Jan 26, 2010
Executives
Caroline Chambers - Vice President & Controller Pat McHale - President & Chief Executive Officer Jim Graner - Chief Financial Officer
Analysts
Kevin Maczka - BB&T Capital Markets Charlie Brady - BMO Capital Markets Mike Snyder - Robert W. Baird Ned Borland - Next Generation Equity Research John Franzreb - Sidoti & Co.
Chris Glynn - Oppenheimer & Co. Matt Summerville - KeyBanc Mark Zepf - Goldman Sachs
Operator
Good morning and welcome to the fourth quarter and year end 2009 conference call for Graco, Inc. If you wish to access the replay for this call, you may do so by dialing 1-800-406-7325 within the United States or Canada.
Dial a number for international callers is 303-590-3030. The conference ID is 4200188.
The replay will be available through January 31, 2010. Graco has additional information in a PowerPoint slide presentation, which is available as part of the webcast player.
At the request of the company, we will open the conference up for questions-and-answers, after the opening remarks from management. During this call various remarks maybe made by management about their expectations, plans, and prospect for the future.
These remarks constitute forward-looking statements for the purposes of the Safe Harbor provision of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors.
Including those identified in Item 1A of Exhibit 99 to the company’s 2008 Annual Report on Form 10-K. This report is available on the company’s website at www.graco.com and the SEC 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 Carolyn Chambers, Vice President and Controller.
Caroline Chambers
Good morning and welcome to everyone. I’m here this morning with Pat McHale, President and CEO; and Jim Graner, our CFO.
Today I will focus mainly on our fourth quarter with a few additional comments on full year and cash flows. Pat will follow with additional comments.
PowerPoint slides are available to accompany the call and can be accessed on our website as well. Following these opening comments, we will open up the call for your questions.
Our net earnings were $17 million on sales of $146 million in the fourth quarter including a favorable effect of currency translation of $5 million on sales and $3 million on net earnings. Sales were steady compared to the third quarter of 2009.
By geography, sales in the Americas declined by 20% in the quarter as compared to the fourth quarter of 2008. Europe declined by 14% or 21% at consistent exchange rates.
Asia Pacific increased by 15%. Gross profit margin as a percentage of sales was 53% in the fourth quarter.
This was consistent with the third quarter of 2009 and increase from 49% in the fourth quarter of 2008. The increase from 2008 was due to the favorable effects of currency translation in the 2008 fourth quarter workforce reduction cost.
Favorable effects of pricing, product mix, lower material costs and other cost reduction activities have helped offset the ongoing low production volume and increased pension costs this year. Fourth quarter operating expenses were down 19% as compared to the fourth quarter of 2008.
Product development spending was consistent with the third quarter of 2009. We also saw the effect of spending reductions including lower workforce reduction costs and lower volume related expenses, though these were partially offset by higher pension expense.
The tax rate was 24% in the quarter, due primarily to higher than expected benefit on filing of prior year tax returns. For the full year, net earnings were $49 million on sales of $579 million including an unfavorable currency translation effect of $10 million on sales and $4 million on net earnings.
By geography, sales in the Americas declined by 28% as compared to 2008, and sales in Europe declined by 39% or 35% at consistent exchange rates. Asia Pacific declined by 17%.
Gross profit margin as a percentage of sales was 51% down from 53% in the prior year. Lower production volumes accounted for approximately four percentage points of the reduction, and increased pension costs accounted for an additional one percentage point of the reduction.
Favorable effect of pricing, product mix, lower material costs and other cost reduction activities partially offset low production volumes and increased pension costs. Operating expenses were down 11% for the full year.
As in the quarter, this reflect spending reductions including lower workforce reduction costs and lower volume related expenses that have been partially offset by higher pension. Effective tax rate for the full year was 29% as compared to 32% in 2008.
The effective federal business credits and domestic production deduction was greater in 2009, as a percentage of pretax earnings as compared to the prior year. Additional information for each of the operating segments is also included in the PowerPoint slides that are available along with this webcast.
2009 cash flow from operations was $147 million as compared to $162 million in 2008. Primary uses of cash in 2009 included repayment of debt of $100 million, dividends of $45 million, capital expenditures of $11 million, and a contribution of $15 million into our pension plan.
Throughout the year, we focused on managing working capital with a reduction of inventory of $33 million and reduction in account receivable of $28 million. We have adequate availability of credit.
Our current long term debt was $86 million at year end, and available unused credit lines totaled $175 million. Going forward, we will maintain our commitment to manage work capital.
2010 capital expenditures are planned at $15 million. Accounts receivable and inventory will vary with sales trends though maintaining service levels is a priority.
No cash contributions to funded pension plan will be required in 2010. Pension expense is expected to be approximately $4 million lower than in 2009.
Volume related items are expected to readjust going forward. For example, incentives and bonuses will add approximately $10 million in expense if performance targets are met.
We may have limited and opportunistic share repurchases during the year. With that I’ll turn it over to Pat for additional comments.
Pat McHale
Thanks, Caroline. Good morning.
My comments on revenue will generally compare our Q4 results to run rate instead of prior year. Revenue in the fourth quarter was relatively flat compared to Q3 and Q2, which supports our view that the global economy has stabilized.
Compared to Q3, increases in our industrial and lube segments were offset by the expected seasonal decline in our Americas contractor segment. In Asia, we had double digit increases in revenue across all segments, compared to Q3.
Most countries within Asia also showed signs of improvement from Q3 to Q4 with the developing countries leading the developed. Revenue in Europe was generally flat across our segments from Q3 to Q4 with Western Europe performing better than the east.
In Contractor and the Americas, both pro paint and home center revenue were down double digits in the fourth quarter, compared to both the prior quarter and prior year. Comparisons to the prior year for the home center business include the impact of additional stores added in the fourth quarter of 2008.
In general, market conditions in pro paint and home center are similar, and we anticipate that residential is going to improve in 2010, but the commercial will remain difficult. Our backlog from the end Q3 to the end of Q4 increased by about $8 million, reflecting an overall low single digit improvement in our incoming order run rate compared to Q3 again, driven primarily by Asia.
Return on sales for the quarter was 12%, and we were able to generate solid gross margins of 53% despite the ongoing challenge of significant unabsorbed manufacturing costs. The impact of prior expense actions in currency translation, product cost reduction efforts and a lower effective tax rate all contributed to our results and again I’d refer you to the slides we have posted for our margin reconciliation details by segment.
We continue to invest in our key growth strategies during the quarter and while product development spending was down compared to the fourth quarter of ‘08, the reduction spend in Q4 was related to project timing and lower project spending, not to any change our project plan. Our overall product development spend is up more than 20% compared to 2007.
We made a strategic decision to ramp investment in new product development beginning in late ‘07 and implemented this decision during 2008. We anticipate spending for full year 2010 will be in the $40 million range.
2010 is the first year we’ll see the full benefit of spending increase we rolled in 2008 and we’ll have a nice increase in new product this year. We also made good progress on expanding our global distribution channel during 2009, with nearly 1,400 new distribution outlets added, including approximately 350 in Europe and 200 in Asia.
Commercial headcount was relatively flat in Europe and Asia in 2009 after the significant ramp up in 2008. We do anticipate increase headcount in both Europe and Asia again in 2010, as business conditions warrant.
Although the strength of the recovery is uncertain and it’s likely to be uneven, I do believe the economy has bottomed and that we’ll see gradual improvement in most of our markets through 2010. Order trends in Asia are encouraging.
Europe appears to have stabilized. Inventories in our channel are low.
We had many new products launching, and our global distribution channel continues to expand. Our decision to maintain our investment in long term growth initiatives has positioned us well to capitalize on the recovery and our incremental operating margin will be healthy as revenue improves.
We have significantly reduced our debt and our balance sheet and cash flow are strong. We continue to look for acquisition opportunity.
As Caroline mentioned, we may also begin limited and opportunistic share repurchase activity going forward. That concludes my prepared remarks.
I’ll now ask the operator to open up the call to questions.
Operator
(Operator Instructions) Your first question comes from Kevin Maczka - BB&T Capital Markets.
Kevin Maczka - BB&T Capital Markets
Pat, I guess my first question on these volume related items that you expect to comeback into the cost structure in 2010. You call out the $10 million item for incentives and bonuses and I think it was mentioned that’s tied to certain performance metrics or goals.
Can you give a little more color on what those goals are and what some of the timing is you would expect those costs to start to comeback into the year? Is that kind of heavily backend loaded?
Pat McHale
Those are going to depend on where we set the quarters, which of course, we’re not going to share publicly, but as we perform throughout the year, we take accruals as appropriate. So I would expect those costs will match up pretty well with what’s happening on our revenue side.
Kevin Maczka - BB&T Capital Markets
So you call out the $10 million in incentive comp…?
Pat McHale
That’s sort of an unplanned. If you assume that we set our performance target and we achieve them that are sort of an on plan number.
Incremental number compared to our actual payout in 2009, which is pretty low.
Kevin Maczka - BB&T Capital Markets
So I look at 2010 and what’s incremental relative to 2009, you call out $4 million item for pension, a $10 million item for incentive. Are there any other items like that, that you can quantify fours?
Pat McHale
Distributor rebates could have some influence there and that really depends on individual account by account performance for those accounts, where we do have some sort of rebate programs in place. Again, I don’t expect that to be a huge number and if we would have thought, so we would have called it out.
Kevin Maczka - BB&T Capital Markets
In terms of additional cost side actions, are there other things that are still ongoing that have not been completed yet or things that are completed now that you will he get the full run rate in 2010?
Jim Graner
Kevin, this is Jim Graner. Most of our actions were completed midyear.
So the run rates that you’re seeing on operating expenses with the exception of the items that we’ve called out, should be fairly true to 2010. Again with the exception as we’re trying to highlight, if volumes improve, incentives will return.
If volumes improve rebates will return. So two things that we’ve called out, the only thing we know so far is the favorable $4 million on pensions.
The rest of it is predicated on volume increases off of 2009.
Kevin Maczka - BB&T Capital Markets
Then just finally on these product development costs, Pat, I think we’ve talked about some timing issues, not any kind of change in your plan for the last two quarters. So based on that should we see a pretty big step up in the first half of the year in those costs?
Pat McHale
I don’t think so. There could be some spill over from Q4 into Q1, but I don’t think you’re going to see anything that’s going to raise your eyebrow too much.
I think that $40 million range could be plus or minus $3 million, I suppose as we through the years, but I don’t anticipate a big spike here in Q1.
Operator
Your next question comes from Charlie Brady - BMO Capital Markets.
Charlie Brady - BMO Capital Markets
With respect to the contractor segment and your comments on your outlook for resi versus commercial construction, can you remind us, at least roughly what the breakdown for that segment is on residential versus commercial construction? I know that’s hard to deal, but you must have some rough idea.
Pat McHale
It is very difficult, because when we sell our sprayer to a distributor, who sells them to a painter, who can use it for whatever job he happens to have in front of him, so we don’t really get any feedback on that front. We really consider three big buckets to be important.
New residential, new commercial, and then the whole remodel/repaint market, and, of course, all three of those have been under a fair amount of pressure. We do think that res is probably bottomed and we’ll see some slight improvements this year, I think commercial has not, but those are the three important buckets, but I can’t give you a good split on that.
Charlie Brady - BMO Capital Markets
With respect to the lubrication segment, you’re in the black here in Q4, is that business at a level going into, on a quarterly basis through 2010 that would it remain in the black?
Pat McHale
Yes, I anticipate that at current volumes, it’s going to be a challenge, but that we’ve got a reasonable chance to remain in the black there.
Charlie Brady - BMO Capital Markets
One more and I’ll get back in the queue. Can you just give us the FX impact on the sales by the individual segments?
Pat McHale
Sure. Hang on a second.
You want the quarter or the year?
Charlie Brady - BMO Capital Markets
Quarter, please.
Pat McHale
So on the industrial segment it’s about three percentage points, excuse me that was for the year. For the quarter, it was 14 percentage points.
I’m just talking just sales, this is not a reconciliation of margin. On the contractor, it was pretty much non-existent, and on lubrication, it impacted by roughly $500,000, so again, a small percentage point.
Operator
Your next question comes from Mike Snyder - Robert W. Baird.
Mike Snyder - Robert W. Baird
Maybe first we could start with industrial. I was focusing on the incremental margins, because that’s certainly the hope as we go into 2010, 2011.
When you back our currency out of industrial this quarter, there was a 10% revenue increase, but I guess incremental margins weren’t at the level of 50 plus percent, as we’ve seen and as I would have expected. Is there anything unusual running through the quarter within industrial?
Pat McHale
We had couple it’s mostly noise, Mike. We had some inventory charge-offs running against cogs.
As we started bringing people back to work here, we ended up taking machinists that have been working in a warehouse and moving them back into machining and pulling people that hadn’t been working for nine or 12 months and bringing them back in. We’ve had some performance as we’ve ramped up here that’s been less than what our normal run rate performance will be and then we had a little bit of spending in sales and marking buckets, but again nothing really I’d call out as being a major impact.
Mike Snyder - Robert W. Baird
So are my expectations still I guess, appropriate to look for 50 plus percent incrementals out of industrial as the volumes come back, or is something different?
Pat McHale
I think other than the things that we’ve called out on the bonus and the rebate programs, that’s a reasonable expectation. Our margins are going to be in the lower 50s, and we’re going to get some of our unabsorbed costs back, so I think that’s still reasonable.
Mike Snyder - Robert W. Baird
The items during Q4, whether it was the additional personnel or the inventory, can you ballpark it? Was it $1 million, or $3 million?
Jim Graner
Roughly in $1 million category for the quarter.
Mike Snyder - Robert W. Baird
Then just taking a step back, if you look at Q1 earnings and kind of the mid $0.20 range, I’m sorry, Q4, as we get into Q1 seasonally, it’s about the same for the total company. You’re going to have the higher pension expense, the higher incentive comp, accrual, presumably.
Is there any reason do you expect on flat sales, why earnings wouldn’t actually be down sequentially?
Jim Graner
First of all, Mike, I need to correct, the pension expense is a $4 million reduction. It’s not an increase.
So that’s a positive. The incentives, of course, if we’re running below 2009, we won’t have any incentive accruals in the quarter.
So those, again will only impact if volumes increase, but with respect to your question, I need to jump a little bit to the gross margin. We’ve got a headwind of four percentage points for unabsorbed burden.
In the fourth quarter, our hours, direct labor house, increased by 10 percentage points. We brought some more people back to work in the first quarter as well.
So I would expect that we will have further improvement in our absorption in the first quarter. So I would say that to answer your question on margins, we should see an incremental small percentage point increase in margins in the first quarter with flat volumes to the fourth quarter.
Mike Snyder - Robert W. Baird
Then the tax rate, what should we be modeling for 2010 as well?
Jim Graner
As Caroline mentioned, we’ve got two items that are bigger as a percentage of pretax earnings now with our earnings dropping from where they historically have been, those are the research and development credit and on a dollar basis, that’s roughly $2.4 million, and the other one is domestic production deduction that last year 2009 was $1.2 million. On a normalized basis, when our production is higher, it’s closer to $3 million.
So that deduction increases as our factory production increases. So a long way to answer your question is I think you can take the annual rate and model a slight improvement.
Again, if our pretax earnings are roughly the same, slight improvement is a slightly lower tax rate.
Mike Snyder - Robert W. Baird
Then you mentioned you built backlog during the quarter. Just going back through the decade, it looks like industrial sales are generally up about 10% sequentially during Q4, and that’s what they were this quarter.
So that was, at least on pace with some normal years, middle of the decade, but you built backlog. Can you just give us some insight into industrial orders by geography as they progress through the quarter?
Jim Graner
We mentioned that our ramp-up in orders that we saw in first quarter, and is continuing into January are coming from Asia. Asia is predominantly an industrial market for us.
So that bodes well. I’ll call at slight up tick in orders in January, with respect to our European region.
Again, that’s predominantly industrial. So the backlog increase coming in the industrial side, I’ll complete the thought there and share that North American orders are not up as much as the other two regions in January.
Mike Snyder - Robert W. Baird
Final question on pricing, do you still expect or what have you done with pricing thus far in terms of announcements in the channel? Do you still expect 150 to 200 basis points of positive pricing in 2010?
Jim Graner
We’ve communicated our pricing increases, still a few negotiations here or there, but for the most part those are implemented, and I think that 1.5% realized is still a good number for you to use.
Pat McHale
I would like to go back and correct a response I gave to Charlie with respect to your questions on sales and the currency impact on the segments. It is 3% in every segment and 3% in the consolidated.
So in other words, the sales decline would have been three percentage points larger, and it’s consistent with all three segments.
Operator
Your next question comes from Ned Borland - Next Generation Equity Research.
Ned Borland - Next Generation Equity Research
Couple questions here. Other than seasonality and contractor, were there any cost items sequentially that may have depressed the margin from 3Q to 4Q?
Jim Graner
Not other than in our response to Mike with respect to a little bit of noise in the industrial segment, and that million dollar kind of range. Again, the start up of the people and moving people back in their jobs and a little bit of noise on the surplus and obsolete inventory.
Ned Borland - Next Generation Equity Research
Then on raw materials is there anything outside of price that you guys are doing to kind of manage your exposure to raw materials as most of these commodities have increased?
Pat McHale
We’ve got ongoing cost reduction programs at Graco, both in the factories and our design engineering groups and we pretty much do that during good times and bad. So, I would say that your expectation there would be that we would continue to do those kinds of things.
We have seen a run up in some of the key committees, especially since the early part of December, but with the exception of some of our materials that are tied to an index, a lot of what we buy has been converted by somebody else into another product, and so there’s lots of negotiations that happen before we actually see those kinds of increases.
Ned Borland - Next Generation Equity Research
Then finally, aiming on the acquisition front, are you guys still looking at that as a source a use of cash perhaps in 2010 outside of share repurchase.
Pat McHale
We are and we were as active or more active in terms of resources looking for M&A opportunities over the course of the last year and we just weren’t able to land any, partly I think is the market out there is dead, and partly it’s the typical deals that we’re going to target are going to be businesses that are going to be privately held. Most of the attractive segments that we like that are owned by public companies, they want to keep them, so we’re going to be look at $30 to $50 million private companies.
It’s just not been a good environment for us to put any deals together, but we’re as interested and work on hard as it as we have in the past.
Operator
Your next question comes from John Franzreb - Sidoti & Co.
John Franzreb - Sidoti & Co.
In regard to a product development can you give us sense of how much incremental revenue, you guys expect from 2008 actions given that you’ve already invested roughly $14 million over the past two years or if not that maybe which segment might be the biggest beneficiary and the timing of that this year?
Pat McHale
Well, we don’t breakout our estimates by product, typically you take a look at what we stated as an objective as an organization. That’s to grow the top line 10% plus with two/thirds of that been organic and both new product development and channel expansion with the key drivers behind that.
Our new product investment, there’s a substantial portion of that spend that we put back into maintaining our technology leadership on our existing product which, of course, is driving our strong growth margins and our channel expansion. So, it’s not all incremental dollars but we put back in there, you can think of it over the long cycle as it being a 3% annual growth kind of number.
John Franzreb - Sidoti & Co.
So Pat, there’s not going to be any meaningful step up this year from that early spend?
Pat McHale
I think some of that is going to depend on what the market conditions are certainly in our contractor business we had a pretty good history of having new product that grabbed the market and generated some pretty nice growth numbers for us. Since the market downturn, the distribution channel has been less interested in the big spring product launches than they have been past so we have had had more trouble getting traction on the contractor side.
As that change we are to see the opportunity for some more traction. Whether that’s going to be this spring or not, I’m not sure at this point.
John Franzreb - Sidoti & Co.
Regarding your CapEx, 15 million, how does that compare to maintenance level it seems like it continues to be depress versus some historical spend?
Pat McHale
That’s correct. It’s at least 50% lower than our replacement costs, and it consists really of, for 2010, new product tooling, and a few things where we can get opportunistic kinds of returns in production savings.
Our bricks and mortar and for the most part our plant equipment is operated at about 60% of capacity, so at this time we really have no need to get back to a higher level.
John Franzreb - Sidoti & Co.
One last question. Can you talk a little bit about what you’re hearing from your customer base, particularly in your industrial jobber base?
Looking at how weak the North American number was, industrial side, just wonder what kind of he feedback you’re getting from those guys.
Pat McHale
We’ve got thousands of industrial distributors around the world what. We are seeing, as we are seeing that our distributors are positioned from an inventory perspective that they are going to be buying from us pretty much anything that they sell through and that North America market and in fact significant chunks of the European market are still pretty soft and I think it’s not dissimilar to the conversation we just had where Graco’s CapEx spending is going to be down in the neighborhood of 50% for 2010.
A lot of what we sell into factories is CapEx. So we need to see production volumes continue to improve in North America and Europe, and for customers to start loosening their CapEx wallet a little bit and we think we’re seeing some signs of that, but it’s probably going to be a little bit of a slow go here for a few quarters.
Operator
Your next question comes from Chris Glynn - Oppenheimer & Co.
Chris Glynn - Oppenheimer & Co.
Just a couple on contractors to start I know you have difficulty on the split between residential and commercial, but maybe you have a view own the mix of repaint/remodel.
Pat McHale
No, I mean really it’s the same issue. When we sell a sprayer we don’t know where it ends up and of course there were enough sprayers out in the marketplace in 2005 and 2006 to paint over two million homes and then market started to contract pretty rapidly so where did all those sprayers go?
Did they get eaten up by commercial guys that are buying them on the used market? I mean, it’s extremely difficult for us to figure out where those sprayers go once us settlements, so I think it would be bad for us to start making guesses on that for you.
Chris Glynn - Oppenheimer & Co.
Then do you think that there’s difficult comparison issues on the middle quarters on ‘09 channel fill dynamics with the retail build out?
Pat McHale
Now is a little bit in Q1. You talking about contractor in the Americas, for sure in Q1 of last year we had added some stores and I think some of those shipments spilled over into Q2.
I don’t see those as being insured mountable at this point.
Chris Glynn - Oppenheimer & Co.
Just a little record checking did you say 1400 new distribution outlets added during ‘09?
Pat McHale
That’s correct.
Operator
Your next question comes from Matt Summerville - KeyBanc.
Matt Summerville - KeyBanc
The increase in distribution outlets that you mentioned at 1400, how much in aggregate increases is that for Graco in percentage terms on a year-over-year basis?
Pat McHale
Well, we have in the neighborhood of 30,000, but all distribution outlets aren’t created equal and certainly we like to see the ones that we’re adding in Europe and Asia and although their contribution to our revenue in the first year or two may be small, those are the seeds that we plant that are going to help us grow business substantially as we go down the road. So it’s been a consistent strategy at Graco for some period of time and we continue to find lots of opportunities, especially internationally to either specialize our distribution or go into new markets.
I think that you shouldn’t start doing the math and start trying to figure out how the 1400 outlets are going to drive revenue as much as it’s an indication of the ability for us to continue to expand into markets that have good long term potential for us.
Matt Summerville - KeyBanc
With regards to the build out and shelf space you’ve had in the home center and professional paint channels here in the U.S., are you essential completed with that, or are there additional store that’s will take place in 2010 how should we think about that?
Pat McHale
In terms of any deals we’ve got signed that we can talk about, you’ve seen it all. In terms of do he we have our product in every possible outlet, we don’t.
So it’s an ongoing challenge for our group up there to try the get the product seated in more outlets and we’ve made progress in the last couple years and hopefully we’ll make more progress in to 2010.
Matt Summerville - KeyBanc
Is there any detail you can provide, Pat, just from what your guys or your customers are saying out in the field with regards to specific end market trends across the three main geographies you serve, if there’s anything to highlight, maybe seeing improvement or maybe getting worse that in regard and then just how your mix of business is trending right now from with regards to new equipment sales versus aftermarket revenue.
Pat McHale
We just went through a round of operating reviews with the divisions within the last couple weeks. Where we have the data broken out, the trend of having part sales be down a lot less than the equipment sale continues.
So, I think that that trend is likely to continue here at least for the first couple quarters of 2010, what we saw at the beginning of last year, we saw kind of everything was drying up pretty quickly, and distributors were reducing their stock and of course, our distributors tend to carry stock of spare parts. So as the mix shifts back, here in the second half of the year and going into next year where they start to replenish what they sell that should be helpful.
In terms of your comments on end market, really in North America and Europe I would say there’s not any dramatic change that were seeing, automotive in Europe and North America continues to be soft, although we’re seeing continued investments in Asia Pacific. Although the overall market dynamics in wind and solar have cooled a bit, from an investment standpoint we’re still quoting a fair amount of projects in those spaces.
Aerospace is still hanging in there okay. It’s not great hanging in there okay again it’s not great.
I would say it’s we’re looking to see a turn in Europe and North America in our end market. We really haven’t seen is it yet?
Operator
Your final question comes from Mark Zepf – Goldman Sachs.
Mark Zepf – Goldman Sachs
I want to ask a quick follow up on the January order trends. So, is North America up sequentially in January thus far?
Jim Graner
Again, we’ve only got a few weeks here in January, and my comments earlier were with respect to the previous year. I’d prefer not it to comment on the sequentially.
Mark Zepf – Goldman Sachs
Is there any end market color you can give just to in back of the January commentary that you did provide?
Jim Graner
Well, again, the majority of that is geographic commentary. Economic conditions seem to be very positive in the developing countries in Asia, and Western Europe, for a few weeks, anyway, seems to be behaving better than the Americas.
In the Americas we’re strong in Latin America and only modest kinds of growth numbers in North America.
Mark Zepf – Goldman Sachs
Then on the capital allocation side, is the balance sheet currently at a level where you would be comfortable doing a deal in the first half of the year, or would you like to bring the leverage ratios down maybe for a couple more quarters before being more aggressive?
Jim Graner
We’re currently comfortable doing a deal.
Mark Zepf – Goldman Sachs
M&A a higher priority than the limited and opportunistic share repurchase or they 1 and 1 A?
Jim Graner
For sure M&A is a higher priority.
Operator
If there are no further questions, I will now turn the conference over to Pat McHale.
Pat McHale
Alright, thanks for joining us this morning and have a good day.
Operator
This concludes our conference for today. Thank you all for participating, and have nice day.
You may now disconnect.