Jan 27, 2009
Executives
Caroline Chambers – VP & Controller Pat McHale – President & CEO Jim Graner – Treasurer & CFO
Analysts
Matt Summerville – Keybanc Ned Borland – Next Generation Equity Research Charles Brady – BMO Capital Markets Terry Darling – Goldman Sachs Christopher Glynn – Oppenheimer Michael Schneider – Robert Baird
Operator
Good morning, and welcome to the fourth quarter and year end 2008 conference call for Graco Inc. If you wish to access the replay for this call, you may do so by dialing 1800-405-2236 within the United States or Canada.
The dial in numbers for international callers is 303-590-3000. The conference id 11124982#.
The replay will be available through January 30 of 2009. Graco has additional information available in a PowerPoint presentation slide, which is available as part of the webcast player.
At the request of the company, we will open the conference up for question and answers after the opening remarks from management. During this call, various remarks may be made by management about their expectations, plans and perspectives for the future.
These remarks constitute forward-looking statements for the perspectives of the Safe Harbor provision under the Private Securities Litigation Reform Act. Actual results may differ from those indicated as a result of the various risk factors, including those identified in item 1A of Exhibit 99 through the company’s 2000 annual report on form 10 K.
This report is available on the company’s web site at www.graco.com and the SEC’s website at www.sec.gov. Forward-looking statements reflect management’s current views and speak only of the time that they are made.
The company undertakes no obligation to update these statements in light of new information or future events. During this presentation, all participants will be in a listen only mode.
Following the presentation, the conference will be opened for questions. (Operator instructions).
I would now like to turn the conference over to Caroline Chambers, Vice President and Controller. Please go ahead, ma’am.
Caroline Chambers
Good morning and welcome to everyone. I am here this morning with Pat McHale, President and CEO, and Jim Graner, our CFO.
I will briefly review our fourth quarter results, and then talk about the business highlights for the segments. Pat will then provide some additional comments.
And following these opening remarks, we will open up the call for your questions. Sales declined in the fourth quarter as compared to the same quarter last year.
The strong sales growth in Europe and Asia seen earlier in the year did not continue into the fourth quarter. The weakness in the contractor and lubrication segments in North America seen earlier in the year continued in the fourth quarter, and the industrial segment also slowed.
The gross profit margin as a percentage of sales was about 49% this quarter as compared to last year’s rate of 53%. Declines in production volumes affected absorption of factory overhead and a reduction in workforce was made in December.
Operating expenses in the fourth quarter include $3 million related to the workforce reduction, $4 million for the write-off of certain intangible assets, and $6 million related to expenses in the contractor for the launch of the entry level spray [ph] and additional paint in home center outlets. Net earnings are down 21% on a year-to-date basis and down 72% for the quarter as compared to last year.
Earnings per share decreased by 70% in the quarter. Included in that net earnings was interest expense that was approximately $1 million as compared to this quarter last year.
Well, this amount is consistent with the prior quarter. The effective tax rate was 21% this quarter as compared to the fourth quarter of last year.
Legislation renewing our R&D tax credits occurred in the fourth quarter and this benefit decreased both the fourth quarter and the full year tax rate. A couple of comments concerning cash flow, cash flows from operations were $162 million in 2008.
The primary uses of cash included capital expenditures of $30 million, acquisitions of $55 million, dividends of $45 million. Share repurchases totaled $115 million during 2008.
As we noted last quarter, the share repurchases program is currently suspended. At year end, we have drawn down about $180 million on our long-term credit line.
Available unused credit line totaled $87 million at year-end. And we also made a brief comment regarding pensions.
We do not believe that we have a requirement to make a cash contribution to the pension plan in 2009, though we may choose to make a contribution later in the year. A few brief comments about the segments.
A reconciliation of the change in operating earnings as compared to the prior year is included for each of the segments in the slide provided for the webcast. Overall, the segments were affected by unfavorable currency and lower order rate and sales volumes in the fourth quarter.
The effective unfavorable exchange impacted fourth quarter operating earnings for the industrial and contractor segment by approximately three percentage points each. As a result of the lower production volume, unabsorbed manufacturing cost affected operating earnings by about two percentage points in each of the segments as well.
The charge for workforce reduction in December affected each of these segments by about two percentage points for the quarter. The industrial segment operating earnings in the fourth quarter were affected by about one percentage point related to the GlasCraft acquisition and the integration cost.
The industrial segment was also affected by the write off of trade names and other intangibles of about $3.5 million, which affected operating earnings by about three percentage points in the quarter. In the contractor segment, the impact of the Airlessco acquisition in the fourth quarter was about two percentage points on operating earnings.
And as mentioned earlier, cost associated with the rollout of the entry level sprayer in the additional paint and home center stores was $6 million in the fourth quarter and affected operating earnings by eight percentage points as well. We also would like to note that we continue to make investments in new product development and the increased rate of investment for the quarter and the year has also affected operating earnings to some degree in each of the segments in the quarter and certainly for the year.
With these comments, I will turn it over to Pat.
Pat McHale
Good morning. Our business conditions in Q4 were obviously difficult for us, and although we are disappointed with our short term results, we continue to take actions and make investments that strengthen our business model and our competitive position.
The recent quarter was negatively impacted by several items that I’m confident will deliver strong long-term returns for us. For example while it hurt us during the quarter, the entry level program in contractor was a nice win for us.
The contractor team really throughout the year 2008 did a great job expanding our presence and taking market share in this product category. We also continue full ahead with our incremental investment in new product development and selling and marketing for Europe and Asia and executed our plans for recently acquired businesses.
Our strong cash flow, balance sheet and leading product positions allow us to be aggressive during this downturn. Our cash flow for the year and for the quarter remains strong.
We have access to adequate credit at favorable terms to execute to our strategic plans. We are of course managing headcount and discretionary expenses closely.
During the course of 2008, we reduced our headcount by approximately 15%, primarily in North America, and I’m happy to say without serious impact to our long term growth strategies. On the topic of new product development, during 2008, we achieved our goal of ramping up our investment in new product development.
I’ve talked about our initiative there for quite some time. We have increased our engineering headcount and launched additional design projects.
We now have the most robust new product development program in the history of the company and we should begin to see the first fruits of the incremental investment in the second half of 2009. In 2008, we invested $37 million in new product development, which is a 21% increase.
During the past year, we launched 34 significant products and platforms. Last year, 26% of our revenues came from products introduced within the last three years.
This year, in 2009, we plan to launch 40 significant products and platforms, and we will begin to see the positive impact of the incremental spending. In 2010, we will achieve the full impact of the 2008 incremental investment decision.
We also continue to be extremely positive on the long-term growth opportunities we see internationally. We see tremendous opportunities for long-term growth both in the developed and especially in the developed economies.
Our go to market model permits us to expand geographically with what I will call an asset-light approach, so we just put salespeople in, they set up distribution, and we only need to add infrastructure later when critical mass is achieved. During 2008, we increased our capabilities through significant additions to our international sales and marketing efforts.
For example, in Asia, we increased sales and marketing people by one third, a substantial increase. In Europe, we increased our sales and marketing people by 15%, and in Mexico and Latin America, off a small base, we increased by 70%.
We also believe our distribution channel is a major competitive advantage. Our channel is a major barrier to new entrants into our market, really allows us to focus on what we do best, provides a fast, scalable way for us to enter new geographies and new segments, and provides our customers with local engineering training and service support.
We worked diligently during 2008 to expand our distribution coverage around the world. Adding new outlets is really like planting seeds, and over time they generate substantial new revenue for us.
In 2008, we added 1,300 distributor locations which is a 5% increase. 350 of those were Europe and about 280 of those were in Asia.
On the acquisition front, we continue to look for opportunities to acquire businesses where we can add value. During 2008, we made four acquisitions, two in our contractor space provided some new branding opportunities for us, as well as consolidation of some smaller players in the market.
In our industrial segment, the GlasCraft acquisition strengthened our position in what we think is a very attractive spray foam and protective coatings market. It will also give us some additional capabilities and new markets to pursue in composites.
The acquisition of Lubrication Scientific builds our position in the industrial lube segment which we have targeted as an attractive market for long-term investment for our lubrication division. Excellence in operations remains the key priority, and for the sake of time, I won’t go through those details now.
But you can remain assured that our zest and zeal for improving operationally continues. In terms of outlook, near term, we expect our business to remain challenged.
Our incoming order rate for January is lower than Q4, partly driven by a very soft week of January week one, which was a holiday week. We’re down about 25% to 30% compared to January of 2008, with North America declining the most, and Asia and Europe flat.
I can’t project these kind of numbers out through the quarter, but I wish you to have the most up-to-date information regarding what we are seeing right now. In North America, we expect residential construction to be weak through 2009 and commercial construction and remodeling expenditures to decline.
We expect automotive and automotive feeder to remain under pressure for 2009, although we are still seeing some project activity. In industrial and lubrication, really few segments or geographies showing any signs of strength in the short term.
We see customers reducing capital spending and we see inventory coming out of the channel at all levels, both at the end user level and with our channel partners. Certainly stabilization of inventory levels should help our incoming order rate.
We expect the developing markets will outperform the developed markets in general, and we do have opportunities to grow the pie as well as take market share. Our competitive base is stable, no irrational behavior has been observed.
This downturn could put some pressure on some of the smaller niche players which might be good for us over the long term. Our long-term business model and strategic plan is sound.
We continue to diversify our business geographically and with the addition of new market niches. Industrial production and the emergence of new major developing countries as consumers will drive demand for products.
We have detailed growth plans for each business segment and we are funding those plans even through this downturn. We invest heavily in technology, we have number one and number two market share positions in most of the niches we serve.
We have an incredible global channel developed over decades that is a huge barrier to entry and our channel partners are profitable. The Graco brand and value proposition to the end-user is strong.
While we do have substantial sort term challenges facing us, we also have some short term opportunities. We implemented a 2009 pricing increase and we expect to realize at least 3%.
We also will have the elimination of one-time costs associated with the 2008 entry-level programs of about $12 million. We also have elimination of one-time costs associated with the 2008 acquisitions, and we will have improvements implemented during the integration activities.
We are working hard to recoup the material cost increases we experienced in 2008. We have got a solid new product launch program for this year.
In closing, I would like to reinforce that although not reflected in our short term financial performance, we have built a stronger company in 2008, and we intend to do so again in 2009. We are managing the business thoughtfully, mindful of the current environment, but not simply slashing expenses to achieve cost reduction targets.
We will monitor and make adjustments as conditions warrant. We will continue to invest when others may not and we expect our shareholders will be rewarded when the current storm has passed.
With that, I would like to turn the call back over to the operator and open it up for questions.
Operator
Thank you. We will now begin the question and answer session.
(Operator instructions). Please standby for our first question.
Our first question comes from the line of Matt Summerville. Would you please state your company name followed by your question?
Matt Summerville – Keybanc
Good morning. Matt Summerville, KeyBanc.
Pat, you mentioned that incoming order rates for January were down 25% to 30%. Are there any particular trends across the business segments or the three major geographies?
Pat McHale
Yes, I would say from an incoming order rate perspective, we are seeing the biggest declines in North America, while we are seeing Europe and Asia more or less flat.
Matt Summerville – Keybanc
Flat with fourth quarter levels or flat on a year over year basis?
Pat McHale
On a year over year basis.
Matt Summerville – Keybanc
Okay. Restructuring costs in the fourth quarter, I think were a little bit less than what you originally were looking for, does that mean we have some spillover into 2009, or did it just turn out to be less expense than what you thought?
Jim Graner
No, Matt. This is Jim.
We were pretty much right on line with what we shared with the world. There was about $1.5 million that went into cost of goods sold, and $3.5 million that went into operating expenses plus – so a total of $5 million plus the $4 million in impairment charges on our intangibles.
Matt Summerville – Keybanc
Okay, yes. It was the $1.5 million I did see them.
What would be your tax rate for 2009 you anticipate right now ?
Jim Graner
Around 33.5% to 34%.
Matt Summerville – Keybanc
And then I guess given where raw material costs are now, when would you anticipate being in parity or better than that from an average selling price standpoint versus again the input costs?
Jim Graner
From an input cost perspective, most of the spike in material cost came in the second and third quarter of 2008. So the first quarter here, we’re looking at about flat to the first quarter of 2008, and we should see a benefit in the second and third quarter.
We believe overall that with the exception of our unabsorbed costs because of volume, our price increases should be realized to the gross margin line.
Matt Summerville – Keybanc
Great. Thanks a lot.
Operator
Thank you. Our next question comes from the line of Ned Borland, please state your company name followed by your question.
Ned Borland – Next Generation Equity Research
Hi. Next Generation Equity Research.
Just talking about product development spending for 2009, are we looking at sort of the same run rate that we saw in the fourth quarter?
Pat McHale
Yes, I think on a year over year basis, we might be slightly up, but we're not going to see a 20% kind of increase again in 2009. We should have achieved really our basic run rate.
Projects, of course, come in – the expenses come at different times and sometimes they stack up a little more in one quarter than in another, but I think overall we'll maybe see a slight increase.
Ned Borland – Next Generation Equity Research
Okay. And do you have sort of a ballpark for the opportunity for the entry level sprayers for 2009?
Pat McHale
You know, that’s kind of a wild card. I think I probably won't take a stab at that in this environment.
You know in a normal environment, we would see an opportunity in the paint channel, probably in that $10 million plus range, and kind of all bets are off right now.
Ned Borland – Next Generation Equity Research
Okay. And contractor at Europe, in years past, it has been kind of a market penetration story, but of course the market is – the housing market is probably worse over there.
What – has penetration in Europe run its course, or are you still seeing signs of market penetration over there?
Pat McHale
I think really we are about in the third inning of a nine inning game there. We made a lot of progress in the last five years, really tripling that contractor business over there.
But the spray rates are still pretty low in places like Germany and France, they might be in that 35% to 40% range. But as you move east, that drops pretty dramatically.
So despite the fact that the market conditions are bad, which does hurt us significantly, because distributors don't want to stock inventory and the other dynamics that are going on. We will be working probably harder than ever in 2009 to do market share growth through conversion.
Ned Borland – Next Generation Equity Research
Okay, great. Thanks
Operator
Thank you. We have a follow-up question from the line of Matt Summerville.
Please go ahead.
Matt Summerville – Keybanc
Yes. Just one follow up question.
With regards to the anticipated $18 million increase in pension expense, how would that look if you distribute it across the segments? And does any of that go into corporate expense?
Jim Graner
In the way we report our segment results, all of that will go into the segment expense line, none of it into the – but you see after segments, and it is really as a percent of salaries in those segment, so it will really hit all segments equally.
Matt Summerville – Keybanc
So I guess if I want to allocate the $18 million between the three segments, if I do it on a percent of sales basis, will I get pretty close?
Jim Graner
Yes.
Matt Summerville – Keybanc
Okay. That's all I had.
Thank you.
Operator
Thank you. Our next question comes from the line of Charles Brady, please state your company name followed by your question.
Charles Brady – BMO Capital Markets
Thanks. BMO Capital Markets.
Just in reference to the new product development, can you give us a little more detail kind of where those, what those products might be, just in broad terms, and kind of the allocation across the three segments, and kind of when you really might start seeing recognition of some of the benefits to pickup on the new products in 2009?
Pat McHale
Yes, the – and I don't want to talk specifically about the 2009 new products. But in general, as we did this ramp up in our product development spending, we caught all divisions.
So we don't have – we shouldn't have any laggards in terms of seeing an incremental increase in the output from any of the groups. And as I talked about when we started this initiative about a year ago, the big pieces is getting the people hired, getting them trained, and getting the projects going, and we have successfully done that.
Typically projects have that 12 months to 18 month kind of time from when we get it off the ground to when we launch the product. And so we should see in the first half of 2009 what I would call sort of a normal run rate for product launches for Graco, and in the second half of 2009, we will start to see the incremental product launch that would not have launched have we not made the run-up.
And then really in 2010, you should see a step function increase in the product development launches that we do, and they really range the gamut from being upgrades and gap fillers to the new technologies out there. We did – I think there's some slides out on the web somewhere where we talk in general in terms of our product development growth strategies at a conference that we did last August that I would refer you to.
Charles Brady – BMO Capital Markets
Thanks. And I don't know if you covered this in the opening remarks, just in terms of declines in home center and paint center channels?
Pat McHale
We did not and we are seeing double-digit declines in both.
Charles Brady – BMO Capital Markets
Thanks.
Operator
Thank you. Our next question comes from the line of Terry Darling, please state your company name, followed by your question.
Terry Darling – Goldman Sachs
Thanks. Goldman Sachs.
Pat, wondering if you could just clarify on the commentary on the January orders. North America down substantially, Asia, Europe, flat year over year, that sounds like a pretty substantial change in kind of the mix of what's going on in the geographic markets versus December.
Maybe I have got that wrong, but I wonder if you could talk about what might be the drivers of that changed profile, or is it just, we have got a couple weeks of data and so don't get too carried away there?
Pat McHale
Yes, I think the latter, and that's the way I'm really looking at it. Our business was fairly consistent through the fourth quarter in terms of the weakness that we saw across the board, and there are a couple of things that are happening.
In Asia, we have got price increases going through here on February 1 versus January 1 for the rest of the world, and so we may be seeing some bookings activity ahead of that price increase that might skew the data a little bit. Europe, we generally start the year strong with promotional programs, nothing new versus last year, but there is always some timing of when our guys get out to the key accounts.
So I think I would not expect that the big disparity that we're seeing between North America and the rest of the world would last through Q1. And also we only do have probably three weeks worth of good data under our belt here, so extending the 25% to 30% out and saying that is what the first quarter is going to look like is probably a stretch as well.
Terry Darling – Goldman Sachs
Okay. And then wonder if you could talk a little bit about a little more detail on the raw material benefits potentially in the second quarter and third quarter, Jim?
You know how big of a headwind was that in 2Q and 3Q, and it sounds like, just to be clear, we should assume that you do have some kind of a tail wind from raw mats easing here on a full year basis?
Jim Graner
I think you're right, Terry, that we will have some tailwind throughout the year. Last year was about a $5 million impact versus our expectations of higher costs.
Again specifically in the third quarter were some smaller amounts than second and fourth. We are looking at roughly $500,000 plus positive in the first quarter.
So again as you round it off, it doesn't give significant percentage returns.
Terry Darling – Goldman Sachs
Okay. And the $5 million was mainly concentrated in the second quarter and third quarter to your point, right?
Jim Graner
Yes, the highest amount was the third quarter with smaller amounts in the second and fourth.
Terry Darling – Goldman Sachs
Okay. And just running through kind of the puts and takes from the fourth quarter to the first quarter, I just want to make sure I'm not missing any of the pieces.
So $0.17 add back, the $0.08 of charges, the $0.06 of new products, are we going to start to see some cost savings, and we have got a little pension hit as well, that sort of rounds up to about $0.29, $0.30 or so as that run rate, and then maybe we have got some seasonality, and then you have got the order issue that still obviously unclear how that is going to play out. Are there any other major pieces in terms of that sort of fourth quarter to first quarter walk that I might be missing?
Jim Graner
Well, the wildcard of course is the exchange rates. On the euro right now, I think this morning it was 1.33.
So that is fairly consistent with the fourth quarter where we averaged 1.32. So right now that should be a nonevent.
And then of course we have got the unabsorbed costs. On our segment reconciliations, we gave you an idea what their impacts were in the fourth quarter.
Of course, our December actions should reduce that somewhat, but again that is a wildcard should we take production down a little bit more here in the first part of March, again depending on our order rate.
Terry Darling – Goldman Sachs
Okay. And then Jim maybe you could step us through the cash flow profile on a full year basis in the earnings.
The questions would be, should we assume some working capital improvement given the volume decline, and then where is your current thought process on capital spending?
Jim Graner
Right. For sure we are planning to take inventories down.
We have got actions in place to bring them down from their current levels. We believe we will even be able to achieve that in our first quarter, which generally is a seasonal build of inventory for us.
Receivables, you will see a little spike in the days of sales in the fourth quarter, days of sales outstanding, and a couple of things going on there. One is the large contractor customers that we have in North America deferred a couple December payments into January as they were working through their year-end.
That is back on track and they are back on the payment schedule. We're not seeing any more difficulties with respect to our North American channel partners.
Those are very generally quite good. We are seeing some delays in payments coming from South America, East Europe, and a little bit from India.
And we have plans in place to get those accounts back to current with that. It won’t happen right away.
Overall, we are confident in our channel and our channel partners and see no need to increase our allowance for doubtful accounts but you may see a couple of these slowing in receivables. With respect to CapEx, we have increased our hurdle rate for our internal decision-making.
We're going to fund what our management team brings forward that exceeds that and has positive ROI for the shareholders. But I would generally expect to the end the year in the $20 million range on CapEx.
Terry Darling – Goldman Sachs
Could you tell us what that hurdle rate has increased from and to?
Jim Graner
No. We increased it from the teens closer to 20%.
Again we may approve CapEx lower than the 20% if we see the risk profile as being small.
Terry Darling – Goldman Sachs
Okay. And then lastly kind of longer term strategic question, maybe Pat for you, you know back to this analogy of your penetration in Europe, it is kind of in the third inning.
I guess the question is, if we assume the world decides to grow again at some point, what inning would we need to be in before you would think about putting some manufacturing assembly into those European markets versus continuing to produce in US and export it over?
Pat McHale
Yes, you know, we do have difficulty taking and breaking our current production volumes up into smaller pieces and moving those around cost effectively. By the time you buy new machines and hire new people and double up on your tooling and increase your inventory, it washes out a lot of the freight savings.
So there is nothing imminent that is happening on that front. Possibly if the contractor business in Europe triples again, which I think it should and it could at some point in the future, we get up over $200 million, there may be enough critical mass there to have its own factory.
But we're pretty careful in terms of making those decisions so that we take the best long term ROI tomorrow and not just kind of a standard cost type decision.
Terry Darling – Goldman Sachs
Very helpful, thanks.
Operator
Thank you. Our next question comes from the line of Christopher Glynn, please state your company name followed by your question.
Christopher Glynn – Oppenheimer
Oppenheimer. Thank you.
Just on the restructuring savings and the headcount reductions, do you anticipate being at that run rate right out of the gate here in 2009 ?
Jim Graner
There are a couple of the decisions that were executed in late January. People were notified but didn't leave till late January.
So I would say 98% of it will be right out of the starting gate.
Christopher Glynn – Oppenheimer
Okay. And a lot of different pieces with the savings and the pricing and the hedge and so forth, blocking all that out, is there kind of a core decremental margin that you think about related to your production that is kind of fundamental at all?
Jim Graner
I think we tried to get to that point in the reconciliations we provided you on the segments. So I would rather not forecast, like you to use your own judgment on going through those line by line.
Christopher Glynn – Oppenheimer
Okay. And then just lastly, on inventory, it didn't look like the inventories were down a whole lot, but how much more would the under absorbed impact if you were to reduce inventories more aggressively?
Another way of saying that, would there be a pretty direct relationship?
Jim Graner
Yes, again, as we look at our cost structures, our cost of goods sold, we have about $90 million call it in the category of fixed and semi fixed, and with every 10% reduction in production, we’ll have another $9 million of unabsorbed cost.
Christopher Glynn – Oppenheimer
Okay great. Thank you, Jim.
Operator
(Operator instructions). And our next question comes from the line of Michael Schneider, please state your company name followed by your question.
Michael Schneider – Robert Baird
Good morning. It's Mike Schneider from Robert Baird.
Pat McHale
Good morning, Mike.
Michael Schneider – Robert Baird
Good morning. If you could just spend a minute, Pat, on the approach to the restructuring and the headcount reduction, can you walk us through just basically how you arrived at the size of the program and just I guess as that relates to what you are sizing the business for in 2009?
Pat McHale
Sure. First of all, you’ll recall that we did a small restructuring program in June.
We started to see things getting soft, softer I would say, in the beginning of the third quarter, and we did about a 50% head count reduction in June. And I would say that, that reduction was very selective.
We went through – we didn't target it into any one particular business segment, we really asked all the businesses and all of the functional areas to participate. And from about the late May timeframe, through let’s call it the end of the third quarter, we additionally reduced nearly 200 temporary and contract workers, that is a normal amount of people for us to have here at Graco on the temporary and contract front.
So we did 50 full-time people in June, and then as the production volumes continued to decline, we are taking out contractors and temporary workers, primarily out of our direct labor and our warehouse pool. And when the bottom fell out at the end of September, then we had the need to go deeper.
And really in terms of the thought process behind it, to the extent possible, I am going to hang on to my last breath to our growth initiatives that I think have got great long-term potential for us, that's the increased investment in new product development and investments that we’ve made internationally. Those are really people driven organizations and we work hard to find the right people and get them on board and get them trained.
So we really kind of have those for the most part off limits as we went through our cuts here in December. And in terms of what we did for December, we did execute to a contingency plan that we had developed earlier and that was what drove us to take the 150 out in December.
I prefer not to give you a view in terms of what revenue that expectation caused us to trigger that contingency plan, but I will tell you that we have additional contingency plans that we can execute to if business conditions look like they are going to be worse than what we plan we did the December decision.
Michael Schneider – Robert Baird
Well, looking at the same question in a different way, Pat, if you size the business based on Q4 when revenue was down, what 19%, and orders today are running at 25% to 30%, does that mean there is another contingency plan that is needed or indeed is that the run rate you are sized to?
Pat McHale
We did the cuts based upon our view for 2009, and not strictly what we saw in Q4, but really kind of the view for the year looking at our different business segments and geographies. I would say it is too early to say that we need to execute our next level contingency plan based upon what we have seen in January.
But certainly at a 25% to 30% kind of run rate, if that looks like a long term problem, it is very likely that we would be taking a look at what we need to do there.
Michael Schneider – Robert Baird
Okay. And then in Q4, it strikes me that your channel generally doesn't carry a lot of inventory, and I think you and I have discussed this in the past.
Are you able to determine how much of this was true demand collapse or I should say can you differentiate between the actual level of demand and then how much was actually just an inventory correction in your distribution channel?
Pat McHale
Yes, in general, no, we can't determine that with any real clarity. We get reports from some of our large retail type channel partners that indicate what's going on with out the door sales, so we can compare to purchases.
So certainly we get some good data there. And we did do some kind of sales guys going to the big distributors in Europe and Asia and doing some kind of informal surveying in terms of what they were doing with their inventories across other channel partners in our industrial segment.
And we are seeing destocking, both at the distributor level, but also really at the end user level, factories out there that have carried X number of dollars as spare parts are tightening their belt, and they are not carrying as much as they were, not altogether different than we are doing internal to our factory operations here. To quantify that really is impossible.
The dynamic is definitely out there. How long it is going to take to play it through?
I don't know. My guess is it is not a huge chunk of our decline and that the biggest part of our decline is really the tightening of CapEx spending.
Michael Schneider – Robert Baird
And again moving on, the level of inventory that your distributors ordinarily carry, do you think that based on their inventory turns, they can resolve this yet in the first quarter, or does that even spill into the second quarter for completion?
Pat McHale
You know, we have been in kind of a cycle where we have seen distributors adjust their inventory and then things get worse. So they adjust their inventory again and things get worse, not altogether different than we have experienced here on this end, you know really it depends.
I think they are trying to achieve turns objectives. And as the business conditions soften, you have to take further inventory to be able to even maintain the same kind of turns.
So there is that dynamic that’s out there. In general, with some exceptions, most of our distribution channel should be able to get inventories scored away in a three to six month timeframe, and I believe they have started that process a while back.
Michael Schneider – Robert Baird
Sure. And then we're all looking for a ray of hope here in January.
The fact that North America is down substantially more and Europe and Asia are actually flat, can you just spend another minute just digging deeper into that. Was the price increase that was issued only North America, and that’s may be because I guess pre-buying in Q4?
Pat McHale
We haven’t seen any significant pre-buying in Q4. Our North American and European price increases went into effect January 1.
Well, we really didn’t see anybody willing to trade inventory dollars for pricing; but normally we would. The Asia price increase, if you recall, we did one September 1 in Asia, and now we did another one in Asia, February 1.
So we could be seeing some pre-buying here in January for Asia in anticipation of the February 1 price increase. And again the European, Europe being flat through the few weeks here, it is a little hard to sort out, because of the fact that they have got promotional programs running.
Michael Schneider – Robert Baird
Is it also – is North America down more principally because of contracted business to your retail customers around the January year end, so I suspect they are scrambling here in January. Is that what is pressuring the North American number more?
Pat McHale
Interestingly enough, all the segments are being hit by reasonably similar kind of declines.
Michael Schneider – Robert Baird
Okay. And then just in contractor, the rollout expenses, it was $6 million higher than you anticipated, and I guess why that was, and then how much is left here in Q1 and Q2 for rollout expenses?
Pat McHale
The rollout cost that we have had for the year, we had a couple different home center partners and professional paint channel partner. And in aggregate and in the fourth quarter, those were exactly where our expectations were.
Michael Schneider – Robert Baird
And are there any more coming in the first quarter or first-half?
Pat McHale
No, we don't have every store out there yet, so we're going to keep working on it. There's nothing big that I think we should flag for you, but you can be confident that our sales guys are out there working hard to get every store we can get, with every channel partner we can get.
Michael Schneider – Robert Baird
Okay. And Jim, just two specifics, the actual amount of the impairment charge, what acquisition did that relate to, and then what was the precise dollar amount, if you could?
I know it rounded to $4 million, but it sounds like it's was 3.5 something?
Jim Graner
Yes. The precise amount was 3.5 and they came on the – 3.6.
They came in the industrial segment, and they related to brand names or not amortized.
Michael Schneider – Robert Baird
Okay. And then the restructuring expenses, I am just curious what those were after-tax?
Jim Graner
Well, they were $5.5 million pre-tax, so they are $4 million after-tax, that’s related to actual cash payments and enhanced retirement benefits that will be paid out in the future. So cash flow is a little bit different than operating expense, but not significant.
Michael Schneider – Robert Baird
Okay. And then final question, I apologize.
Within industrial, you’ve talked in the past about the different subdivisions within industrial. I'm curious if you’ve seen any major disparities in performance between high-performance and cements and adhesives, et cetera?
Pat McHale
You know, earlier in the year, we had some more disparity. But really when things fell off the map, everybody was impacted.
We didn't really have anybody flying through with stars and stripes.
Michael Schneider – Robert Baird
Okay, thanks again guys.
Operator
Thank you. And if there are no further questions, I will turn the conference over to Pat McHale.
Please go ahead.
Pat McHale
All right. Thank you very much for your time this morning.
We are going to continue to work hard on this end and this too shall pass. Thanks.
Operator
This concludes our conference for today. Thank you all for participating and have a nice day.
All parties may now disconnect.