer
For the Home Depot roll out and that's. As we look forward, we look that cost be evenly split between the first quarter and second quarter.
Tom Brinkmann - BMO Capital Markets
Got you, okay. And then, the other thing was have you...
has Home Depot allocated any additional stores to Wagner or is there any update on that in terms of exclusivity situation?
Mark W. Sheahan - Chief Administrative Officer
No, just the 20% that we had talked about before.
Tom Brinkmann - BMO Capital Markets
Okay. And, I guess which line of business will see that February 2008 price hike you mentioned earlier in the call?
Mark W. Sheahan - Chief Administrative Officer
Yes, that's all divisions. I think in Europe, we actually went January 1 if I am mistaken but, here in North America, all divisions implementing their price increase on February 1.
And that range is... that's not across the board.
It ranges by product line, even part number within product line.
Tom Brinkmann - BMO Capital Markets
Okay. Thank you very much.
Mark W. Sheahan - Chief Administrative Officer
Yes.
Operator
Thank you. Our next question comes from the line Terry Darling with Goldman Sachs.
Please go ahead.
Terry Darling - Goldman Sachs
Just on the price increases, can you... the range that we are talking about there?
Mark W. Sheahan - Chief Administrative Officer
Yes. I think that we probably going to realize somewhere in that 1.5% to may be 2%.
This price increases may be different than that, but I think that's what we will probably end up realizing.
Terry Darling - Goldman Sachs
And, wonder if you can give us the geographic breakout on Industrial and may be talk about just your Asia business there broadly in terms of growth rate expectation '08 versus '07?
Patrick J. McHale - President and Chief Executive Officer
Sure, Mark will run the numbers for you here on the percentage on Industrial.
Mark W. Sheahan - Chief Administrative Officer
The Americas was about 48%, Europe was about 31 and Asia was the rest.
Patrick J. McHale - President and Chief Executive Officer
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 that we are, that GDP numbers that they are projecting are slightly less, I think for 2008 and 2007, just from market conditions perspective. But, I think we are going to do well, we have added distribution in that region in 2007.
It will deliver incremental sales in 2008. We put additional sales people 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 driving the business force.
Then we have got a new product that we launched through our divisions in there. So, I think we are in pretty good shape for Asia going into 2008.
Terry Darling - Goldman Sachs
Just to clarify there, I think it was our impression you are growing in the 15%, 20% range in a full year basis so '07, if you are putting more heads, reasonable to assume you've got a potential for an acceleration growth in Asia in that business, just the Industrial side?
Patrick J. McHale - President and Chief Executive Officer
It's hard to say. I don't think I can take a stab at that one for you.
James A. Graner - Chief Financial Officer and Treasurer
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.
Terry Darling - Goldman Sachs
And on the North America 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 that the residential fixed investment numbers look across the board or you think you can get the inventory adjustment process that you have seen suggest that you are going to see some improvement obviously be down but not as bad as in '07?
Patrick J. McHale - President and Chief Executive Officer
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 going to still 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 symmetric as you 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. And on the housing starts front, I think the number that they are looking for 2008 is in that 1 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 pretty uncertain time for us and we are really going to work on controlling the things that we can control.
Our new product launch, our programs, our end users call on commercial and we are going to have a let play out little bit
Terry Darling - Goldman Sachs
Yes. And I am wondering if you could 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, and you mentioned a longer term target of being above where you were prior to the integration and then back in the mid 20s, but I am trying to get a better understanding, what your expectations are for timing there?
Patrick J. McHale - President and Chief Executive Officer
Yes, I would expect that they will be in the teens in the first quarter. And we would like to see them get up into that 20%, 21% for the year by the end of the year.
And in order 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've got good plans; it's really a matter of executing to those on schedule.
Terry Darling - Goldman Sachs
But just to be clear, exiting '08 in the low 20s with that mid 20s target further down the road?
Patrick J. McHale - President and Chief Executive Officer
That would be correct
Terry Darling - Goldman Sachs
And lastly, can you give us the foreign currency impact on net income fourth quarter in 2007 in total?
Mark W. Sheahan - Chief Administrative Officer
Yes, for the fourth quarter roughly about $3 million, Jim correct on that, and for the full year about $7 million.
Terry Darling - Goldman Sachs
Thanks very much
Operator
Thank you. Our next question comes from the line of John Franzreb with Sidoti & Company.
Please go ahead
John Franzreb - Sidoti & Company
Good morning guys.
Patrick J. McHale - President and Chief Executive Officer
Hey John.
James A. Graner - Chief Financial Officer and Treasurer
Good morning John
John Franzreb - Sidoti & Company
Just one question. Could you talk a little bit about with your total distributors, how many you added in 2007 and what are you expectations in increasing your distributor count in 2008 is?
Patrick J. McHale - President and Chief Executive Officer
I can't give you a number right now. I know that in Europe when I did recently look at what Europe and Asia were, I track it more closely and I think we're at 194 in Europe and Asia.
They had significant sales over the last 12 months period. Across the North America, we get the 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 trying to accelerate in Asia, our activity over there and I think with the additional headcount that we've been putting in the second half that we should continue to see a good activity hopeful in 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.
John Franzreb - Sidoti & Company
Similar in magnitude or --?
Patrick J. McHale - President and Chief Executive Officer
Yes.
John Franzreb - Sidoti & Company
Okay.
Patrick J. McHale - President and Chief Executive Officer
So I would say Asia, I'm hoping to see more, in Europe, I would say would be similar and I can't give you the North American numbers.
John Franzreb - Sidoti & Company
Great. Thank you very much
Operator
Thank you. Our next question comes from the line of John Emerick with Ironworks.
Please go ahead.
John Emerick - Ironworks Capital
My question was answered, thanks a lot.
Operator
Thank you. [Operator Instructions].
And there are no further questions. I would like to turn the call over to Pat McHale.
Patrick J. McHale - President and Chief Executive Officer
All right. Well, thanks for your participation in the phone call today.
Obviously, we've got our work cut out for us in 2008, but I think we've got good plans and we're going to work hard to make sure that we execute to those and hopefully will give you an upside surprise sometime here. Thank you.
Operator
Thank you. This concludes our conference for today.
Thank you for your participations. And have a nice day.
All parties may now disconnect.