Jan 31, 2012
Executives
Caroline Chambers – Vice President and Controller Pat McHale – President and Chief Executive Officer Jim Graner – Chief Financial Officer
Analysts
Charlie Brady – BMO Capital Markets Kevin Maczka – BB&T Capital Markets John Franzreb – Sidoti & Company Matt Summerville – KeyBanc Terry Darling – Goldman Sachs Mike Halloran – Robert Baird Liam Burke – Janney Capital Markets
Operator
Good morning, and welcome to the fourth quarter and year-end 2011 conference call for Graco Inc. Please note it is not Graco Incorporated.
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. The dial-in number for international callers is 303-590-3030.
The conference ID number is 4502375. The replay will be available through February 4, 2012.
Graco has additional information available 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 the 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 purposes 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 risk factors, including those identified in Item 1A of, and Exhibit 99 to, the company’s 2010 Annual Report on Form 10-K and in Item 1A of the company’s most recent quarterly report on Form 10-Q. These reports are available on the company’s website at www.graco.com and the SEC’s website at www.sec.gov.
Forward-looking statements reflect management’s current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events.
Later on in today’s presentation, we will have a question-and-answer session, and at that time, instructions will be given. I would now like to turn the conference over to Caroline Chambers, Vice President and Controller.
Please go ahead.
Caroline Chambers
Good morning, everyone. I’m here this morning with Pat McHale, Jim Graner, and Christian Rothe.
I will provide some comments on the financial highlights of our fourth quarter, and Pat will follow with additional comments. Slides are available to accompany our call and can be accessed on our website.
The slides include information about our consolidated financial results and each of the segments. After our opening comments, we will open up the call for your questions.
Sales for the quarter were 9% higher than the strong fourth quarter last year, which included 14 weeks as compared to 13 weeks in 2011. The inflation rates did not have a significant impact in the quarter.
Sales for the year increased by 20% or 18% at consistent translation rates, with strong growth in all the segments and regions. Although the changes in currency translation rates had no effect in the fourth quarter, the full year effect increased earnings by $7 million after-tax.
Additional information about effective currency translation on sales for the segments and regions as well as sales by currency are included on page five in the slides that accompany this webcast. Gross profit margins were 54% for the quarter, consistent with the prior year, and 56% for the year, an improvement of 2 percentage points from the prior year.
Material cost increase in the second half of the year largely offset by improved factory efficiencies. Operating expenses in the fourth quarter were flat compared to last year.
For the year, the increase of $30 million from the prior year included additional product development spending, continued development of commercial and support capabilities in developing geographies, and increased general and administrative expenses. Operating expenses also include $8 million in 2011 related to the proposed acquisition of ITW’s finishing businesses.
Interest expense was $4 million for the year and $9 million for the year. The effective tax rate for the quarter was 30% compared to 26% for the quarter last year.
In 2010, the effective rate for the quarter was low because the federal R&D tax rate was not renewed until the fourth quarter and the full year effect was included in that quarter. The lower 2011 fourth quarter rate compared to the 2011 annual rate is due to higher estimates for the domestic production deductions in R&D credits as compared to earlier in the year.
Year-to-date cash flow from operations was $162 million compared to $101 million last year. Inventories and accounts receivable leveled off in the second half of 2011 after increases in the first half related to increased business volume.
Capital expenditures were $24 million in 2011, and we also paid dividends of $51 million. We repurchased 43 million of company stock during the year.
Cash of $300 million at year-end is held in deposit accounts and money market funds. Long-term debt is $300 million, with an additional $264 million of unused credit lines available at year-end.
Our net liability for retirement benefits and deferred compensation increased to $120 million at the end of 2011 as compared to $76 million last year, primarily due to the very low discount rates at year-end. A few other items to note.
We expect to see material cost pressures continue into 2012. Even as some commodities moderate, other materials continue to see upward pressure.
We have a robust plan for factory efficiencies that will be implemented during 2012. Factory production levels are expected to be in line with sales growth going forward.
Although we expect cost overall to be consistent for the full year 2012, we do and expect an increase of cost of 1% to 2% in the first quarter comparison. Our annual price increase has been implemented and we expect to begin to see the impact in the first quarter with full year expected price realization of 3%.
Expenses associated with the proposed acquisition are expected to be in the range of $4 million to $6 million in the first quarter, as we support the cost of litigation to gain approval for this transaction. We expect an increase of approximately $5 million in pension expense in 2012 and are considering an additional contribution of $10 million to $20 million to our funded pension plans.
2012 capital expenditures are expected to be in the range of $30 million. And at this point, an extension of federal R&D tax credit has not yet been passed by Congress.
And we expect the annualized tax rate to be approximately 34%. With that, I’ll turn the call over to Pat.
Pat McHale
Thank you, Caroline. And good morning, everyone.
As we start, I want to take a moment to thank our employees, our distributor partners, and our end users for a great 2011. We achieved record sales for the year, and our 2011 diluted EPS returned to the peak.
Well done. I appreciate your efforts.
Before we get into the details of the quarter, I want to underscore for our investors that was one less week in the fourth quarter and full year 2011 than it was in the same periods in 2010. We called this out at the end of Q3, and I’m going to reference it several times today.
You are hearing many of my comments, figures that compare average weekly sales from Q4 2010 to Q4 2011. This removes the comparison issues with the additional week in 2010 and I believe is more insightful regarding our business tempo.
Even when adjusting for the extra week, there was a slowing of growth rate sequentially from the third quarter to the fourth quarter. This is not entirely surprising given the strong double-digit figures we posted throughout 2011 as well as the headlines on the Eurozone sovereign debt crisis, the potentially slowing growth rates in China, and the ongoing overhand in worldwide construction.
The fourth quarter was still strong. It’s just that the growth moderated somewhat.
We posted our eighth consecutive quarter of double-digit growth in average weekly shipments, 18% year-over-year. For the quarter, we had a few expense headwinds compared to the fourth quarter of 2010, including $2 million of acquisition-related costs, $3 million of additional interest costs on borrowings that will be used to fund the acquisition, and a tax rate that was 4 percentage points higher than last year.
All told, these costs were a $5 million after-tax headwind on net income. Material cost, which we were expecting to moderate in the fourth quarter, continued to put downward pressure on our margins throughout the quarter.
While these costs are currently stable, we are actively working on cost reduction initiatives as part of our annual drive for zero cost change in our factories. Now let’s go through each of our divisions and regions starting with the Contractor segment.
Worldwide, sales in this segment were up 1% in Q4 versus the prior year. On an average weekly sales basis, the segment grew 8%.
In North America, the pro-paint channel was up 18% in average weekly sales for the quarter, reflecting the continued strength that we have seen in this channel throughout all of last year. This strength had been somewhat masked during the year due to the difficult 2010 comps that included the store load of the handheld products.
The fourth quarter didn’t have that problem. Average weekly sales for the home center business in North America was up 14%.
In Europe, Contractor struggled in the fourth quarter with sales down 15%. While this is disappointing, the decline in underlying business tempo is not as extreme as it appears.
Europe had a later launch of the handheld product line in 2010, and the fourth quarter of 2010 included $4 million of handheld sales that were associated with store loads. When converted to average weekly sales and removing the handheld comp, the Contractor segment in Europe actually grew modestly.
That said, I’m generally cautious on my outlook for Contractor Europe, particularly over the next couple of quarters, where achieving growth over prior year will be challenging. In Asia-Pacific, Contractor average weekly sales were up double digits in the fourth quarter.
We’ve got some exciting new products that we are launching in Contractor this year, including an extension of our handheld line that can apply protecting coatings; innovations in our line striping category, including a standup right on unit; and more products in development for a second half 2012 launch. We remain focused on converting end users from manual application methods to using spray equipment, particularly in the emerging markets, and will continue to invest as opportunities warrant.
While our North America Contractor business will continue to be challenged by depressed new construction levels, we intend to stick to our strategies and investments. When the US market tanked at the end of 2006, we made a decision not to right-size this business.
Instead we’ve continued to provide high levels of support to our distributor partners, innovate our product offering, and compete hard for new business. Operating margins in this segment have suffered, but we’re confident that as base business volume returns, we will have good leverage.
When construction markets normalize, I expect this business will return to the mid-20s operating margins and we will be a more able competitor as a result of our continued investment during the downturn. Moving on to the Industrial segment.
The fourth quarter was another strong quarter for our Industrial segment across all geographies and product lines. On an average weekly sales basis, sales in Europe and North America grew in the mid-teens, while Asia-Pacific grew at 29% compared to the prior year.
This was the highest quarterly revenue ever recorded in Industrial for any fourth quarter in the company’s history. From an end market perspective, we are seeing favorable growth trends, with automotive, energy, mining, Ag, and general industrial all generating above trend activity levels.
Operating margins were strong in this segment, and we are positioned well for more growth in 2012. Now to the Lube segment.
During Q4, sales continued to grow at a strong rate, with solid double-digit increases in North America and Europe. On an average weekly sales basis, growth in Asia-Pacific was outstanding at 71%.
Operating margins continued to improve in Lubrication as well. We excited the year at 19%, right on plan with our stated goal of the high-teens.
Looking to 2012, we expect that operating margins will expand into the low-20s. Ultimately, we believe that this business can perform in the mid-20s although we are still a few years away from that goal.
We are seeing strong activity for vehicle services, both domestically and abroad, and we continue to gain traction in our Industrial Lubrication initiatives with recent wins and renewable energy applications as well as other traditional onboard lubrication systems. As you know, we’ve invested significantly in this business in the recent past, adding resources to grow our channels to market around the world and new product development initiatives.
We made further investments into our plant in late 2011 and will continue those investments into 2012. As the equipment comes online, we will gain efficiencies in our plant, which should improve our operating margins.
We still see outstanding opportunities to grow our Lubrication segment into 2012 and beyond. It’s a big market and we’re just scratching the surface.
I’m pleased with the great progress the entire LED team has made over the past two years. Now for Europe.
Q4 sales in Europe were flat to last year. Looking at it from an average weekly booking rate, however, the region grew 7% in the prior period, with growth in the mid-teens for Industrial, 26% for Lube, but down 9% for Contractor.
As stated in the Contractor discussion earlier, there were $4 million of handheld sales in the fourth quarter of 2010 related to our launch of that line in Europe. Without that difficult comp, we would have posted a modest increase.
That being said, there is no doubt that the overhang of the Eurozone’s sovereign debt crisis as well as economic weakness in the developed countries of Western Europe is having an impact. There are bright spots.
Automotive has been strong off late with some nice wins with major European auto manufacturers. Our Lubrication business is doing very well, plus renewable energy in Eastern Europe are contribution.
On an average weekly sales basis, Eastern Europe grew at a rate in the high-teens during the fourth quarter. Moving to Asia-Pacific, our businesses in Asia-Pacific all had a strong quarter, with each segment posting double-digit growth in average weekly sales, plus every segment also achieved new peak sales figures for any fourth quarter in the company’s history.
The team in Asia-Pacific has done a tremendous job. Since 2006, Graco’s business in Asia-Pacific has nearly doubled.
Before I get on to our outlook, I want to briefly discuss our litigation with the Federal Trade Commission, which is trying to block our acquisition of the finishing brands from ITW. We patently disagree with the FTC’s position that this deal is anti-competitive, and we are fully prepared to lay out the facts in court.
Beyond the facts of this case, which I believe support our position, I am personally disappointed to be fighting our own government on this transaction. Graco is a shining example of a US manufacturing company competing successfully in a highly competitive global marketplace.
Less than half of our sales are in the US, more than 90% of our manufacturing is here. We invest heavily in state-of-the-art technology, and we provide a reliable and growing base of well paying jobs and tax revenue.
I see this transaction is consistent with the strategic goals outlined by President Obama on many occasions. Approval of this transaction will expand our capabilities and allow us to more successfully compete against the many non-US players we face here at home and around the globe.
We will continue to press forward. In terms of outlook, we are planning for growth in 2012.
Certainly there are a number of headwinds that we will be facing, including continued economic uncertainty in Europe and a construction market that will remain challenging. As is always the case with Graco, we don’t just take what the market gives us.
Each of our segments have a plan of attack for 2012 that has us taking share, entering new market segments, increasing our presence in emerging markets, growing our distribution in both developed and emerging markets, converting end users from manual paint application methods to using spray equipment, and launching new products to keep us ahead of the competition. While we have a strong history of executing against these strategies, we do have difficult comps from our record year in 2011.
This is particularly true in the first quarter where we had very strong results in all of our segments in 2011. Nonetheless, we are expecting growth and we are off to a good start.
Incoming orders for the first four weeks of this year have been solid in all segments and geographies. From a margin perspective, I’m expecting that we will grow margins sequentially from the fourth quarter.
New pricing took effect on January 1 in both the Americas and Europe and will take effect February 1 in Asia-Pacific. We have new equipment coming online that should improve factory efficiencies this year and the cost reduction projects, as I mentioned earlier.
We have the right strategy and the right team. I’m pleased with our performance in 2011 and I’m excited about the opportunities we have for 2012.
Operator, we’re ready for questions.
Operator
Thank you. (Operator instructions) And our first question comes from the line of Charlie Brady.
Please state your question.
Charlie Brady – BMO Capital Markets
Hey, thanks. Good morning, guys.
Pat McHale
Good morning, Charlie.
Charlie Brady – BMO Capital Markets
Hey, can we just get a little more granular on some of the growth expectations and the incoming order rate? When you talk about slowing growth, are you referring to – comparing that to Q4 growth rate or all of ’11 or something else?
Jim Graner
Charlie, this is Jim. We’re looking – as Pat said, we’re looking forward to a good year in 2012.
The first quarter comparison will give us some difficulty, especially in the Contractor area. If you recall last year, we had an initial store load that we’re estimating about $6 million with one major US chain.
That store load will give us a tough comp for the quarter as well as the comments that Pat made about the Contractor in Europe. With that, we are looking for a flattish revenue number to slightly positive in the first quarter worldwide.
But we should see an improvement in our operating margins, as the approximately $3 million in store load costs we incurred last year first quarter won’t reoccur in 2012. Regarding Europe, we’re looking at single-digit growth, again, quarter-to-quarter, first-to-first, as Europe struggles in the construction.
And we were expecting very little help from Southern Europe. Northern Europe looks okay.
The incoming order rate there is in the double-digit. So again, we’re confident at this point in forecasting the growth area in Europe in the low-single digits.
Given that, we’re still expecting Asia-Pacific and Latin America to grow in double digits as well as our worldwide Industrial and Lube segments.
Charlie Brady – BMO Capital Markets
So just to be clear, so – are you – for Industrial and Lube for the year, would you expect those both to grow double digits?
Jim Graner
Yes, that’s our current plans.
Charlie Brady – BMO Capital Markets
Okay. And – okay, that’s fine.
With regard to the acquisition expenses, the $4 million to $6 million in Q1, can you help us out beyond Q1 what your expectation is for expense beyond that for the full year maybe?
Jim Graner
We haven’t gotten there. It’s currently our expectation that the litigation will start and complete in the first quarter and in that range that Caroline threw out of $4 million to $6 million that expects the start and completion in the first quarter.
And of course, if we win, we should start to execute on the acquisition.
Charlie Brady – BMO Capital Markets
Okay. One more and I’ll hop back in the queue here.
On your commentary on material cost headwinds, can you give us a sense just on that piece of it how much of a headwind to margins that was in the quarter?
Jim Graner
It’s less than one full percentage point. What we did see – I think we called out in the third quarter that we did expect the moderation in the cost of the metals.
We did see that. We had some surprises though and some other material costs that offset the reduction in the metal kind of area.
But in total, it was less than one full percentage point, closer to three-quarters of 1%.
Charlie Brady – BMO Capital Markets
Great. Thank you.
Operator
Thank you. And our next question comes from the line of Kevin Maczka with BB&T Capital Markets.
Please go ahead.
Kevin Maczka – BB&T Capital Markets
Good morning.
Jim Graner
Hey, Kevin.
Pat McHale
Good morning.
Kevin Maczka – BB&T Capital Markets
Pat, you’re back to record revenue now. You’re increasing CapEx a bit in 2012.
Can you just talk about utilizations by segment? Are you capacity constrained anywhere?
And where do you need to spend the money to expand that capacity?
Pat McHale
We have two major processes that we do internally through our factories. And one is machining where we get the raw material, the bar stock and the castings, and we turn that into precision parts, and then the other is our assembly area.
From a machining standpoint, generally we’re fairly well utilized on our machining equipment. It’s hard to justify new equipments unless you got a fair amount of load to put on it.
So I would say that going forward in 2012, we’re in, I would say, sort of a fairly normal position from the machine utilization. And as we grow, we will continue to add machines like we do every year.
From an assembly and from a brick-and-mortar standpoint, the evaluation gets a little bit more complex. We can take a lot of growth in our existing product line within the assembly lines and the space that we have.
As we get new products get launched, they have to have their own assembly lines is where we start to push the boundaries a bit on brick-and-mortar. I’d say our factories are pretty full right now in the $30 million number.
We do not – in that $30 million, there’s not an expectation that we’ll do a brick-and-mortar project.
Kevin Maczka – BB&T Capital Markets
Okay. Incremental margins, I wanted to ask a question there.
You broke that out nicely 44%, even higher if we back up the ITW acquisition. Generally, should we be expecting something similar next year?
And can we just talk about this pension expense a little bit more? Because that looks like that will be quite a drag potentially.
Jim Graner
There is no reason, Kevin, that we shouldn’t achieve the 44% of incremental margin if we get the kind of growth rates we talked about a few minutes ago. The pension cost was an incremental $5 million.
So if you compare that to a $900 million revenue number, it’s less than 1% of sales. So it’s an impact.
I think all corporations are feeling the pain of the ever-decreasing long-term interest rates and the lower discount rate that Caroline talked about. So we’ve fully allocated equities.
We’re at about 80% of our assets in equities. So we’re fully leveraged to what I expect to be a more positive equity market in 2012.
And if that happens, that will diminish the need to put more funds into the plant.
Kevin Maczka – BB&T Capital Markets
Right, Jim. The $5 million is relatively minor, but in your slide, it may be as much as $25 million.
I guess what would be the (inaudible)? What would trigger that?
Jim Graner
Caroline, do you –?
Caroline Chambers
Yes, sure. The $5 million is what we expect to see running through the P&L.
What we might is the need, as Jim referenced, to contribute some additional cash into the plant. Part of that will really depend on what we see for asset growth during the coming year.
So there’s difference between the cash contribution expectation, the possible expectation there as compared to what will run through the P&L.
Kevin Maczka – BB&T Capital Markets
Okay, got it. Two more quick ones from me.
Are you ramping product development spending again in 2012? And was that 3% price increase across the board?
Pat McHale
On the product development side, we may do a little bit, but it’s not going to be a dramatic step function increase. And in terms of pricing, we do our pricing by product line and by region and by category.
So that’s an aggregate number of all the different areas.
Kevin Maczka – BB&T Capital Markets
Got it. Okay.
Thank you.
Operator
Thank you. And our next question comes from the line of John Franzreb with Sidoti & Company.
Please state your question.
John Franzreb – Sidoti & Company
Good morning, guys.
Pat McHale
Good morning.
John Franzreb – Sidoti & Company
Pat, could you talk a little bit about the roadmap to growth in Europe? It sounds like you are allowing for some slowing growth in Contractor Europe with growth coming out of Lube and Industrial.
Is that the case and is there more needed for you to have year-over-year growth in that business over there?
Pat McHale
Well, of course, there’s been a lot of uncertainty in the headlines since kind of the summer time period. But what we’re trying to communicate really is that sort of the fourth quarter and even off to the beginning of this year, we’ve continued to see pretty good demand on the Industrial and Lube side of the business.
And where we’re having the most impact is on Contractor. Certainly, even within Industrial, there are areas that are stronger and weaker.
I think Jim pointed those out here where the North is doing better and the South not doing very well. But for Graco, it’s EMEA.
That includes the Eastern Europe, Russia, the Middle East and parts of Africa. And so we believe that despite the fact that there is going to be some challenges in our Contractor business in ’12 that there are ample opportunities for us to continue to grow other segments of our business within that reporting region.
John Franzreb – Sidoti & Company
Great. That was helpful.
And the margin profile, it’s improving incredibly in the Lube business. And you’ve kind of laid out a formula that will go to the low-20s next year and mid-20s sometime thereafter.
You’ve talked about investments. Can you provide a little color as what kind of investments we’re talking about here?
Is there some sort of end markets that are outperforming others or are there some sort of processes and improvements that are more important to get you that kind of margin profile? A little color would be helpful.
Pat McHale
So you know we were there back before we did all the acquisitions and moved all the factories. So we do have a history.
We also have a view that the businesses that we acquired, the underlying nature of those businesses is not less attractive from a margin standpoint than a historical business that we had. It’s been a challenge for that group, shutting down three factories associated with the acquisitions and moving the Minneapolis business all to a new factory and then trying to get those product lines reengineered to, I’ll say, Graco standards and get some product differentiation.
So we’ve been confident during this I guess what you’d call swoon in our Lubrication operating margins that we were going to return to our kind of historical place in the mid-20s. And over the last couple of years, they have really been doing that on schedule.
The opportunity in Lube for Graco isn’t necessarily just a particular end market. The way I really view it as is that we’re going to make investments in our distribution channel and our sales coverage outside the US where we have small share and there’s a lot going on.
And then in the US, where our major product development is, not all, but we have some in China, but in the US is the big chunk of it, and we’re going to continue to invest in, making sure our product is differentiated. From an operating margin standpoint, the factory is still not performing up to what we believe that it can do.
They justified a lot of new capital that showed up gaining in second half and particularly in the fourth quarter of 2011. And so we think we’ve got some nice improvements that we’re going to have flowing through that factory in 2012 that will also contribute to the operating earnings.
So we expect to see leverage on the top line. We expect to see better factory performance and investments related to people, channel and new product.
John Franzreb – Sidoti & Company
Perfect. And lastly, should the IT deal go against you, have you guys thought about it or articulated a plan B first to think about out there?
Jim Graner
We have not articulated any – anything else rather than that at this time, John. So we’re still focused on this transaction, and all our efforts are on completing this transaction.
Pat McHale
I’d also remind everybody that we made the decision to put the long-term debt in place of the $300 million before we actually had the ITW deal. And we believe from a strategy standpoint that interest rates were historically low and locking in some long-term debt.
Those low rates would be beneficial to our shareholders. And so we’re confident that outside of the ITW acquisition, we’ve got enough opportunities to invest and to grow that we can put that money to good use.
John Franzreb – Sidoti & Company
Okay. Thanks, Pat and Jim.
Operator
Thank you. And our next question comes from the line of Matt Summerville with KeyBanc.
Please state your questions.
Matt Summerville – KeyBanc
Good morning. Couple questions.
First, are you able to provide an update as to the performance of the ITW finishing businesses given that those guys are out reporting today as well versus kind of the expectations that you have laid out for those businesses back in March or April whenever this transaction was originally announced? Are there any updates you can provide us to those numbers?
Jim Graner
Yes, Matt. I’m going to get back into specifics, but we would say that their business is performing like our Industrial business and they are close to their peak that they have that we announced back at that time.
Matt Summerville – KeyBanc
Okay. And then with regards to the handheld products in Contractor, you’ve added around that product line a little bit already with fine finishing.
Now you’re moving more into – I think you indicated other types of materials that you’re looking to put there those devices. How big is that handheld business for Graco now?
And I guess what can these new products add incrementally to that platform?
Jim Graner
It’s been a little volatile with the store load. So it’s about – this year we ended about $20 million, down from the $28 million we had last year.
We do have some products scheduled to launch in 2012. But at present, we are still thinking in the $20 million range on an annual basis, down from where we were a couple years ago, which at that time we were forecasting much higher volumes that we are today.
Matt Summerville – KeyBanc
And then with regards to corporate expense and bearing in mind the pension, what sort of numbers should we be using for 2012? And just for the purposes of this discussion, let’s exclude the transaction costs, which I mean you really can’t predict beyond the first quarter anyway.
So let’s exclude that. What should the ongoing rate of Graco’s corporate expense look like, Jim?
Jim Graner
I would expect that the pension expense would roll by the $5 million referenced earlier. And if we exclude the ITW numbers, it should stay fairly consistent to 2011 plus the $5 million in 2012.
Matt Summerville – KeyBanc
So that punching does hit the corporate expense line?
Jim Graner
Correct.
Matt Summerville – KeyBanc
Okay. And then with regards to the fourth quarter, if you back out the ITW transaction costs, it looked like your corporate expense run rate did come down a bit.
Is there some adjustment there or is that kind of the right run rate to think about?
Jim Graner
The only thing that we didn’t do in the fourth quarter, Matt, was make the contribution to the Graco Foundation. So the full year, the Foundation contribution was $3 million, all of which was made in the first three quarters.
Other than that, there is nothing significant in the fourth quarter.
Matt Summerville – KeyBanc
Got it. Thank you.
Operator
Thank you. And our next question comes from the line of Terry Darling with Goldman Sachs.
Please state your questions.
Terry Darling – Goldman Sachs
Thanks. Good morning, everybody.
Pat McHale
Good morning, Terry.
Terry Darling – Goldman Sachs
I guess couple quick follow-ups on a number of items. First on maybe a finer point on first quarter organic growth.
Pat, given your comment about solid double-digit weekly orders here through the first four weeks and if you go back and adjust for the weeks issue in the fourth quarter and sprinkle in Jim’s more precise commentary on Contractor, does organic for the entire company get into the low-double digits for the first quarter? Is that the translation?
Pat McHale
So I’ll make a couple comments for you, Terry. First of all, I didn’t give any specific order run rates for the first four weeks of the year.
My comments were that we had the double-digit run rate through the fourth quarter –
Terry Darling – Goldman Sachs
Thank you.
Pat McHale
– and that the first four weeks of the year, we were off to a good start. And I really don’t want to get into trying to make fine estimates in terms of what our organic growth rate is going to be in the first quarter, primarily because as you know, we have a short cycle business and it’s pretty spread geographically.
Terry Darling – Goldman Sachs
Thank you. Perhaps – maybe a finer point on the full year commentary of double-digit organic for the company, on the segment side, is it fair to put Lube in the, call it, the strong double digits and Industrial in the low-double digits at least?
Is that fair?
Pat McHale
I think you’re going to have to do your own numbers.
Terry Darling – Goldman Sachs
Okay. And then maybe we’ll follow up on your comments, Pat, on Contractor margins getting back to the mid-20s.
Revenue for this year, just under $300 million. I think if you go back to the period when you last had mid-20 margins in Contractor, you were just over $300 million.
I guess the question is, what level of volume do you need to see in order to get back to that level, or is it more a complicated equation based on mix and those sorts of things?
Pat McHale
Yes, let me take a stab there and then Jim can jump in if he wants. When you take a look at the current revenue that we have in Contractor, by product family, it looks a lot different than it did back in 2006.
It’s been a really terrible environment for that division to try to grow, and yet they have been eking out some pretty consistent double-digit gains. That’s primarily been with new products and with new initiatives.
So the underlying base business, particularly in the North America but to some extent, in Southern Europe, on our – I'll say, our core everyday bread-and-butter products, is down by tens of millions of dollars from where it was back in 2004 to 2006 timeframe. From my standpoint, we really need to see that base business continue to rebound.
Again, we did see it starting to come back in 2011 for the first time, which was nice, but we really need to get that revenue back in order to drive our profitability up the assembly lines that are sitting there, the machines that are there. We know how to make the product.
It tends to be our higher volume pro-product – excuse me, higher margin pro-product. And that’s going to be really important getting driving that improvement in operating margins.
If we get our growth through new products or primarily get our growth through new products in that course of the next year, then I would expect that we would see operating margin leverage that is more in line with what you’ve seen in the last couple of years and not the snapback that I expect to get when we see the end markets get better. From my perspective, a normal housing market in the US is somewhere around 1.5 million units.
And we get back to 1.5 million housing starts, I think, that the operating margins in our Contractor North America business are going to start to look pretty nice again. And Jim, you can jump in if you want –
Jim Graner
I’ll just – Terry, just to echo Pat’s comments, it does take that in exchange to come into the equation. We’re geared to do that.
Our market position is as strong as it’s ever been. We have a few new products that are being launched in the second quarter.
So we see an incremental march back to the mid-20s that won’t happen in 2012 but maybe by ’14 hopefully if we see some improvement here and in Western Europe with respect to construction.
Terry Darling – Goldman Sachs
Okay. And just to be clear, Pat, so if the growth was coming from new products, you have growth and profit in line with what we’ve seen in recent years where margins are about where they are now.
Jim Graner
Then I think we’d see incremental operating margins in line with what the incremental operating margins have been coming from new product.
Terry Darling – Goldman Sachs
Okay. And then maybe it would be helpful for folks if we could get a little bit of a breakout within your European business.
You’ve called out emerging market Europe. What is that as a percentage of total Europe at this point?
Pat McHale
Emerging markets is about one-third of what we reported under the Europe heading.
Terry Darling – Goldman Sachs
Okay.
Pat McHale
And two-thirds is what we refer to as Western Europe.
Terry Darling – Goldman Sachs
Okay. And can you tell us what that emerging Europe piece grew in the fourth quarter, as we calibrate the pieces of the puzzle here?
Pat McHale
In the high-teens.
Terry Darling – Goldman Sachs
Okay. And then lastly, on Asia, Pat, I wonder if you could provide a little more color there.
We saw a pretty good deceleration at the company level overall, still very healthy, above 20%, with a lot of that reflected in the results of a number of other companies in the China area in particular. I think most people are looking for kind of similar slow type environment in Q1 and then a rebound.
But I wonder if you might add some color from what you guys are seeing.
Pat McHale
You got to remember too when you look at our fourth quarter, we had the same 13 versus 14 issue in Asia as we had everywhere else, which would (inaudible) on some more growth there. In general, feeling pretty good about what’s happening over there.
There are some areas of watch-out I guess from an economic perspective. We’ve been investing a lot.
We’ve put a nice new training center in place in June. We got new products launching over there.
The team is getting better every month. So I think the building blocks for Graco in Asia-Pacific look pretty solid.
And I think that as long as something dramatic doesn’t happen over there, our ability to get nice growth in 2012 stays intact. They have been putting up some really big numbers.
It’s hard to predict whether those kinds of big numbers are going to continue, but we definitely feel confident that they can do double-digit kind of numbers in ’12.
Terry Darling – Goldman Sachs
Okay. Sorry, I’ll just try to squeak one more in here.
Jim, I think I heard the tax rate guidance, 34%, that does not include an assumption of an R&D tax credit re-up. Would you be in a similar zone in ’12 versus ’11 if that did come through at the end of the year?
Jim Graner
We would. For your equations, R&D credit for Graco represents about $3 million in tax savings.
So again, it depends on where you’re modeling the earnings, but it’s $3 million in cash and lower tax rate.
Terry Darling – Goldman Sachs
Okay. Thanks very much.
Operator
Thank you. And our next question comes from the line of Mike Halloran with Robert Baird.
Please state your question.
Mike Halloran – Robert Baird
Good morning, everyone.
Pat McHale
Good morning, Mike.
Mike Halloran – Robert Baird
So just a point of clarification on Jim’s more granular comments. When you were referring to kind of flattish revenue and up – and a little bit better on the margin line, were you specifically referring to the Contractor piece?
Jim Graner
Yes, only the Contractor –
Mike Halloran – Robert Baird
Only the Contractor piece. Okay.
That makes sense. And then on the Industrial margins specifically, still great margins.
Just wondering at the revenue level, you saw third – fourth quarter versus third quarter lower margin sequentially off of that. Is that just a function of some of the commodity costs you mentioned, maybe some incentive comp differences and things like that or maybe just a little more granularity there.
Jim Graner
Yes, it’s mainly – one point of that is the cost pressures in the equation. And as we talked about before and we have pricing in 2012 that should offset those cost pressures and then the other piece is little bit on the exchange rate.
Mike Halloran – Robert Baird
Okay. And so when I think about margins on a sequential basis as you work through the year this year, your high watermark with the first quarter trended down through the year.
Is there anything structural about the business that that would be the case or is it just a confluence of lot of those one-off environmental oriented – maybe not one-off, but environment-oriented costs that ekes through through the year that cause that trend line.
Jim Graner
Yes, I would say that, one, the cost pressure is – our pricing happened in the first quarter. Our cost pressure has got a little bit more extreme as the quarters went by.
And then the exchange moved against us is really the cause in that quarter-over-quarter sequential decline.
Mike Halloran – Robert Baird
Okay. That makes sense.
I appreciate it.
Operator
Thank you. And our next question comes from the line of Liam Burke with Janney Capital Markets.
Please state your question.
Liam Burke – Janney Capital Markets
Thank you. Pat, you talked earlier about kind of the consistent concern about the construction market in the US and how it’s – how did your stores got back to the 1.5 million, you’d be having impressive operating margins.
North American Contractor was up 18% in the fourth quarter. Are those end markets doing any better or worse than you had anticipated from the beginning of the year?
Pat McHale
I’ve quit trying to guess what the market is going to do because I was wrong for so many years. But I would say the pro-paint business, in the first quarter of 2011, we really started to see some improvement in the kind of underlying base business and the mix on some of the units that are used in larger construction projects like our large gas sprayers and our large electric sprayers.
And it had really been three or four years when those product lines had done hardly anything. And so in the first quarter, we saw that underlying base business get better.
And it really stuck throughout the year. So the optimistic part of me wants to say, well, look, we saw a nice trend, improvement in our pro-paint business, particularly in what I would call standard bread-and-butter units throughout 2011 and potential that bodes well for 2012.
Of course, the negative part of me says as I was wrong for so many years about when the recovery was going to happen, I should just shut up. So I’m not really sure, but I would say – currently I feel a pretty decent about what we saw in ‘11 and I’m fairly optimistic that we’re going to see some sort of continued slight improvements in construction markets quarter-over-quarter going forward.
Liam Burke – Janney Capital Markets
Okay. And I know you talked about in one of the earlier questions, but your CapEx gaps from about 24 to 30.
Are there any one-off large projects in that or is it just capacity increases?
Jim Graner
It’s really a combination of capacity and productivity. So we – and new products.
Liam Burke – Janney Capital Markets
All right. Thank you.
Operator
Thank you. And our next question comes from the line of Matt Summerville with KeyBanc.
Please state your questions.
Matt Summerville – KeyBanc
I just had a couple of follow-ups. Maybe if you guys can comment with or without the ITW businesses, how you are thinking about share buyback here and then as you start off 2012?
Pat McHale
Our long-term goal is to have no net increase in our shares outstanding. So our cash flow, as you can see, are solid.
We generated $160 million this last year. Our cash balances are greater than our outstanding debt.
So we feel good about the position we’re in and we will continue to make opportunistic share buybacks.
Matt Summerville – KeyBanc
Hey, Jim, how much of that cash is in the US versus outside?
Pat McHale
It’s all in the US.
Matt Summerville – KeyBanc
Okay. And then just one follow-up on the Contractor business.
Are you guys able to give out sort of a breakdown in terms of how much of your business down is being derived from the pro-paint channel versus the home center channel without getting into individual customers?
Pat McHale
We prefer not to.
Matt Summerville – KeyBanc
Okay. All right.
That’s all I had. Thanks.
Operator
Thank you. (Operator instructions) And our next question comes from the line of Charlie Brady with BMO Capital Markets.
Please state your question.
Charlie Brady – BMO Capital Markets
Thanks. Hey, guys.
Just a follow-up here. And I don’t mean to beat a dead horse on the revenue growth rate.
But you’re giving some broad guidance as to what you expect the growth rate to be for the full year. And on the first quarter, across the three business segments, not so much.
And particularly given your visibility that you have in the business, I’m trying to square that up with the enthusiastic I guess growth rates for – we're talking about double-digit in Industrial and Lube for the year. Just to get a sense of what that means in Q1 and what the ramp might be through the year because second quarter is a tough comp as well.
Jim Graner
So just to clarify, Charlie, the – I'll call it the flattish call is really just Contractor in Europe. Contractor globally and then Europe in the – I’ll call it the low-single digits.
We are looking at – we are looking at in Q1 as well. They have double-digit growth in Asia, Latin America, North American markets outside of Contractor.
So it’s really the Contractor market in total that has a tough comp in the North America in Q1. That comp will going to easier in the next quarters.
And then we’re seeing sort of a bottoming impact in Europe. So again, we’re looking further on in the year to having some rebound in the Contractor market there as well as continuing strength in the Industrial and Lubrication.
Charlie Brady – BMO Capital Markets
Okay. Thanks.
Operator
Thank you. I’m showing no further audio questions at this time.
Pat McHale
All right. Thank you, everyone, for attending the call this morning, and have a good day.
Operator
This concludes our conference call for today. Thank you all for your participation and have a nice day.
All parties may now disconnect.