Oct 24, 2008
Executives
Caroline M. Chambers - VP and Controller Patrick J.
McHale - President and CEO James A. Graner - CFO and Treasurer
Analysts
Matt Summerville - KeyBanc Capital Markets Ned Borland - Next Generation Equity Research Charlie Brady - BMO Capital Markets Mike Schneider - Robert W. Baird Kevin Maczka - BB&T Capital Markets Ajay Kejriwal - Goldman Sachs
Operator
Good morning and welcome to the Third Quarter 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 number is 11120683.
The replay will be available through October 26, 2008. Graco has additional information available and PowerPoint slide presentation, which is available as part of the webcast player.
At the request of the company, we will open up the conference for question and answer after the opening remarks from management. During this call, various remarks may be made by management about their expectations, plans and prospects for the future.
These remarks constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risks factors, including those identified in Item 1A and Exhibit 99 to the company's 2007 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 obligations to update these statements in light of new information or future events. I'll now turn the conference over to Caroline Chambers, Vice President and Controller.
Please go ahead, Caroline.
Caroline M. Chambers - Vice President and Controller
Good morning and welcome to everyone. I'm here this morning with Pat McHale, President and CEO; and Jim Graner, our CFO.
I'll briefly review our third quarter results. Pat will discuss business highlights by operating segment.
Following these opening comments, we will open up the call for your questions. Sales were flat in the third quarter as compared to the same quarter last year, though down 2% when translated at consistent exchange rates.
We continue to see strong sales growth in Europe and Asia this quarter, offsetting weakness in the Contractor and Lubrication segments in North America. Sales in the second quarter included $3.5 million from GlasCraft.
GlasCraft was acquired in March of this year. Gross profit margin as a percentage of sales was 52.2% or 53.2% this quarter as compared to last year's rate of 53.4%.
We saw the impact of higher material costs, though continue to offset them with pricing and manufacturing productivity improvements. The effect of currency translation rates was not significant this quarter.
We have seen shifts in mix and a decline in sales growth rate for some higher margin product lines and in Western Europe, which has also affected gross profit margins. Operating expenses for the quarter are 11% higher than last year, including the effect of currency translation, which was 2% of this increase.
Operating expenses for GlasCraft were 3 percentage points of the increase, and the impact of new product development was another 4% points. Net earnings are down 5% year-to-date and down 17% for the quarter as compared to last year.
Earnings per share decreased by 10% in the quarter. A couple of additional points there.
Interest expense was up approximately $1 million as compared to this quarter last year, though it is consistent with the second quarter of this year. The effective tax rate was 34% this quarter as compared to 32% in the third quarter last year.
The lower rate in 2007 resulted from expiring statutes of limitations and a higher-than-expected benefit when we filed that year's tax returns. Approximately 900,000 shares were repurchased this quarter.
There are approximately 3 million shares remaining under our current Board authorization as of the end of September. Additional share repurchases are not contemplated in the near term.
A couple of brief comments regarding inventory. We did see inventory grow slightly this quarter.
And for the year, we see that it's really in three main areas, as we continue to increase our international distribution, develop new products and continue to improve our service levels. I'll now turn it over to Pat for a discussion of the business unit results by segment and a review of the key operating strategy.
Patrick J. McHale - President and Chief Executive Officer
Good morning. Before discussing the segments, I'd like to make a couple of general comments.
First of all, despite a difficult quarter, we are pleased that our gross profit margin held up well at that 53.2%, about the same as last year, as our manufacturing and purchasing group have done a good job on cost reductions during the first nine months of this year, helping to offset some of the commodity price spikes that we saw. You'll also note that as I talk about the individual business segments, operating expenses for the growth initiatives are starting to kick in.
New product development for the quarter was about 4.6% of sales versus 3.4% of sales for the same quarter last year. And you see an increase in selling, marketing and distribution expenses of about $2 million for the quarter.
$400,000 of that was GlasCraft. A lot of the rest of it was the growth investments that we're making, primarily in the developing markets of Europe and in Asia.
Moving on to the segments, I'll talk about the Industrial segment first. Worldwide, our Industrial sales grew 9% for the quarter.
We had sales growth in all regions. We did see a lot of variability in our end markets.
Markets that are still strong for us include sanitary, oil and gas, alternative energy, electronics, medical, egg, rail, infrastructure, aerospace and military. So, we have quite a number of markets that are still holding up well.
However, we do have a number of markets that are getting quite soft. Certainly, automotive is very weak as is auto feeder.
Anything related to the housing market has been difficult, whether it's been windows, door, furniture, cabinets, bath. And then big ticket consumer items like RVs and pleasure boats, of course, continue to be very soft.
Our business in Western Europe was extremely weak during the quarter with double-digit declines at constant currency on average across our Industrial product offering. That was offset by strong double-digit gains in Easter Europe, the Middle East and Africa.
For the Industrial Equipment business, the operating margins in Q3 were 30% versus 35% in the same quarter, prior year. There is a reconciliation included in the slide show.
Our gross margins were slightly under 56%, down about 2 points from prior year. That's reflecting regional and product mix, including the impact of the GlasCraft acquisition.
Product development spending increased by about 50% versus Q3 of 2007, again, consistent with our initiative to try to drive organic growth with some nice projects. We also increased spending and selling and marketing and distribution by about 14% in the Industrial segment.
The majority of that increase was related to GlasCraft and to our international growth initiative. Moving on to the Contractor segment, our Contractor segment on a worldwide basis, we're down 12% for the quarter.
We had a nice growth in Europe, 16%, 10% at constant currency. And we had good growth in most of Asia, a 2% number I'll talk more about in a minute.
But those growing regions were not enough to offset the continued double-digit declines we're seeing in North America. North America paint segment was down 18% and the home center rental business was down 34%.
We continue to see purchases from our distribution channel be less than their out-the-door sales, as they continue to reduce inventory in… as they're reacting to a housing market that clearly hasn't bottomed yet. Also, another unfavorable trend is that end user purchasers at most of our accounts continue to show declining trends.
We have or we're announcing today that we got the Sherwin-Williams entry-level business for 2009 from Wagner. That's a nice development for us.
Wagner had exclusivity in that product line. We'll be resetting the Sherwin-Williams stores and lifting the Wagner inventory.
That will result in about a $3 million one-time cost here going into the fourth quarter that you should model, but we'll have the stores set early in Q1, and we'll get the incremental revenue on that program next year. Also, on the Lowe's program, we expect to be at about 300 stores by yearend.
We have seen some competitive reaction on that as Wagner is testing their Titan line that they tested against us at Home Depot last year. They're testing that in about 200 Lowe's stores beginning in November.
Lowe's has advised us that they'll ultimately choose one supplier, and we expect that to happen sometime in the first half of next year. Contractor sales in Europe, again, we saw the issue with Western Europe where we saw single-digit declines at constant currency in the West.
Those were more than offset by strong double-digit sales gains in the East and the Middle East. The Asian number, 2% as reported, was not particularly concerning, as we did experience solid double-digit sales gains in all areas of Asia except for Australia and Japan.
We have something unique happening in Australia. We're implementing a Graco-owned distribution center.
We fired that up here at the beginning of this month. So the last couple of months, we've been working the inventory off at a master distributor.
And that's accounted for about a 50% or $1 million sales decrease in our Australian business that will right itself once the master distributor inventory is worked through. On the earnings front, operating margins in Contractor were 22% compared to 27% for the same quarter last year.
Gross margins remain relatively flat at 51%. Spending was essentially flat, but we have product development increase of 45% versus the same quarter last year.
And we've talked a lot about our total market initiatives in Contractor. We've got some great projects that we're working on that will start to launch later in 2009 and more significantly in 2010.
And you see the spend as we support that investment. We had increases in selling and marketing expenses for Contractor in Europe and Asia.
Those were largely offset by spending reductions in North America. As you can see, we weren't able to cut our expenses to the extent that volume… that our revenue dropped.
And so we took some additional pressure on the margin side. In terms of our fourth quarter outlook for the Contractor business, it's pretty clear housing hasn't reached bottom quite yet.
Commercial construction is softening, although the painting side of that is still hanging in there. We're expecting a similar 20% kind of a drop in our North America Contractor business in Q4 versus Q4 '07, even though the comps were easier from a bad fourth quarter in '07.
In the Lube segment, sales declined 5% for the quarter versus same quarter last year. We had strong double-digit sales gains in Europe and Asia, but they weren't enough to offset a significant decline in our North America business.
Our vehicle service, the old historical Graco Lube business, declined by about 18% in the quarter, and we've really seen a rapid deterioration there of our business, especially as it related to the car dealership market during the past few weeks. On a positive note, our industrial lube growth initiative posted solid double-digit sales gains for the quarter and we're continuing to invest in that new market opportunity.
Operating margins in Lube were 16% for the quarter versus 11% last year's same quarter. And we do continue to make progress, improving the profitability of the acquired industrial lube segment.
However, the steep decline in our more profitable VS business combined with lower factory volumes caused our Q3 operating margins to fall below our expectations and below Q2. We are continuing to work on a solid list of cost reduction and profit improvement opportunities in this segment, and we do expect the operating margins to return to the mid-20s when business conditions in Lube return to more normal levels.
Although we don't give formal guidance, I am going to make a few comments regarding Q4 and 2009. In terms of Q4, our incoming order rate for the first three weeks of October is down about 15% from our run rate of October of last year.
We are seeing that slowdown across all of our divisions and regions, and we're quite concerned about that. The economic uncertainty in the credit markets appear to be having an impact on our end users, and we are seeing some delays in capital equipment spending.
So we'll have to see how that all plays out here over the number of weeks, but we're monitoring that situation closely. On the positive note, for Q4, you should be modeling in the fact that R&D tax credit was reinstituted, and we'll get about $1.5 million of net earnings boost from that in the quarter.
From a long-term perspective, we're still very positive. We've got a great business model, strong fundamentals.
Our end markets are very diverse. Our business is global with 45% of our sales from outside North America.
We've got a strong well distribution channel with a large installed base and a good parts and accessories business. We do continue to have pricing power, and we're continuing to make disciplined ROI decisions within the business.
And with a strong balance sheet and good cash flow, we can expect to continue to do well over the long term. We're executing to a strategic growth plan.
We have a five-year plan. It's fully supported by the Board.
And that plan calls for us to invest in growth initiatives: new products, new markets, geographic expansion, and strategic acquisitions. So, our vision is clear.
Our investments are ramping. And when this is over, we will emerge as a stronger and more diverse company.
Lastly, a few comments on 2009, we do expect that we're going to have some difficult end markets in 2009 and that it will probably have some significant currency headwinds, but we also see opportunities for us in 2009. We have some of our end markets we expect will remain relatively strong.
Examples would be alternative energy, infrastructure, both our foam and process business we're very optimistic about, and of course our industrial lube initiative. The GlasCraft integration will be completed in Q4 of this year.
That's going to provide some earnings upside going into 2009. Airlessco and LubeSci acquisitions that we recently announced should be accretive to earnings next year.
We had the big Home Depot rollout in the first half of 2008 with the associated expenses that won't repeat in 2009. And we've got good slated new products coming from all the divisions.
We've got the 300 Lowe's stores going into '09 that we didn't have in '08. We have the Sherwin-Williams entry-level program.
We'll have launch expenses here, as I mentioned, in Q3 that will be non-recurring, but will get the revenue starting in 2009. Our manufacturing group has got a good strong slate of projects… cost reduction projects lined up.
And so, we're expecting that the slowing economy may provide some relief on commodity and transportation costs and we'll be able to take some of those manufacturing cost improvements to the bottomline. And we're also doing a January price increase that will be on our normal cycles.
While we are planning for EPS growth next year and we do see some opportunity, it is a difficult planning environment, probably the most difficult planning environment that I've been associated with during my 20 years here at Graco. We are managing discretionary expenses, and we are building contingency plans that we can execute should conditions warrant to do something more dramatic on expenses.
You should know that I am going to exercise some patience, as the incremental investments do have strong returns and that stopping and restarting these programs like new product development and our emerging market expansion has some pretty significant impacts from timing and then from the expense to get them going again in perspectives. So, we're going to exercise some patience and watch this thing play out for a while.
Ultimately, we're managing for growth. We think that's where our future is.
So with that, I will turn the conference back over to the operator, and we'll open it up for questions. Question and Answer
Operator
Thank you, sir. The question-and-answer session will begin at this time.
[Operator Instructions]. Our first question comes from Matt Summerville from KeyBanc Capital Markets.
Please go ahead.
Matt Summerville - KeyBanc Capital Markets
What would the anticipated FX headwind be in 2009 at current spot rates?
James A. Graner - Chief Financial Officer and Treasurer
The best way, Matt, for me to respond to your question is to talk about the first nine months of this year. Our average euro exchange rate in that period was 1.52, and our average euro exchange rate the prior year was 1.34.
Mathematically, when you calculate the impact on exchange rates in the two different periods, it represents about $8.6 million for the nine months. I know the rates today are a little bit lower than that, but I think you can get the relative… gauge the relative part of our headwinds.
The… we'll expand the response to include the fact that our revenues are made up of 65% U.S. dollars, 20% euros, and then we drop off dramatically to about 4 percentage points in Canadian dollars, 3 in yen and lesser amounts in pounds, sterling and Korean won.
So, we have a mix. On our cost of goods sold, we're 95% U.S.
dollar base, and on our operating expenses, we're 74% U.S. dollar base.
So, we do have the headwind. Again, the $8.6 million is the impact for the nine months.
Matt Summerville - KeyBanc Capital Markets
Okay, great. Thank you.
And then secondly, can you discuss at all how big the entry-level program is at Sherwin-Williams? I guess what your expectation is for that in '09?
Patrick J. McHale - President and Chief Executive Officer
Yeah, I'm expecting that Contractor business is going to still be struggling through at least part of '09, hopefully not the whole year, but that remains to be seen. That business could be north of $10 million in a normal environment.
I would say that for planning purposes, it's probably more logical to look at that $6 million range for next year.
Matt Summerville - KeyBanc Capital Markets
And then what are the average price points that these products will be selling for, Pat?
Patrick J. McHale - President and Chief Executive Officer
That's similar to the line that we've got running at Home Depot. That's kind of a sub-$900 kind of product line.
Matt Summerville - KeyBanc Capital Markets
And then the January price increase you're planning on implementing, will that be in order of magnitude pretty similar to what you've done in past years? And then were there separate pricing actions that went into place here in Q3?
Patrick J. McHale - President and Chief Executive Officer
We did not except for… we did a price increase in Asia, about 4% on September 1st. We'll realize probably something less than that.
But other than that, we did not do any pricing actions this year. It really works out better for our channel partners if we do it on an annual basis, especially on the industrial side.
A lot of those distributors have annual contracts with their customers. So, we'll be doing it on our normal schedule.
And I think we'll be a little bit more aggressive here in the first quarter than we were last year.
Matt Summerville - KeyBanc Capital Markets
Okay, great. And then finally, if you can just maybe comment on commodity pricing, at what point do you start to see relief there as we head into 2009?
Patrick J. McHale - President and Chief Executive Officer
Yeah, I am expecting we're going to see relief in the run rate for Q4. Some of our weekly reports now we're starting to see that.
Steel is still way up in that 50% kind of an increase versus last December, but a lot of the other commodities are down. And we do have a little bit of a lag in our agreements with our suppliers, anywhere from a month to a quarter, but expect that we'll probably here in Q4 start to see some of the benefits of that.
Matt Summerville - KeyBanc Capital Markets
Great. Thanks a lot, Pat.
Operator
Thank you. Our next question comes from Ned Borland from Next Generation Equity Research.
Please go ahead.
Ned Borland - Next Generation Equity Research
Good morning, guys. On the mix within industrials, I mean what percentage of your customer base is truly economically cyclical versus the ones that were still remaining strong?
Can you give me a ballpark flavor for that?
Patrick J. McHale - President and Chief Executive Officer
I mean that's really impossible to get at. We sell product through distribution, and our products can be used in a lot of different industries and markets.
So, we only have sort of order of magnitude kind of numbers in terms of the exact split of end markets. But I think you can take a pretty good proxy for what you're seeing out there in the environment and take a look at what's happening with our industrial business currently and get somewhat of an idea of how we're looking at it.
Certainly, we have some exposure to automotive. Probably around 20% of our industrial business on a global basis is either automotive or automotive feeder, but the rest of the markets drop off pretty quickly.
Ned Borland - Next Generation Equity Research
Okay. And then on the raw materials, the relief that you're seeing here, I mean is there anything contractual with anybody here that would cause some downward pressure?
I mean is that what you were speaking to previously on the month to a three-month lag?
James A. Graner - Chief Financial Officer and Treasurer
Pat tried to answer that. Again, we're seeing some decreases in copper and stainless steel, aluminum in particular, but not yet relief on carbon steel.
So, we expect an improvement from the third quarter for sure. In the third quarter, we estimate slightly less than 1 percentage point of sales was lost to commodities, which we offset through the pricing that we had earlier this year.
So, you'll see on the reconciliation sheets for each of the segments, we're calculating that pricing and cost pressures offset each other in the quarter. We're still a little bit benefited in the year-to-date.
We would expect that to turn more favorable as we progress through the fourth quarter and as the contracts, as Pat mentioned, from one to three months roll over to reflect the new prices.
Ned Borland - Next Generation Equity Research
Okay. And then maybe I missed it, but did you quantify the launch costs in the quarter for the Lowe's test program?
James A. Graner - Chief Financial Officer and Treasurer
No, we've got it on our reconciliation at 1% of sales.
Ned Borland - Next Generation Equity Research
Okay. All right.
Thanks.
Operator
Thank you. Our next question comes from Charlie Brady from BMO Capital Markets.
Please go ahead.
Charlie Brady - BMO Capital Markets
Thanks. And just with regard to the product development costs that you talked about and are going to continue those projects going forward, what sort of order of magnitude to margins do you think we can expect, similar to what 3Q was?
Patrick J. McHale - President and Chief Executive Officer
Yeah, I think we're getting pretty close to being… there is some lumpiness in that because of what point the projects are at when we're doing prototyping and what not. But I think we're pretty close to achieving the step increase that we had planned to do from that 3% to 3.5% up to that 4.5% range.
So, I would anticipate going forward, you'd see something similar.
Charlie Brady - BMO Capital Markets
Again, I'm sorry if I missed it. Did you quantify the price increase that's going to go on in January?
Patrick J. McHale - President and Chief Executive Officer
No, we did not.
Charlie Brady - BMO Capital Markets
Would you like to?
Patrick J. McHale - President and Chief Executive Officer
I will if my customers first.
Charlie Brady - BMO Capital Markets
Fair enough. Thanks.
Operator
Thank you. Our next question comes from Mike Schneider from Robert W.
Baird. Please go ahead.
Mike Schneider - Robert W. Baird
Good morning, guys.
Patrick J. McHale - President and Chief Executive Officer
Hey, Mike.
James A. Graner - Chief Financial Officer and Treasurer
Mike.
Mike Schneider - Robert W. Baird
Maybe first just on industrial within the Americas. Can you give us a sense of what the numbers look like by sub-segment there and just if there is any discernible differences between the different sub-segments?
Patrick J. McHale - President and Chief Executive Officer
Yeah, I mean certainly we did see some differences. Businesses that were related to infrastructure projects are still holding in there pretty good.
Our fast-set foam business was still doing well. Our two components, sealant and adhesive business out in Ohio that's really related a lot to some markets that Graco traditionally didn't play in, was doing okay.
But our standard sealant and adhesive business, which has got a significant automotive component and our liquid finishing business, they were pretty negatively impacted.
Mike Schneider - Robert W. Baird
Okay. So, that means process and high-performance coatings were strong and the sealants and adhesives were weakest?
Patrick J. McHale - President and Chief Executive Officer
And finishing.
Mike Schneider - Robert W. Baird
And finishing, okay. And am I right that the Americas on an organic basis in industrial were up 3%, 4%?
James A. Graner - Chief Financial Officer and Treasurer
It was 5% in the quarter.
Mike Schneider - Robert W. Baird
5%, okay. And now as you talk about the first three weeks of October being down 15%, can you talk about that geographically?
And specifically, what I'm wondering, presumably the U.S. slowed down to Western Europe, but did Eastern Europe and Asia, ex-Australia slow down as well?
James A. Graner - Chief Financial Officer and Treasurer
We don't have that information at this point. But in a general basis, the slow down is in all three geographies and in all three segments.
Mike Schneider - Robert W. Baird
Okay. And then just looking at margins in industrial, the slides walk through at least the impact of the different factors in industrial.
But are you surprised at how quickly they came down even [ex] the additional product development costs? I guess the 5 point decline ex-GlasCraft, ex-product development means margins came down 3 points from all these other items.
I guess I'm just surprised on positive organic growth that margins were down 300 basis points, ex-GlasCraft and product development.
Patrick J. McHale - President and Chief Executive Officer
Yeah, I guess the thing that's probably surprised us the most there and it wasn't throughout the quarter, but we did have some regional product mix changes, I think it was heaviest in the month of August.
James A. Graner - Chief Financial Officer and Treasurer
Correct.
Patrick J. McHale - President and Chief Executive Officer
That it kind of knocked that number off kilter [ph], and we did see that come back in September. So, hopefully that was an anomaly, and we're not going to have that same regional product mix issue going forward, but we'll have to wait and see.
Mike Schneider - Robert W. Baird
And what is that mix shift?
James A. Graner - Chief Financial Officer and Treasurer
Well, it was principally a shift from West Europe to East Europe and a shift from lower finishing product sales and more high-performance coatings and foam.
Mike Schneider - Robert W. Baird
Okay. And then the additional selling and marketing costs, you point out at a point or hit at one point this quarter, that continues or was that just an initial launch cost that was booked in the quarter?
Patrick J. McHale - President and Chief Executive Officer
I would expect that sort of… again, we can be a little lumpy quarter-to-quarter, but I'd expect that to continue.
Mike Schneider - Robert W. Baird
Okay. And then if we plan for minus some figure in the industrial segment and hopefully it's not a continuation of the minus-15% you mentioned month-to-date, but what type of decremental margins would you expect and are you anticipating in this division, because I guess there is a fear you've shown such extraordinary leverage on positive organic growth?
Are we going to see the downside of that or is there some way to mitigate the decremental leverage here?
James A. Graner - Chief Financial Officer and Treasurer
For sure. If we see a drop off in sales at the 15% level, there will be continued pressure.
Leverage works both directions. We're expecting the run rate to improve, but that's what it is today.
So far, we've taken no actions to significantly change our business model here. We're investing in this segment for the long term as we are in all of our segments.
And we'll continue to deploy our strategies.
Mike Schneider - Robert W. Baird
Okay. And then in '09, Pat, you mentioned you're still striving for positive earnings growth in '09.
With Contractor presumably enduring as tougher markets and industrial facing incrementally tougher markets, what delivers in, I guess, some of these spending initiatives continuing, given your comments about being patient, how do you deliver positive earnings growth next year?
Patrick J. McHale - President and Chief Executive Officer
I'm not expecting… in my view of next year, I am not expecting Contractor in North America to decline another 20%. I think what the addition of the Sherwin-Williams program and with what we've got going on with Lowe's and we've got going on with some of the new product launches that we've got a chance to have 2009 for Contractor not look like the last two years.
I'm not saying it's going to be great, but I think that there is some reason to be optimistic there. Take a look at the GlasCraft integration.
That's going to give us some tailwind on the expense side as we get that done here in Q4. The Home Depot launch was very expensive next… last year… this year.
That won't repeat. And the industrial side, it is a wildcard with the environment that we have out there, but we serve a lot of different industries, and we're pretty geographically diverse.
So, I don't think it's all doom and gloom. I don't think it's going to be a walk in the park either.
Mike Schneider - Robert W. Baird
Okay. And then specifically on Lowe's, given that the order season and selling season are quickly approaching here, it strikes me as odd that Lowe's is testing a product line here starting in November already.
And does that mean by the time they get to the evaluation period, we're really talking about the selling season of 2010 before they make a decision?
Patrick J. McHale - President and Chief Executive Officer
It's hard to say. When we started the Lowe's program back in, I don't know, May-June timeframe, their indications were to us is they were going to decide by the end of September.
And then they proceeded in August to give us more stores. And then they proceeded us now to get us set up to get some more stores.
So, they like what they're seeing ,and they're giving us more stores. But of course, Wagner I think is under a lot of pressure.
They thought they were going to get a big chunk of the Home Depot business last year, and we kept them out of most of that. And we came in and we took the Sherwin-Williams entry-level program from them.
And now, we're in with what seems to be a pretty successful test at Lowe's. So, I know Wagner has been down there doing what we'd do if we were in their shoes, fighting hard.
And they were able to convince them to test a product line here before they got… before they made a decision. And I can never figure out exactly what's happening behind the scenes, but the process to me doesn't seem all that out of line.
Mike Schneider - Robert W. Baird
So, the timing, do you think you can still accomplish an award and full rollout in Lowe's yet for the selling season of '09?
Patrick J. McHale - President and Chief Executive Officer
No, I'm not sure about that. But we didn't have any stores coming in into the year.
So, we're going to have more Lowe's stores than we had. Whether we're going to… whether they'll make a decision in February and we can do a rollout before Memorial Day or not, I think it would be a bad guess for me to make right now.
If I was going to guess six months ago, I'd have guessed they would have decided in September, and I would have been wrong. So, I think I'll just not hazard a guess at this one.
Mike Schneider - Robert W. Baird
Okay. And your revenue per store now, are the results at the Lowe's locations comparable on a revenue per store basis to Home Depot, just so we can make some modeling assumptions?
Patrick J. McHale - President and Chief Executive Officer
I don't have that information in front of me. I can tell you that we believe that the total Lowe's business compared to the total Home Depot business was in that 50%, 60% off kind of a range.
Mike Schneider - Robert W. Baird
Okay. And Asia contractor… just you mentioned that Australia was the hit.
Can you give us a sense of what Asia is doing ex-Australia? I guess we don't know what the mix is precisely.
Patrick J. McHale - President and Chief Executive Officer
If Australia would have just been flat, we'd have had a nice double-digit increase on Contractor in Asia. India was up double digit.
China was up double digit. Southeast Asia was up double digit.
So, the markets that you'd expect us to be doing well in, and we were doing well in. Japan is a small base, and we don't have a real active program for Contractor in Japan yet.
So, the fact that they were down didn't really make a whole lot of difference. But in general, Asia was strong.
That $1 million hit that we took in Australia really made the number look worse than it really is.
Mike Schneider - Robert W. Baird
Okay. Then I apologize.
Final question back on the Sherwin-Williams, Lowe's rollouts. If I look, the incremental product line at Home Depot cost you about $5 million in rollout costs over the past 10, 11 months.
The incremental $6 million in Sherwin-Williams revenue, what type of expenses does that bring with it as far as the rollout goes?
Patrick J. McHale - President and Chief Executive Officer
We'll have a one-time rollout cost that we think will be somewhere in that $3 million range that will happen here in the fourth quarter.
Mike Schneider - Robert W. Baird
Okay. And then --.
Patrick J. McHale - President and Chief Executive Officer
That's the Sherwin-Williams piece. The Lowe's piece, of course, we'll have to see what they decide to do on stores.
Mike Schneider - Robert W. Baird
Okay. But based on the incremental stores you've been awarded are ready, is there an amount we should be modeling as well for the rollout of those or is it basically the run rate you've been on?
Patrick J. McHale - President and Chief Executive Officer
Yeah, I don't think you need to do much for Q4.
Mike Schneider - Robert W. Baird
Okay. Thank you, guys.
Operator
Thank you. Our next question comes from Kevin Maczka from BB&T Capital Markets.
Please go ahead.
Kevin Maczka - BB&T Capital Markets
Good morning.
James A. Graner - Chief Financial Officer and Treasurer
Hey, Kevin.
Kevin Maczka - BB&T Capital Markets
Jim, so much emphasis on new product introduction. I'm just wondering what the reception in general has been in the market.
If it's a case that customers are willing and looking for new and improved products or if it's a case that end markets are so bad that they're not buying any product seemingly at any price.
James A. Graner - Chief Financial Officer and Treasurer
I would say it's a mixed bag. Of course, all of our products improve productivity and save materials.
So there is always an ROI selling even in slow markets. And I would say that rollouts are going okay, given the economic conditions.
Kevin Maczka - BB&T Capital Markets
Okay. And then the October orders month-to-date, down 15%, I think most of your shipments are not… your orders are not taken and put in, in any kind of longer-term backlog.
They've turned fairly quickly. So, can you give us some kind of sense?
I mean if orders were to continue at that rate, would that approximate what revenues should do for the quarter?
James A. Graner - Chief Financial Officer and Treasurer
We have a very low backlog and backorder situation. So, our sales out-the-door are a little bit better than 15%, but it's only three weeks and the quarter is 13 weeks.
So, we've got 10 weeks to go. And I think the whole world is trying to figure out where this credit situation is going, and people are just a little tighter turning loose some of their money.
Kevin Maczka - BB&T Capital Markets
Sure. And then a capacity-related question.
Are you still planning to increase capacity, add new plants or anything along those lines?
James A. Graner - Chief Financial Officer and Treasurer
Well, we're always investing in capital equipment for productivity and returns in our factories. So, those will continue.
There will be less volume to justify those, so that may ramp down some. In our 2009 capital plan, we are planning to expand our Rogers plant to handle the new products that we're rolling out.
They are a significantly larger physical size, and we just need the floor space in order to manufacture those. So, we are looking at $15 million in capital next year to enter the new market initiatives that we've been talking about.
Kevin Maczka - BB&T Capital Markets
Okay. And just finally on the buyback, Jim, that's been a big part of your use of cash in recent quarters.
But I think you're on the sidelines now. Any further comments you want to give on your outlook there?
James A. Graner - Chief Financial Officer and Treasurer
Well, we're really troubled by the freeze in liquidity in the capital markets. At one time, we didn't have an idea whether LIBOR was going to go all the way to 10.
It seems like it's settling down now. So, as those markets free up, we'll readdress that issue with our Board.
But I would suggest that you assume that we don't do any in the fourth quarter.
Kevin Maczka - BB&T Capital Markets
Okay. Thank you.
Operator
Thank you. [Operator Instructions].
Our next question comes from Ajay Kejriwal from Goldman Sachs. Please go ahead.
Ajay Kejriwal - Goldman Sachs
Thank you. Maybe just on the orders… and good color there.
But wondering if you could maybe talk about how industrial orders were in Europe and North America. Was it down 15% or did industrial do a little worse than that?
James A. Graner - Chief Financial Officer and Treasurer
I think, Ajay, we addressed that before. I think the decline is pretty much consistent through all three geographic regions and the three segments.
We really don't have any information mid-quarter relative to how we're doing in each specific country.
Ajay Kejriwal - Goldman Sachs
Okay. And nice win with Sherwin-Williams and you did provide some color on the home center channel down 34%, but maybe if you could provide some color on how sell-throughs were versus sell-ins.
Patrick J. McHale - President and Chief Executive Officer
Actually sell-ins across most of our accounts are less than sell-throughs, but sell-throughs are still very weak.
Ajay Kejriwal - Goldman Sachs
Okay. And that's… is there any inventory reduction that's coming to the picture here with your bigger accounts or is it end market demand?
Patrick J. McHale - President and Chief Executive Officer
Yeah, it's a combination. But certainly, we are seeing an inventory reduction.
When they're buying less from us than they're selling out the door, by default, they're reducing inventory. Of course, Home Depot had a specific program that they started this summer where they started classifying their stores into different kinds of categories, the A, B, and C type classification where they'd carry the full product line at A stores, and they'd carry a scaled down product line at the B stores.
And they've been implementing that. So, as they… they had a full line at every store.
And so as they sold units out there that aren't on the new [inaudible] they haven't been reordering that, that's impacted us. But end markets are also very weak.
So, it's a combination of the two factors.
Ajay Kejriwal - Goldman Sachs
Good. And maybe on the product development expenses, could you maybe help us understand the nature of these expenses?
It sounds like 4.5% is kind of the run rate. But at any point in future, do you expect that to come down or should we be modeling 4.5% next couple… several quarters?
Patrick J. McHale - President and Chief Executive Officer
I'd model 4.5% for next year. Again, that can be a little lumpy, depending upon the nature of the project, but we ramped up the headcount.
We added a bunch of incremental projects. And as long as those teams are able to continue to execute on projects that have nice returns, we'll keep spending the money.
Should the project list not be as healthy or the markets change so that those products are not well accepted in the market, of course we'll take another look at that. But right now, we're pretty happy with that run rate.
Ajay Kejriwal - Goldman Sachs
And are these projects directed at the auto market? I mean could you give us some color what these projects are?
Patrick J. McHale - President and Chief Executive Officer
I don't want to give you too much. Obviously, a lot of these projects would have competitive implications, if we talk too specifically about them.
But they're in all divisions. So, we put additional engineering resources and teams in every division.
So you're going to see incremental projects start to launch. Our run rate for new product development launches is going to be higher in the second half of '09 and into 2010 than it otherwise would have been.
On the Lube side of the business, we're focusing on industrial lube. On the Contractor side of the business, we're focusing primarily on new markets, things that we don't play in today where we have truly incremental sales, but where we can leverage our manufacturing and our channel.
And on the industrial side of the business, it is spread around a little bit. But certainly we are doing some focused things to try to position ourselves well for markets that we think have better than average growth potential, alternative energy being one.
James A. Graner - Chief Financial Officer and Treasurer
I think if you want a little bit more color on the new product development focus, you should look at the slides that are out on our website from our August… excuse me, our September 9th investor presentation. They'll give you the general categories and the direction we're headed in the segments.
Ajay Kejriwal - Goldman Sachs
Sure. On the VS sales decline in the quarter, wondering if you could give some color?
Was it related to the pressure on truckers that we've seen or is it due to some contract lumpiness and things come back?
Patrick J. McHale - President and Chief Executive Officer
That's more related, I believe, to what's happening with car dealers. I think it was 61 car dealers that closed in the month of September alone.
The forecast for dealership closures is pretty high. Last data that I saw was they're expecting around 2,000 car dealership closures could happen here in the next 12 to 15 months.
So, we have… a lot of that business has been driven by what's happening with the nice car dealership build out that there has been in the last five or eight years. And that's… that downturn here that we've seen just in the last couple of months has had a pretty significant impact on us.
Ajay Kejriwal - Goldman Sachs
And how big is that product line as a percent of your Lube business?
Patrick J. McHale - President and Chief Executive Officer
It's probably about two-thirds.
Ajay Kejriwal - Goldman Sachs
Two-thirds of total Lube?
Patrick J. McHale - President and Chief Executive Officer
Right. That's our… that's where we were before we got into the industrial lube initiative a couple of years ago.
That's our core long-term business.
Ajay Kejriwal - Goldman Sachs
Okay. And any sense of what the decline was?
Was it like 10%, 15% or was it greater than that?
Patrick J. McHale - President and Chief Executive Officer
The North America vehicle services piece was in that 18% range.
Ajay Kejriwal - Goldman Sachs
Okay, great. Thank you.
Operator
Thank you. Our next question comes from Mike Schneider from Robert W.
Baird. Please go ahead.
Mike Schneider - Robert W. Baird
Pat and Jim, could you just spend a minute on the acquisitions? I am looking for some color on how the two businesses split between the segments and basically how we should split the $17 million in annualized sales, and then geographically as well, how that split looks?
Patrick J. McHale - President and Chief Executive Officer
Let's see. I'll take a stab at it and Jim can fill in the holes.
You probably want to split the revenue $14 million into CED and $3 million into Lube. The LubeSci piece is industrial lube.
We think there is some nice growth opportunities obviously there and that complements what we did with lube equipment, and we're going to take that through our global channel. The Airlessco piece in terms of geographic split, I think that's around 50-50.
James A. Graner - Chief Financial Officer and Treasurer
Yeah, 60-40, North America and Europe.
Mike Schneider - Robert W. Baird
Okay. And then the closing dates?
James A. Graner - Chief Financial Officer and Treasurer
They're both closed. We closed one the first day in our fiscal fourth quarter and the other one closed a week or two before the end of the third quarter.
Mike Schneider - Robert W. Baird
Okay. And rough margin profile of these businesses?
James A. Graner - Chief Financial Officer and Treasurer
Well, the LubeSci is… again, it was a very small machine shop without a lot of automation and margins are quite low, I mean to say that all-in margins less than 10%. But again, that's a Graco-typical acquisition that we hope to evolve over time through our manufacturing processes.
We bought that principally for the technology and the product offering. And as Pat mentioned, we think there is a great opportunity to take that outside of North America.
It fills in our open holes in… excuse me, industrial lube product line quite nicely. The Contractor business we bought, Airlessco is probably closer to 12% or 13%.
And again, we'll leverage our volume and the manufacturing technology to bring that up to speed. In principle, that brought us a number of accounts that we didn't have before, and we were unable to penetrate with the Graco brand name.
So, we expect to keep the Airlessco name and build on that in particular in Europe.
Mike Schneider - Robert W. Baird
Okay. And then just within Contractor, another follow-up question on the professional versus the DIY channels here in North America, did I hear you correctly that the professional channel was down 12% and DIY was down 34%?
Patrick J. McHale - President and Chief Executive Officer
18% and 34%.
Mike Schneider - Robert W. Baird
18% and 34%. Okay.
And when you look at the professional channel, I presume that's far more commercial contracting than the DIY channel. Do you have a sense if you look at your price points, just has there been any marked change in the declines, whether it's a low end price points through the professional channel versus the high end, which would be more indicative of commercial construction?
James A. Graner - Chief Financial Officer and Treasurer
Earlier in the year, we saw a significant drop in our high-end units, and we were surprised at that, because we figured commercial construction was going to continue. What was happening was all the contractors out there were competing for the business.
I'll call them the people that were focused on homes versus the people that were focused on commercial construction. But in the last quarter, we've seen a shift back to the bigger units.
So, right now, we're sort of questioning where that market is going.
Mike Schneider - Robert W. Baird
Okay. And then just a final question on the earnings momentum here, Pat.
So this quarter you reported a $0.06 year-over-year decline from $0.60 to $0.54, tough markets that you've laid out. Is there any reason to suspect again with the higher spending levels in the October order patterns that we should expect, again, another year-on-year earnings decline in Q4?
Patrick J. McHale - President and Chief Executive Officer
Well, you'll have to run your model. But I think based upon the information we gave you, that would be a pretty safe assumption.
Mike Schneider - Robert W. Baird
Okay. Thank you again, guys.
Operator
And at this time, we have no further questions in queue. I would like to turn the conference back to Pat McHale for any concluding comments.
Please go ahead, sir.
Patrick J. McHale - President and Chief Executive Officer
All right. Thanks all for your time this morning, and we'll talk to you again in a few months.
Thanks.
Operator
And this concludes our conference for today. Thank you all for participating, and have a nice day.
All parties may now disconnect. Thank you.
.