Graco's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Graco Inc. (GGG)

Graco Inc. (NYSE:GGG)

Q4 2012 Results Earnings Call

January 29, 2013 11:00 AM ET

Executives

Caroline Chambers - VP and Controller

Pat McHale - President and CEO

Jim Graner - Chief Financial Officer

Christian Rothe - VP and Treasurer

Analysts

Charles Brady - BMO Capital

Liam Burke - Janney Capital Markets

Jim Foung - Gabelli & Company

Kevin Maczka - BB&T Capital Markets

Matt Summerville - KeyBanc

Jim Krapfel - Morningstar

Mario Gabelli - Gabelli & Company

Operator

Good morning, and welcome to the Fourth Quarter and Year End 2012 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. The dial-in number for international callers is 303-590-3030. The conference ID number is 4587286. The replay will be available through February 1, 2013.

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 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 2011 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 obligations to update these statements in light of new information or future events. (Operator Instructions)

I will now turn the conference over to Caroline Chambers, Vice President and Controller.

Caroline Chambers

Good morning, everyone. I'm here this morning with Pat McHale, Jim Graner and Christian Rothe. I'll start by providing some top level discussion on our overall financial results for the fourth quarter, and then we'll turn the call over to Pat. Slides are available to accompany our call and can be accessed on our website. The slides include information about our consolidated financial results for the fourth quarter in our usual format.

Sales totaled $254 million for the quarter, including $32 million from Powder Finishing operations. A table showing impact of volume, acquisitions and currency by segment and region is included on page 5 of the slides. Translation rates did not have significant impact on sales growth for the quarter. Contractor segment sales were up 13% in the quarter driven by growth in the Americas.

Without the increase in sales in Industrial segment are related to the addition of Powder Finishing, sales in the segment were flat compared to the quarter in the prior year, Lubrication segment sales declined by 3% in the quarter. Also without the increase in sales related to the addition of acquisitions and a consistent exchange rate, sales in the Americas grew by 14%, sales in Europe were flat and sales in Asia Pacific declined by 17%. By region, Powder Finishing sales for the quarter were $6 million in the Americas, $20 million in Europe and $6 million in Asia Pacific.

Net earnings totaled $42 million or $0.68 per diluted share for the quarter. We have also included a walk on page 9 of the slide deck, to providing the quarter-over-quarter overview of change in operating earnings.

Gross profit margins as a percent of sales were 55% for the quarter, up nearly 0.5 percentage point from the fourth quarter last year. Lower margin rates on acquired Powder Finishing operations affected the overall margin rate by approximately 1.5 percentage points in the quarter, while margins on the legacy Graco operations improved as compared to the prior year with strong operating performance and cost management.

Total operating expenses increased $11 million for the quarter. Powder operations accounted for $9 million of the increase of which $2 million was intangible amortization. Acquisition expenses totaled $1 million in the quarter a decrease of $1 million from the fourth quarter last year. Our unallocated corporate expenses include stock compensation, pension finance costs and contribution to The Graco Foundation as well as acquisition and divestiture costs. On a quarter-over-quarter basis, we saw an increase in pension expense of approximately $1.5 million.

As noted earlier acquisition and divestiture costs were $1 million in the quarter, a decrease of $1 million as compared to fourth quarter last year. $4 million of dividends, post-tax were received from the Liquid Finishing business and are included in other income. Other income also includes $2 million for a non-recurring reimbursement related to share and shared employee retention payment.

Interest expense increased by $1.3 million for the quarter as compared to last year due to higher levels of borrowing. Since the purchase of the powder and Liquid Finishing businesses in April 2012, we have paid down debt by approximately $80 million.

The effective tax rate for the quarter was 28% as compared to 30% last year. This year's effective rates are reduced by the effects of the investment income from liquid finishing businesses held separate and the effects of a tax rate change on deferred liabilities from a tax holiday that was received in a foreign jurisdiction.

Our usual slides about segment results are also included in the slide deck starting on page 13. Net cash provided by operating activities was $58 million for the quarter and $190 million for the year. We are managing working capital in line with business volumes. Capital expenditures were $18 million and we paid dividends of $54 million for the year. Earlier in the year we also made a voluntary $10 million contribution to our U.S. funded pension plans. Our outstanding long-term debt declined by $33 million during the quarter to $556 million.

Very briefly I'll discuss the accounting for Liquid Finishing business that is reflected as a cost investment on our balance sheet. Under terms of the whole separate order from the Federal Trade Commission, we cannot exercise directional or controlled operations of Liquid Finishing, nor are we able to exert significant influence over the Liquid Finishing operation.

The $427 million investment in the Liquid Finishing business has been reflected as a cost method investment, and its financial results have not been consolidated with those of the company. Income is recognized based on dividends received from current earnings; i.e. post tax and is included in other income in Graco's income statement.

Dividends from the Liquid Finishing business totaled $4 million in the fourth quarter and were $12 million in the nine-months since the acquisitions. We anticipate a steady rate of quarterly dividends as long as this investment is held.

Looking forward, I'd also like to mention a few other items. Going into 2013, we expect pricing to align with inflation and continued factory improvements and efficiencies resulting in modest cost improvements. We anticipate that the total future cost of the divestiture will be approximately $10 million. So the timing of the expense and the final amount will be affected by the sale of regulatory review process.

Our annualized 2013 tax rate is anticipated to be between 32% and 33% assuming the $4 million in post tax dividends per quarter from the liquid finishing business as long as we hold it. The reinstated federal R&D tax credit will have a favorable effect in the first quarter of 2013 and will include a catch up for 2012 of approximately $2.5 million resulting in a tax rate for the first quarter of 31% to 32%.

We expect the annual pension expense to be $2 million lower as compared to 2012. We may elect to make a voluntary contribution to the U.S. funded pension plan net this year in a range of $10 million. Capital expenditures are expected to be around $25 million in 2013.

With that, I'll turn the call over to Pat for more comments on our results.

Pat McHale

Thank you, Caroline. Good morning, everyone. This morning, I'll give you some color on the trends we saw in our business in the fourth quarter and our views as we move into 2013.

Generally, I was pleased with the performance of the company in the fourth quarter. Of particular note was the excellent performance of all of our factories, driving significant quality and process improvements across product categories.

Gross margins on an as reported basis improved from the fourth quarter of 2011 to the fourth quarter of 2012 by about 40 basis points. The difference between those two periods however is the addition of the Powder Finishing business, which actually diluted margins by 1.5 percentage points. In other words, the legacy Graco operations improved gross margins by nearly 2 percentage points year-over-year.

My thanks go out to all of our purchasing, manufacturing, distribution and customer service employees for another fine year in 2012.

The Americas Contractor business had a strong showing in Q4 after a weaker than expected Q3. The improvement was a combination of good team performance, a recovering construction market, new product and easier comps versus a weak Q4 of 2011.

Outside the Contractor business I'd say that the business environment for the legacy Graco operations is relatively unchanged from the third quarter. Europe is stable with growth on the east and headwinds in the west. Asia Pacific remains challenging throughout the region and across product categories.

On Graco legacy business we knew we had a difficult comp in the fourth quarter versus 2011. Our hope was to try and built from the run rate of the third quarter of '12 and gain some momentum going into 2013. Unfortunately, shipments were spotty in the fourth quarter and sales were down 4% sequentially.

I'll get into details more in a moment. Focusing, on to the powder business which we are managing on a worldwide basis I am very pleased with powder performance for the year and particularly in the fourth quarter. Top line performance was in line with expectations and gross margins and operating margins have improved each quarter since the acquisition, resulting in bottom line performance above expectations. The Gema team and Graco team are working very well together and we look forward to continued progress in 2013.

Next, let's walk through each of the regions and segments for the legacy Graco business and I'll briefly give you a few data points and our go forward outlook. My comments are based on year over year performance on a constant currency basis.

First let's go back to Asia Pacific, sales declined in each of our reporting segments in the Asia region during the fourth quarter. As stated earlier this wasn't surprising due to difficult comps from the prior year but the performance was disappointing nonetheless.

Across the board activity levels have been stagnant, since late in the first half of 2012, which we expect will continue into the first half of 2013. Industrial segment sales in Asia were up 15% from the fourth quarter of '11 although from an incoming order perspective, bookings in the industrial segment showed some growth from Q3 and our backlog grew in the fourth quarter. This was mostly due to timing, as we had a nice spike of orders in late December that were scheduled for shipment in the first quarter of 2013.

Order activity was a mix of distributor and end user stocking orders as well some larger automotive project activity in China and Korea. Currently, we're booking on trend with the averages we experienced over the second half of 2012. From an end market perspective when compared to the prior year, we are seeing a similar story to what we've discussed in the third quarter. Automotive production levels are holding steady but other industries such as wind, solar, construction equipment and shipbuilding remained soft.

Our Contractor business in Asia Pacific was down 7% in Q4 versus the prior year. Sales were flat sequentially to Q3. We continue to work our key initiatives including most importantly end user conversion. Lubrication sales in Asia posted a 40% decline from the prior year the biggest driver of the decline is the slowdown in mining activity.

As most of our investors know, we're in the early innings with our Industrial, Lubrication line. A lot of the share gains that we've made in Asia over the past two years have been in the mining space which has seen CapEx under pressure in the past six months.

Sequentially, lube sales in Asia were flat, so we believe we've likely hit the bottom from an incoming [order rate] perspective.

Moving on EMEA, the emerging markets of EMEA continue to grow nicely for us led by Russia and Central Europe, while we saw an overall reduction year-over-year in the west. The mix of sales between the west and the east were similar to the third quarter at approximately 60 west and 40 east.

From an end market perspective, Western European activity is weak across the board from construction to automotive to general industry. We've had some wins in automotive, which has helped to keep our industrial sales close to the levels achieved in 2011, while our contractor business continues to make gains in the emerging markets to offset the Western European declines.

The growth in lubrication in Europe in Q4 was nice but it's coming off of small base and as a result quarterly results can be choppy. We believe conditions in Western Europe will be soft into 2013, we continue to focus on the emerging markets try to outperform what the market gives us.

Onto the Americas, I'm very happy with the growth rates achieved in all of our segments in the Americas in the fourth quarter capping off a really nice year of nearly double digit growth for Graco in the region. Our Industrial segment grew at a double digit pace reflecting strength across the range of end markets. We're optimistic for continued growth in this segment in the Americas in 2013, albeit at a slower pace as we lap strong comps throughout the year.

Our Lubrication segment grew at a high single digit pace in the fourth quarter in the Americas with contributions from both the legacy, petroleum management products as well as our industrial and lubrication lines. We're expecting both product categories will continue to drive growth into 2013.

Lastly, we look at the Contractors segment in the Americas which grew at a very strong double digit pace in the fourth quarter. Results were a combination of a good performance by the team, easier comps from Q4 of 2011 a recovering housing market and probably some bounce back from Q3, which were softer then we had expected. As the housing market recovery continues we anticipate that we may see some choppiness from quarter to quarter above the overall trend should be favorable.

During Q4 we experienced strong double digit sales increases in both the paint stores and the home centers. Out-the-door sales we were good in both channels and our data indicates that inventory levels with of all of our partners are appropriate. So we're not expecting significant changes in 2013 related to stocking.

We saw good growth in our product categories however the mix still remains skewed towards the units for slower output. Lastly we've had indicated previously that there was a pending new product launch in contractor that would give us the additional sales volumes.

The product did launch late in the fourth quarter and contributed a few percentage points to the Q4 growth rate. The product is an extension of our hand-held line that is targeted for heavy duty applications particularly protective coatings. The HD unit as it called is appropriate for touch up work and bridges ships pipelines and other metal applications that are exposed to the elements.

Initial response from our channel partners and distributors has been good and we're looking for this product to contribute about 1 percentage point of growth through the worldwide contractor segment in 2013. Few comments regarding overall outlook, looking at the demand side as we enter 2013 we expect continued variability and performance between regions.

The Americas was our best performing region in 2012 and we anticipate this will continue in 2013. For the full year 2013 we expect all segments will grow in the Americas led by Contractor with lower double digit growth and anticipate Industrial and Lube to generate mid single digit growth.

We expect EMEA will be a struggle throughout the year due to lack of any real help from the macro environment in the Western Europe. We look to further penetrate the emerging markets and are expecting to see overall growth in EMEA in 2013 albeit at a lower single digit rate.

In Asia Pacific, we expect to end 2013 with overall single digit growth but with tough comparisons the first half will likely we see our trend of negative year-over-year growth continuing.

Despite the challenges in EMEA and Asia we like our strategic plan and we're committed to funding initiatives that have a long term return for our shareholders. We've constantly analyzing returns we're achieving from those initiatives and we make adjustments as needed to ensure the ROI is there?

The Graco team is focused on execution selectively adding distribution growing our end markets, broadening our geographic reach, converting end users from manual applications methods to sprayers and developing and marketing best in class new products.

We also expect our factories will continue to perform in 2013 and contribute positively to our results. Few comments on Liquid Finishing divestiture process, there isn't much that we can say publicly that is different than what is already been said, the final decision and order from FDC has not yet been issued and the timing of the order is unknown to us.

As stated on last quarter's call the delay is related to some intellectual property matters that Graco doesn't believe are material to the overall operations of the business. That being said the FDC has been focused on that matter and actions are being taken.

Due to the nature of our ownership structure the whole separate arrangement and the FDC's involvement, we are aware what is happening but our role is very limited. Due to the relative size of the matter we're not expecting the outcome will have a material impact on our ability to sell the business or our ultimate proceeds. Unfortunately, I'm not in a position to give much more detail.

In the meantime now the business continues to perform well posting another quarter of growth in sales and EBITDA. We're the beneficiary of the cash that's being generated by the business and we remain confident that there will be significant interest in the asset.

This concludes my prepared remarks Operator we're ready for questions.

Question-And-Answer-Session.

Operator

(Operator Instructions) Your first question comes from Charles Brady from BMO Capital. Please proceed with your question.

Charles Brady - BMO Capital

Hey, good morning.

Pat McHale

Good morning.

Charles Brady - BMO Capital

I just want, on the Contractor business, I just want to understand a little bit, what would happen in the quarter. So you had a new product launch, which helped a little bit in terms of tail-end and you also had may be a little bit of bounced back from Q3, and I guess, I'm trying to understand, we look into 2013 particularly Q1 of 2013, should we expect that growth rate to tail off, it sounds like you've got a couple of things that helped to get a little bit of bounce of Q4 that may be don't carry through as strongly going into the first half of '13?

Pat McHale

Yeah I don't want to start slicing our projections quarter-by-quarter, but our projection is is that the environment is going to be good for us here in the Americas in 2013 and we'd expect the Contractor division over the course of the year to end up with growth and in that lower single digit range.

James Graner

Excuse me.

Charles Brady - BMO Capital

Okay and can you just clarify.

Pat McHale

Excuse me, sorry.

Charles Brady - BMO Capital

Yeah.

Pat McHale

Jim has interrupted me, I had a brain cramp, it was a low double-digit range.

Charles Brady - BMO Capital

Okay, that makes a little more sense, then.

Pat McHale

Thank you. I just dropped $20.

Charles Brady - BMO Capital

No, you're still okay. Yeah on the other expense line you went through and I missed part of what you said about the extra $2 million, what was that related to?

Caroline Chambers

So were you talking about the extra $2 million in other income.

Charles Brady - BMO Capital

Yeah.

Caroline Chambers

Yeah, so what we had there was a non-recurring reimbursement of $2 million that was related to some shared employer retention payments.

James Graner

So Charlie you can think of it similar to the dividend distribution, we received from the Liquid Finishing. The only difference is that $2 million is pretax and the $4 million is after-tax.

Charles Brady - BMO Capital

Right, and then that's a non-recurring, it's a one-off type thing this quarter, correct?

Caroline Chambers

Correct.

Charles Brady - BMO Capital

Okay, thanks.

Operator

Thank you. The next question come Liam Burke from Janney Capital Markets. Please proceed with your question.

Liam Burke - Janney Capital Markets

Yes, thank you. Good morning, Pat, good morning, Jim.

Pat McHale

Good morning.

James Graner

Hello, Liam.

Liam Burke - Janney Capital Markets

On the Lubrication side I know you had some tough flooding in south-east in the Asia-Pacific area, but you did have year-over-year decline in revenue but a significant step up in operating margin. So it couldn't be just volume improvement, where did you see that improvement, where did you see the profitability improvement?

James Graner

Liam, just to come back to your comment, the segment decline for the quarter of 3%.

Liam Burke - Janney Capital Markets

Right.

James Graner

Okay, but it did grows for the year for 7%, but the improvement in the operating performance in the fourth quarter really comes as a result of improvements in our factory and what we're able to deliver on margin perspectives. Caroline do you want to add anything?

Caroline Chambers

Jim's correct on that, what we saw a nice improvement is coming out of the factory really and it ramped up in the year went by.

Liam Burke - Janney Capital Markets

And just to talk a little bit more about on the industrial lubrication side, these so obviously the mining in Asia-Pacific was tough, are you seeing on other segments success and market share gains there?

Pat McHale

Yeah it's really hard to measure without any industry data on that, we are seeing nice growth in that category over the course of last 3 or 4 years as we've really started to improve our product acquisition and we believe that our growth in that category has been better than what the market is doing, so we can assume some market share gain but its hard really to put a metric on it. Keep in mind that our market share in industrial Lube is probably above 3% overall.

Liam Burke - Janney Capital Markets

Great, thank you.

Operator

Thank you. The next question comes from Jim Foung from Gabelli & Company. Please proceed with your question.

Jim Foung - Gabelli & Company

Hi, good quarter.

Pat McHale

Hi Jim.

Jim Foung - Gabelli & Company

When I look at the contract of the business your peak was about $320 million going back to 2006, and looks like you're early approaching that on a revenue basis? The margins at that time was about 28% and I guess you're doing about 18% now. So I guess question is this, how long would it take you to get back to those peak type of operating margins that you had in your last cycle?

Pat McHale

Yeah, I'll make a couple of comments then Jim can jump in may be with some more granularity, but the way to think about the Contractor revenue line today versus where was that in 2006 as the revenue line is made of fairly significant different mix. We are still somewhere in that $70 million to $90 million may be plus short fall in our base business product categories. And we've made a lot of that up with our growth of somebody emerging markets and with the lot of the new products that we've launched over the years.

The incremental margins on that product compared to what we had in the base business is still a significant headwind for us. So from my prospective, we're going to look at operating margins in Contractor should continue to improve as the base business improves but then we wouldn't be looking for mid 20s until we have housing starts and the corresponding underline, core product strength in that, million and half housing starts range.

James Graner

So, Jim while you're right that in total we're getting closer back to the peak. When we look at the business in North America and we strip off the additional products we've launched in the last 3 or 4 years from our total market initiative, we still think we're about $80 million and our legacy business under the peak and as Pat mentioned, lot of that $80 million came from the high-end units, that probably will take us, take a housing environment of more $1.5 million for us to achieve. So, we'll see a slow improvement in the operating margins but at the next, this cycle until the housing starts get well over $1.5 million, I don't think we'll approach the 26% to 28% probably low more in the low 20s, 23% or 24%.

Jim Foung - Gabelli & Company

So that would be new talk it look at the how's the market improves?

James Graner

Correct.

Jim Foung - Gabelli & Company

Okay. Okay great. Thank you.

Operator

Thank you. The next question comes from Kevin Maczka from BB&T Capital Markets. Please proceed with your question.

Kevin Maczka - BB&T Capital Markets

Thanks, good morning.

Pat McHale

Good morning.

Kevin Maczka - BB&T Capital Markets

Pat first on the gross margin, it doesn't sound like there was anything unusual there that helped you this quarter like mix or anything else, I think you called out pricing volume in factory efficiencies and since there wasn't much in a way of organic volume growth I'm wondering, can you say a little bit more about that May -- including the pricing impact and other specific things that are happening in your factories now to drive that other thing you're ongoing normal continuous improvement?

Pat McHale

I'll make the couple of comments about the factories and then I'd let Jim weigh in on the pricing. We continue to invest in capital in our factories and really throughout 2012 both with capital that we justified in 2011 and we put in place in '12 and then we're putting in place, we saw the factories have good cost improvements throughout the year and gained momentum and just good work done by folks on cost reduction, Kaizens, capital equipment installations, drove that trend it wasn't any one product line or any one factory, it was pretty broad based improvement by all the groups.

James Graner

Yeah, for the quarter one thing that stands out is the fact that our factory delivered a 1 percentage point improvement in the gross margin just from their in book productivity, that compares to a flat kind of number for the year. So another words are cost were flat for the year but actually improved gross margins in the quarter by 1 percentage point. So the pricing impact under quarter was basically the same as this year-to-date and incremental margins improved and here it's coming out of the factory and impairment side.

Kevin Maczka - BB&T Capital Markets

Okay and Jim your ramping CapEx in 2013, any specific projects there that we should be aware of?

James Graner

It's really just volume dependent. You probably also saw that our actual number for 2012 was less than we had told you in the second and third quarters and really that’s the deferral of projects that - the CapEx projects that are volume related and those will happen in 2013.

Kevin Maczka - BB&T Capital Markets

Got it, and then just finally from me a general question related to ITW and the FTC. You don’t of course have to sell that yet until you get the final verdict from them or decision from them. But is there anything that inhibits you from just going ahead and doing that, assuming you have a buyer at a suitable price?

Pat McHale

Well, we have to file an application what the FTC, and the application will disclose the buyers. FTC does have to rule that the buyer is able to keep the competition in the marketplace. So, if we can take a buyer himself and close on asset without the FTCs approval.

Kevin Maczka - BB&T Capital Markets

Okay, so you’re just still limbo of sorts until you get that decision?

Pat McHale

Correct.

Kevin Maczka - BB&T Capital Markets

Yeah.

Pat McHale

We don’t want to get ahead of ourselves.

Kevin Maczka - BB&T Capital Markets

Yeah, okay. Thank you.

Operator

Thank you. The next question comes from Matt Summerville from KeyBanc. Please proceed with your question.

Matt Summerville - KeyBanc

Good morning couple questions. First on the powder portion of the business, you've had that now for just under a year. As you look over the next one year period and maybe then thinking longer term three to five years. How would you characterize your expectation in terms of how fast that business should grow organically and what an acceptable margin trajectory would be for that business? Now that you've been it for year, again do you think 30 plus is in the cards like the remainder, the legacy Graco business as to pertain us to the industrial segment?

Pat McHale

On a top line perspective that business has got fair amount of exposure to Europe. So over the short term that could be a bit of challenge for us, but they also do very well in Asia and have seen a good growth there historically. And so our view when we brought that businesses that it would be equivalent to our maybe slightly better than the average growth rate that we see in other coatings businesses on the industrial side. So it should be a neutral to a positive from our overall industrial growth standpoint.

You'll also recall that this is already a well performing business and our strategy on these things from a integration standpoint was just to make sure that we protect revenue. And so we’ve been executing along those lines and would expect to see some modest improvements in gross margin both by pricing actions and by cost reductions, as we move forward but not any kind of a dramatic increase.

I don’t view this business as having the same upside in terms of operating margins that are legacy industrial business, primarily because they sell a lot of call it sheet metal, plastic type components along with the system, the goose, the recovery systems that you’re just not likely to see this sort of margins that we would see on their based value added engineered product.

Matt Summerville - KeyBanc

Got it. And then can you maybe talk just a little bit more about China and some of the emerging markets outside of Europe, I thought you hit on that in a pretty detailed manner. Has your bidding activity improved at all in China? Are utilization rates in issue that is maybe impacting your aftermarket business there, help me understand more about what you’re seeing in kind of real-time, some companies are starting to be a little more optimistic about China and maybe I am misinterpreting, but I just - I am not seeing that from you guys?

Pat McHale

I would say that we’re more optimistic about the second half of the year and I think just our culture here is that we think that’s dangerous to be always excited about the second half of the year. Looking at in the short term, our run rates in Asia in general seem to be starting the year out sort of on the same path that they were at in the second half of 2012. That the factories are being used in China, and we haven’t seen a big drop off in our spare parts business, but it was really general softness across the industries probably also driven by a little bit of pull back on CapEx. GDP was still good in China in 2012, we’d love to have a number like that but the fact it was a little bit less than prior year, I think cause people that utilized investments they had in place and a little bit less focused on putting new capability in place. I think they had heard us on the project side. We’d anticipate there could be another six months or that before we start to see the kind of investments at the level that we need to get to get that kind of double digit Asia growth back.

Matt Summerville - KeyBanc

Then just one more Pat in EMEA as Asia Pac you provide a little bit of kind of real-time end market color. Can you do that just for the industrial business in North America kind of what you show and what you expect as we move through the year?

Pat McHale

Well, I mean we had a really strong year, so obviously comps are going to be more difficult, but we show strength across really a lot of different end markets and in fact we just finished up our industrial sales meeting that kicked off the year in the last couple of weeks and I would say the overall tone of the sales people is positive. They continue to see people make investments, even in industries that maybe aren’t going that strong. People are looking for costs reduction opportunities and process improvement and I think we’re feeling generally pretty decent about 2013 for industrial.

Matt Summerville - KeyBanc

Thanks guys.

Operator

The next question comes from Jim Krapfel from Morningstar. Please proceed with your question.

Jim Krapfel - Morningstar

Thanks good morning everyone.

Pat McHale

Good morning Jim.

Jim Krapfel - Morningstar

Why (inaudible) do you think we are with regards to the margin recovery in the Lubrication segment. Do you think this business will achieve mid 20% margins with the next three to five years as I think you’ve previously articulated?

Pat McHale

Yeah, I am not sure exactly what the timeframe is, we’ve seen continuous improvement now over the course of the last few years and their expectation was as they get up over that 20% number for 2012 and they did that with some top line growth I think we'll continue to see modest improvement in that, we are investing to grow that business over the 3% market share in industrial Lube. There is lots of opportunity for us to push that product around the world, and we also need to do some things on the product development front. So, Lube has a decent year and they had point, point and a half to their operating margin in 2013. I will be happy and we don’t have a big push on right now to [jam] them back in the mid 20s. We could do that by doing some significant expense reductions but we like the investments that we’re making in that space and we’re going to be patient.

Jim Krapfel - Morningstar

Okay. That make sense, second question. Certainly economic conditions will make segment results choppy, but would you estimate the annual revenue boost, you receive from converting users to spray equipment in Europe in a specific confluence of Contractor segment?

Pat McHale

I mean that’s almost impossible to measure if I tried to drove gas out there, Jim will probably jump across the table and tape my mouth shut. We launch new product every year and we add people in the emerging markets. We have a good distribution channel add program in place, we’re doing specialization and so there is really no way to accurately measure the impact of any particular initiative. But I will tell you we really believe in end user conversion and we do thousands of end user conversion demonstrations every year and we have dedicated people not sales people but we have dedicated end user conversion people in Europe that are going around doing that activity. So we think it’s really important and if you take look at the paint consumption there compared to the amount of equipment that’s sold you can see that the runway is along. So we just continue to try to drive that but an exact measurement is really difficult.

Jim Krapfel - Morningstar

Okay. Thank you so much.

Operator

Thank you. The next question comes from Mario Gabelli from Gabelli & Company. Please proceed with your question.

Mario Gabelli - Gabelli & Company

Yeah, I’d win a double TV but Jim is on the sell side I didn’t that what he is going to ask, I always know.

James Graner

Hey Mario.

Mario Gabelli - Gabelli & Company

When I look at the amount of say dry powder in your financial statement, or I should say electrostatic powder that you’re going to get back. What it what's on your drawing board in terms of tuck-in deals, you did a fairly significant one with ITW obviously ran into a speed bump, but and you must have a pipeline fill of acquisitions, you not do them well as ITW transaction with the FTC is pending or do you just move ahead at some point?

James Graner

Well, if we found the right deal we would absolutely move ahead as you know people are paying up pretty substantially for deals and the flow control space right now, we do have a number of folks at Greco they have been working pretty hard. They have build a vision of where we want to go and identifying candidates, but we’re going to be careful we don’t want to overpay as well.

Mario Gabelli - Gabelli & Company

You've got, obviously you could put a wrapper around the sales of the electrostatic business and get a fairly - you have a number that you have it financeable and there is no concerns over size anymore. There is a limit, the last one was pretty sizable?

James Graner

Yeah, I think that has an organization where getting battery, we actually started doing some deals back about 10 years ago and we gradually improved and of course the capability of the organization to execute as well as our capability to identify spaces is getting better. So I think we're comfortable doing things that are bigger but again I think we're going to keep our discipline and we're not going to do something just to do it. We're not going to overpay, we need to find something where we can add value, particularly in our core competencies on the manufacturing and engineering new products front. And if we found something and it was sizable we would figure out how to finance it.

Mario Gabelli - Gabelli & Company

Never a problem. Just one minor edit, I don't think it, you're in limbo, I think you're in hell on this one. Take care.

Pat McHale

All right.

Operator

If there are no further questions, I will now turn the conference over to Pat McHale.

Pat McHale

All right. Thank you very much, for your participation this morning and we look forward to talking to you again in a few months.

Operator

Thank you, this concludes our conference call for today, thank you all for participating and have a nice day. All parties may now disconnect.

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