Caroline Chambers - Vice President, Corporate Controller and Information Systems Pat McHale - President and Chief Executive Officer Jim Graner - Chief Financial Officer Christian Rothe - Vice President and Treasurer.

John Franzreb - Sidoti & Company Kevin Maczka - BB&T Capital Markets Mike Halloran - Robert Baird Charles Brady - BMO Capital Markets Liam Burke - Wunderlich Securities Jim Krapfel - Morningstar Walter Liptak - Global Hunter Evelyn Chow - Goldman Sachs Jim Giannakouros - Oppenheimer & Company Joe Radigan - KeyBanc.

Good day and welcome to the Fourth Quarter and Year End 2014 Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 within the United States or Canada. The dial-in number for the international callers is 719-457-0820. The conference ID is 2880728.

The replay will be available through January 31, 2015. 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 the company’s 2013 Annual Report on Form 10-K and in the 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 those statements in light of new information or future events.

I will now turn the conference over to Ms. Caroline Chambers, Vice President, Corporate Controller and Information Systems. Please go ahead, ma’am..

Good morning, everyone. I am here this morning with Pat McHale, Jim Graner and Christian Rothe. I will provide a brief top level summary of our quarter and then we will turn the call over to Pat for additional discussion. Our conference call slides are on our website and provide additional information on our quarter.

Sales in the fourth quarter were $306 million, an increase of 13% from the prior year and net earnings were $49 million, an increase of 10%. Diluted net earnings totaled $0.80 for the quarter. Changes in currency translation rates reduced sales by approximately $8 million and decreased net earnings by approximately $3 million for the quarter.

Sales from businesses acquired in 2014 were $15 million in the quarter or 5 percentage points of our overall growth. Regionally, sales in the Americas grew by 18%, sales in EMEA increased by 8% or 14% at consistent translation rates, and sales in Asia-Pacific increased by 5% or 8% at consistent translation rates.

Gross profit margins for the fourth quarter as a percentage of sales were 54%, down slightly from last year. The decrease was primarily due to the effects of purchase accounting, which totaled $2 million in the quarter and lower margins from acquired businesses.

Operating earnings totaled $69 million, an increase of 10% from the fourth quarter last year. Operating earnings as a percentage of sales declined by 0.5 percentage point from the fourth quarter last year. A reconciliation of our operating earnings from the prior year is included on Page 8 of our slides.

The effect of purchase accounting inventory step up, acquisition costs and the effects of acquired businesses were unfavorable to operating earnings as a percentage of sales by 2 percentage points.

Incremental investment in regional and product growth initiatives totaled $2 million in the quarter and was also unfavorable to operating earnings by 1 percentage point. Offsetting these items were favorable volume, lower pension and stock compensation expense as compared to the quarter in the prior year and favorable expense leverage.

Other income includes dividends of $4 million from the liquid finishing businesses, consistent with the fourth quarter of 2013. As announced in October 2014, the Federal Trade Commission issued its final decision and order requiring the sales of liquid finishing businesses.

Shortly thereafter, we also announced a definitive agreement to sell the liquid finishing business assets in a $500 million cash transaction. The sale is subject to regulatory and other customary closing conditions. Until the sale has closed, we will continue to account for the liquid finishing businesses held separate as a cost investment.

The sale of the liquid finishing businesses is expected to be completed in the first half of 2015 and the timing of the close will affect the timing of the dividends to be received. When the sale of the liquid finishing businesses has been completed, there will be no further dividend income from the investment.

Transaction costs related to the sale are expected to be $11 million to $13 million, most of which will be incurred when the transaction closes. Additional information on the liquid finishing businesses is included in 2013 Form 10-K and our third quarter 2014 Form 10-Q. The effective tax rate for the quarter was 27% as compared to 28.5% last year.

The decrease reflected the full year effect of the federal R&D tax credit that was reinstated in the fourth quarter partially offset by the effect of a reduction in foreign earnings taxed at lower rates. Cash provided by operating activities were $71 million in the fourth quarter.

The use of working capital is in line with volume and seasonal trends and days of sales outstanding for accounts receivable remained consistent. In the quarter, capital expenditures were $5 million, dividends paid totaled $16 million and share repurchases net of shares issued totaled $45 million. A few other discussion points.

We have been monitoring the changes in currency exchange rates the past few weeks and months. We are the most affected by changes in the euro.

If we were to assume the same volumes, mix of products and mix of business by currency as the full year in 2014 and currency translation rates stayed the same as they are this week, for the full year, sales will be decreased by approximately 4% and earnings will be decreased by 10%.

Corporate expenses are expected to be approximately $10 million higher in 2015 primarily due to increased pension expenses as well as the incremental $2 million related to the full year of operations in our new central warehouse and distributional costs. We expect capital expenditures to be approximately $35 million for the full year in 2015.

The annualized tax rate is expected to be approximately 32% to 33%, excluding any impact from post tax dividends from the liquid finishing or gain on sale of the investment. The federal R&D tax credit has not been extended into 2015. If approved, the 2015 annualized tax rate is expected to be approximately 31% to 32%.

I will turn the call over to Pat now for further discussion..

Alright. Thanks, Caroline. Going morning, everyone. Thanks to the efforts of our employees and our channel partners worldwide. We finished 2014 with a strong quarter achieving new records in multiple categories for the quarter and the year. On a constant currency basis, organic growth was double-digits in Q4, our strongest growth quarter of the year.

It was our strongest quarterly organic growth since 2011 and our 20th consecutive quarter of organic sales growth at consistent year-over-year exchange rates. We continue to see a decent economy in the U.S., spotty improvement in Asia-Pacific and a mixed bag in EMEA with growth continuing in the West and significant declines in Russia.

Caroline highlighted a number of discrete costs related to acquisitions and regional and product expansion in her comments. You can also find more information on these costs in our slide deck, in our press release.

After adjusting for these costs our incremental profit on our organic sales growth was solid for the quarter and for the year, both in the 40% range.

Acquisitions added 5 percentage points to our growth in Q4, reflecting contributions from QED and EcoQuip, which were acquired in December of 2013 and Alco Valves which was acquired early in the fourth quarter of 2014.

When you add these acquisitions to our strong organic growth on a constant currency basis, Graco grew at a double-digit pace in every reportable segment and region during the fourth quarter except Asia-Pacific, which grew at a high single-digit pace. My review of the segments will focus on organic growth on a constant currency basis.

Let’s start with contractor. Our contractor business posted double-digit growth in the fourth quarter, driven by double-digit growth in Asia-Pacific and the Americas. We mentioned before that we are expecting to see variations in the growth rate of contractor Americas from quarter-to-quarter during recovery of the U.S. housing market.

However, the team was able to post double-digit growth in the Americas in every quarter of 2014. And that was against the 22% growth comp from 2013. We are still cautious about variability, but remain bullish on the long-term trajectory supported by the continued growth of the U.S. construction markets.

Sales increased double-digits in both the paint store and home center channels in North America this quarter. The contractor segment posted – excuse me the contractor segment in both Asia-Pacific and EMEA achieved mid single-digit growth for the year.

Moving on to industrial, our worldwide industrial segment posted high single-digit organic growth in Q4 above the mid single-digit growth that we achieved for the full year.

In the Americas, our industrial business grew at a double-digit pace against our hardest comp of the year exceeding expectations and pushing the region’s full year growth rate into the high single-digits.

The EMEA industrial business also outperformed in the quarter with a double-digit organic growth rate that helped the region to achieve mid single-digit growth for the year. The Asia-Pacific industrial business grew at a low single-digit pace in the fourth quarter, matching the growth rate for the full year.

If you recall we started the year in the whole with a poor performance in the first quarter and have made good strides to finish the year in positive territory. Worldwide industrial demand levels are good and we continue to have nice contributions from nearly all product categories. Next, let’s talk about lubrication.

Worldwide, lube posted double-digit growth for the quarter, driven by a strong 22% increase in the Americas and double-digit growth in Asia-Pacific. Nearly every product category in the Americas grew at a double-digit pace in the fourth quarter and contributed to the performance.

In EMEA, lube was down year-over-year off a small base due to a large Q4 2013 shipment into the emerging markets that didn’t recur. Now moving on to some comments regarding our overall business in EMEA and Asia-Pacific, similar to last quarter our growth in EMEA came primarily from the developed economies in the West.

Developed economies of the West grew at a pace in the lower teens during the quarter. In the emerging markets, Russia was down year-over-year in the lower teens consistent with the full year pace. Q4 growth in the Middle East offset the declines in Russia while the other portions of emerging EMEA were relatively flat.

Excluding Alco, our current sales split in EMEA remains close to the third quarter at 68% developed economies and 32% emerging markets. The Asia-Pacific region grew mid-single digits organically in the quarter against the strong double-digit comp from the fourth quarter of last year.

Sales were flat in China and Australia and New Zealand, while every other geography in the region posted good levels of growth. In China overall performance was stronger than the headline numbers would indicate. Q4 of 2013 had a high level of shipments of powder coating equipment for the aluminum profile market.

And as we have discussed on many occasions these projects are lumpy and can move growth rates around from quarter-to-quarter. Without that product category growth in China would have been mid to high single-digits in Q4. We continue to see variability in bookings and billings by country and product line.

The overall direction of the region is good though and I like how we exited the year. Before commenting on our outlook for Q1 and for 2015, I want to take a moment to expand on our recent activities on the acquisition and divestiture front.

Early in the fourth quarter, we announced and closed on the acquisition of Alco Valves, a UK-based manufacturer of high pressure, high quality valves for oil and natural gas and industrial process applications for a purchase price of £72 million. We also announced four other acquisitions, which have all now closed.

The first is Geo Blaster, while a small of this business is complementary to the EcoQuip business that we acquired in late 2013 and expands our abrasive blasting surface product offering. The second business is Multimaq, a very small manufacturer and distributor of industrial fluid handling products in Brazil.

This is our first operational footprint in Brazil and our intent is to use it as a platform to enhance our long-term competitive position in Brazil. The third business is White Knight Fluid Handling, a manufacturer of specialized s air-operated double-bellows pumps, air-operated double-diaphragm pumps and metering pumps.

The White Knight product line expands Graco’s current process pump offering into niche, high and ultra-high purity applications where Graco previously had no presence. Fourth acquisition is High Pressure Equipment, a manufacturer of valves, fittings and other flow control equipment engineered to perform at ultra-high pressure environments.

About half of the revenue is in oil and gas applications with the other half in attractive niche process segments. This business will complement Alco Valves offering. We have a slide in our conference call deck on high pressure equipment.

We expect these transactions to add approximately 5 percentage points of growth to our 2015 sales, $26 million of EBITDA, and $0.13 to $0.15 of earnings accretion in 2015 before purchase accounting and transaction costs.

Regarding the sale of the Liquid Finishing brands to Carlisle Companies, our current estimate is this transaction will close either late in Q1 or early Q2. As a reminder, the sale price is $590 million, after paying cash taxes, transaction costs and harvesting the remaining cash, we expect to receive $570 million in net cash proceeds.

When all is said and done including the proceeds from the divesture and the cash we have spent on recent acquisitions, we currently expect to be in a net debt position of approximately $200 million, that would consist of $300 million of our existing private placement debt, which has a pretax interest rate of about 4.8%, offset by a little over of $100 million in cash.

For 2015, we are planning achieve organic growth in every reportable segment and every region of the world. In the Americas, we are expecting industrial organic growth in the mid single-digits. We expect the U.S. construction environment will continue to improve and that our contractor Americas business can grow at a double-digit pace again in 2015.

The lubrication business is expected to have mid single-digit growth. All-in, the Americas should grow in the mid to high single-digits organically. On a constant currency basis, we expect EMEA and Asia-Pacific will grow organically in the low single-digits for the first quarter and the full year 2015.

Overall, we believe Graco can achieve mid single-digit organic sales growth in the first quarter and full year. As noted in the press release, if currency rates stay above where they are today, there will be a sales headwind of about 4% for the full year 2015, with the impact skewed somewhat to the first three quarters.

FX headwind should be more than offset on the top line by growth from acquisitions of around 5%. Our 2015 plan relies on a continued focus on our strategic growth initiatives, new products, new markets, expanded distribution and end user conversion.

Our slate of new products hitting the market this year looks solid and we have most of the resources already in place to execute our market and distribution initiatives. In short, we had a good all-around performance in 2014 and look forward to maintaining our momentum as we head into 2015. Operator, we are ready for questions..

Thank you. [Operator Instructions] We will take our first question from John Franzreb with Sidoti & Company..

Good evening, everybody..

Good morning, John..

I would like to start with actually the acquisitions of High Pressure and I guess also Alco. But, first on High Pressure, how much of that business is in distribution versus OEM sales.

And can you talk a little bit about distributor inventories, what they are saying out there, especially in the oil and gas sector?.

Yes. So, the High Pressure has got a direct sales model and it’s got fairly diverse business or holistic customers I should say. The business of course is half in the process and half in oil and gas world, and that’s split between the different segments of the oil and gas marketplace.

I don’t have an exact breakdown for you in terms of the detailed sales clip we are talking – you are talking pretty small numbers, that’s $38 million in revenue. We are talking of less than half into oil and gas and its split up into quite a few different segments..

Okay.

And when you add Alco and the rest of the existing business, how much is your total exposure into the oil and gas sector?.

So, the new initiative that we have is really focused at the well site. And between those two acquisitions, we are talking about 3% of Graco sales approximately..

Okay..

When you think about the rest of Graco’s business, of course that we do have pluses and minuses.

There is going to be winners and losers in other markets that are important to Graco regarding what’s happening with oil and gas, our protective coatings businesses and others have exposure to either tangential markets or markets that are going to do better or worse because of what’s happening with oil prices..

Right..

So, it will have an impact plus and minus in other areas of our business as well..

Okay.

And just sticking with the acquisitions in total, can you talk about potential margin improvement opportunity to acquire businesses?.

One of the things that we look for when we decided to go into the space is we look for businesses where we felt like our core competencies fit both from an engineering and from a manufacturing standpoint. So, we do see opportunities here.

We are not going to realize those overnight, but certainly, we see opportunities to invest our manufacturing capability into those organizations to help on the cost and the quality side.

Also I think there is more that we can do to fund new product development and engineering projects for both of those businesses that will help drive organic growth over the longer term..

John Franzreb-Sidoti & Company:.

, :.

Timing being pushed back, it’s just because it’s taken a long time. There is nothing specific going on. So, I think we just have to work through the process, whole process, nothing has been so fast. I will let Caroline or Jim here jump in on the other part of your question..

Okay..

So, John, we are, of course, waiting for some word out of Washington on the agreement that we submitted to them for approval. If it looks like we can close that early in the second quarter, we will not take a dividend in the first quarter..

Okay, thank you very much. I will get back into queue..

And we will go next to Kevin Maczka with BB&T Capital Markets..

Thanks. Good morning..

Good morning..

Good morning..

So kind of to follow-up on that and expand on it in terms of some of the big moving parts here for 2015, so if you don’t take a dividend in Q1 or Q2 and then the business is sold on schedule, so the dividends were about $0.45 I think in 2014 and now you are calling out the large currency headwind and the elevated pension expense.

So, I mean, there is some nice offsets here in terms of your M&A and organic growth and buyback, but it still seems like you are suggesting that earnings will be down quite a bit in ‘15. Is that – without quantifying that, is that what….

I’m not ready here sitting here in January to say that I am expecting earnings to be down quite a bit in 2015. We got 3,000 people that are going to work hard to have a good year. We have got a lot of new products and other things going on. I can’t argue with the math that you have laid out there on pension and currency and on liquid dividend.

So, we have got our sites clearly set on that and we are going to have to do some things to try to have a good year..

Got it..

So, Kevin, just on the $0.45, we are about two-thirds of the way to recovering the $0.45 with acquisitions and share buybacks. We of course are planning for the growth numbers that Pat talked about. So I think if you do the math, you should get some accretion..

Okay.

Jim, on that point of acquisitions, I mean, five deals in the past few months, did you just take out your entire pipeline that you are looking at or is it still fairly healthy and we ought to expect more to come in the New Year?.

Yes, I would say it’s fairly healthy. They tend to skew to the smaller side. So, they will be along the lines of the smaller deals that we have got down at least those that are close, you could see three or four, but again nothing as significant as the High Pressure or Alco Valves transactions..

Okay, okay.

On the corporate line that you called out and the elevated pension expense, are you suggesting that the total corporate line ought to be about $10 million higher or it’s up about $10 million on pension and another things and maybe there are some other offsets like some other I don’t know acquisition and divestiture costs that maybe don't recur?.

Yes. For sure, you need to take into account acquisition costs because for those deals are past and we will just see what comes for the future on those items. What we do see is some headwind with the pension as well as we have only about half a year of our new central warehouse into 2014, so we will have additional incremental half year of that.

And that’s also included in that number..

So yes Kevin, the total will go up less than the $10 million..

Okay.

Less than $10 million with I guess $5 million of acquisition costs in the quarter that go away but some additional full year effect of the other costs that were just mentioned?.

Plus the pension, yes..

Okay, that’s it from me. I will get back in line. Thank you..

We will take our next question from Mike Halloran from Robert Baird..

Good morning everyone.

On that same trend you saw, what’s the estimated purchase accounting hit in the first quarter coming up here?.

We are thinking it’s about $2 million. We are finalizing some of that purchase accounting work as we speak here for some of these deals that closed now in the New Year. But with inventory step up and the finalization of the acquisition costs we are thinking it’s about $2 million..

Okay, makes sense.

And then on the European side of things, what do you see through the quarter, I mean are you at the point now where the swings in currency are starting to help some of the demand, hurt some of the demand over there, what’s the core underlying trends feel like in your perspective?.

Well, I think it’s too early to say what currency is going to do with respect to demand. Again we are optimistic on the West. We talked about the growth in the fourth quarter in the West. Russia is going to get worse on a comp basis especially in the first quarter.

But overall, we expect EMEA to grow again on a constant currency basis on the underlying demand in that single-digit kind of number..

It makes sense and then anything different on the mix in North America contractor?.

Now, there shouldn’t be anything dramatic on the mix. We don’t have any major channel shifts.

We do have some new products that we are launching, kind of on both ends of the spectrum, although when I take a look at what we got launching we could be in a situation where this stuff that is most popular again could be towards the lower half of the pro line this year. But generally, I would expect mix to be more stable..

Appreciate the time..

And we will go next to Charles Brady with BMO Capital Markets..

Hi. Thanks. Good morning folks.

Just a quick question on number one raw material costs, are you guys seeing any positive uplift from lower raw material costs and is that budgeted into the forecast in ’15?.

Yes. So we – I took a look at our commodity current charts yesterday. And obviously they are favorable as compared to where they were 3 months and 6 months ago. It will take a little bit of time for that to work all its way through. So maybe just a slight favorable compared to Q4 and depending on what happens maybe we will see more into Q2..

Great.

And just on the contractor side, I am wondering just from a competitive standpoint given where the euro has gone, has that had any impact on your primary competitor as far as getting more aggressive on pricing or trying to use that as leverage against you guys or does it not – is not having any impact at all?.

So far I would say we haven’t seen anything that’s significantly different in terms of competitive strategy on pricing or otherwise out there. One of our main competitors, a significant portion of their cost of goods sold is driven out of Asia not driven out of Europe. Although of course, they do have corporate costs and people in Europe..

Okay, that’s helpful. Thanks. Appreciate it..

And we will go next to Liam Burke with Wunderlich Securities..

Thank you. Good morning.

Pat you mentioned you have got a whole slew of new products coming out is there any particular business segment that you are emphasizing this year, I mean last year you had a pretty big slew of the contractor related products?.

Yes, contractor looks good again this year. But really all the businesses have been active and have been investing and the product pipeline does not really have any what I will call slug to air and it looks like all of our divisions are going to be launching at a pretty good cadence this year that are the new products that we have been working on.

So, generally, I feel like we are in decent position on new products across the front and then probably nobody is going to be dramatically stronger than anybody else..

Okay.

And I know on the contractor side, you don’t know exactly who the end buyer is, but are you saying anymore weighting towards the higher end systems as we look into a stronger commercial construction market in 2015?.

Yes. We have seen growth in the large end of the product category, but we have also seen really strong growth in the small end of the product category. I just got back from a sales meeting and show at one of our vendors, where all of our sales guys were from around the country yesterday. And I got a chance to talk to quite a few of them.

Frankly, my read on that is that while there is a decent level of activity in general, the big resurgence in non-res is not actually being seen right on the ground today and then it’s still – we are still kind of grasping for it. So, is it going to be soon? We hope, but I would say most of my guys weren’t seeing a big spike right now today..

Great, thank you..

And we will go next to Jim Krapfel with Morningstar..

Hi, good morning. Thanks for taking my question.

So, you noted the industrial segment in the Americas exceeded your expectations, I am just wondering looking to hear some further color on that and how sustainable you think that pickup in growth was?.

Yes. When you take a look at our performance across product categories, it’s been pretty good. It hasn’t really all been concentrated in one particular end market here in industrial Americas. And while the economy is, I wouldn’t say it’s smoking hot, it’s pretty decent. And of course compared to the rest of the world, it still looks pretty darn good.

So I would say we are going into the year with a feeling that North American industrial economy is going to give us a good chance to be successful. And that’s going to be fairly broad-based..

Okay.

And I know it’s kind of difficult to forecast acquisitions, but do you expect a similar breakdown between share repurchases and acquisition in ‘15 as what you did in ‘14?.

If you count the high pressure deal that we just got done, it was a pretty active last three months for us.

And if you were going to ask me, if you are going to put me on the hot seat and ask me to guess, I would say that we would probably – it might be less likely that we will get as many deals done in the next 12 months as we have the last 12 months, but we certainly have an active team and we are looking for opportunities.

The share repurchase we have got a cadence that we are executing to and of course should the market give us a reason to be more aggressive, but I am certain that we would be..

Great, thank you..

And we will go next to Walter Liptak with Global Hunter..

Hi, thanks. Good morning guys.

So, I wanted to kind of follow-on to that last question about acquisitions and you have had the last 3 months being more active, I wonder if it’s because of the finishing business kind of getting closer to getting divested or is it just that those deals came in and the timing is the timing?.

I think it’s more the deals just came in. We have really started to put more resources on building an M&A pipeline way back in the end of 2008. And it took us quite a while to get traction.

I can tell you here a couple of years ago I was somewhat frustrated by the fact that we had done as much work as we did and we weren’t bringing anything to the table. And it just seems like the last 6 months or so something started to fallout. So, I think it’s more random than anything else..

Okay.

And the deals that you are finding, I don’t know if I have seen anything on multiples, but can you give us an idea of where – what kind of multiples you are looking at?.

Yes, up until recently, the multiples have been pretty healthy in the marketplace. And so we have had multiples, Jim, you can jump in probably, but probably between what a high single and low double digit kind of multiples.

I would anticipate for some of the product categories and assets that we are interested in if things continue the way they are, we might see some better buying opportunities in the next 12 months than we did in the last 12 months. So, having a little bit of patience here could be good for us as well..

Okay. And I realize your comment about ONG is a very small percentage of Graco’s overall mix. It just seems that like the valuations are high for industrial, low for oil and gas and that’s maybe where you could look for capital allocation.

So, I guess I am wondering if you look at it that way as you are looking for acquisitions trying to get the right valuation at the right time or if there is something about oil and gas where you wouldn’t want to increase your sales mix above a certain level?.

Yes. It’s interesting, because 6 months ago oil and gas deals were hot, right, and everybody was paying up big time for oil and gas and you were a hero if you are buying oil and gas deals and now you are dog. So, things can change rather quickly. We are early on trying to, I will say, learn that market space.

We have identified some things that we think for the next 20, 30 years that are going to be attractive and we believe that we can leverage our core competencies, but we have got a lot to learn.

And actually the timing may turn out to be good for us, because if the oil prices stay down and maybe some assets that would have been expensive 6 months ago that in a year from now or 18 months from now become available at a better price for. And of course we take a long-term view of things. So, we will be watching that closely.

Certainly, our appetite to purchase an oil and gas asset at the prices we were willing to pay 6 months ago has been dampened and we will take into consideration as we take a look at opportunities that might come up here throughout the course of the year..

Okay, great. Thank you..

And we will go next to Joe Ritchie with Goldman Sachs..

Good morning. This is actually Evelyn Chow for Joe. Pat, Jim, Christian and Caroline, I appreciate you taking my question. I appreciated the color you provided on FX for sales and EPS.

Given how much of your COGS is denominated in USD, would you consider implementing more natural hedging in your portfolio or do you remain fairly committed to your low volume high mix model?.

Yes. No, we remain committed to our model. This is one of those deals that it’s always moving around. And we decided a long ago that we are going to perform better over the long-term.

If we sink roots and work on process improvement and training our employees rather than trying to chase around to wherever he exchange rates happened to be more favorable at a given point in time.

I would view the long-term natural hedging to happen as we want to produce more products close to the end-market, so that we can get better service to the customers, not because we are necessarily chasing any kind of a hedging strategy.

So, I think it could happen over time as we move production close to the customer, but not specifically for the reason of expense management..

Okay, understood.

And I guess as a quick follow-up, do you have any hedging contracts in place or if not would you consider starting some hedging quarter-to-quarter?.

We don’t do any hedging with our revenue stream and our cost stream. I have been through these cycles quite a few times and we always get this question when we are at the bottom, but hedging moves your problem out 12 months or 24 months, it doesn’t fix the problem and hedging has a cost.

So, our model has not been – not to do it and we have no contemplation of doing it in the future..

Thanks guys. I will get back in queue..

And we will go next to Jim Giannakouros with Oppenheimer & Company..

Hi, good morning, everyone. .

Good morning, Jim..

Sorry, if I missed this, but can you breakdown the core margin profile of your acquired sales in ‘15? I know you talked about the top line effect, but I was just trying to see from a gross margin SG&A or even just on the industrial segment, how should we be thinking about their margin contribution this year and next?.

Jim, this is Christian. So, I am just going to make sure that I am answering your question properly, but we do have a slide in our slide deck that does call out the effect of the acquired businesses and operating earnings leverage.

So, for the full year of 2014, it was $6 million increase, that excludes the inventory step up and acquisition costs, which were $5 million for the full year, So again, I think your question was just around if you were to take out kind of those one-time costs, what exactly would that improvement of the operating earnings be? And again it’s that $6 million and that is an EBIT number.

So, if you were looking for EBITDA number, I don’t have the depreciation and amortization in front of me, but that was of course being added..

So, I will try a little bit different response, Jim, in the core margins, I would say the acquired businesses in aggregate are running in the low 40s from a gross margin perspective and in the lower double-digits from an operating margin.

Of course as with most of the things we acquire, we focus a lot on the manufacturing opportunity and we view these opportunities to not be dissimilar from what we have been able to do in the past, which is generally around 1,000 basis points improvement on the gross margin side.

Again, it takes time and it takes some capital to get there, but nothing we have seen in the acquired businesses prevent us from taking our core industrial manufacturing technology IP to get those kinds of returns in the future..

That’s helpful because I was looking for some guidance on 2015.

And also the pension expense, everybody is going to be hit with a higher year-over-year in ‘15, but help me understand, should I think that your corporate unallocated should stay at a relatively elevated level in ‘16 or does that come down again and we should be treating that pension expenses kind of like one-time issue?.

Well, you know the function of the discount rates on pension expense. So, we really can’t answer that question. The long-term bond rates dropped by I think 80 basis points between ‘13 and ‘14 end of the year. So, if that was to go back up that 80 basis points, we would be back where we were in ‘13.

If it goes higher of course we would be even lower expense in ‘16 than we were in ‘13. So, it’s a function of the discount rates the rate at which you discount the future liabilities are really driving those costs..

So, we saw some favorable in 2014 kind of put us back not so different as to 2013 although there is various other assumptions that go into play as well as the discount rate..

Okay, fair enough. Thank you..

[Operator Instructions] We will go next to Joe Radigan with KeyBanc..

Thanks. Good morning. Question on contractor in Asia, Pat, I know you have been disappointed in the growth rates there. It looks like they rebounded a little bit in the fourth quarter off of a relatively easy comp, but in the past you have mentioned more local competitors perhaps distribution gaps in smaller cities.

Is that still the case or have you changed your strategy at all in an attempt to reaccelerate growth there?.

Despite the good performance in the fourth quarter, my view on contractor, Asia hasn’t changed. I am still not satisfied with how we are executing over there that particularly in China we have made some adjustments to our channel strategy over there.

We had been selling through I will say more of a traditional paint dealer distribution model and had been avoiding I will call it the hardware market where we see a lot of these competitors springing up, but the division has been working hard and region has been working hard on initiative to establish a presence in these hardware markets around the country.

We have made some pretty decent progress and we are seeing some sales performance there, but certainly I don’t think you should take Q4 and say jeez, we got that fixed and we are taking off in China. We got a lot of work to do there both from a leadership standpoint as well as from a channel and product standpoint to get to where I am satisfied..

Okay. And then for the contractor segment overall, I mean you have had a pretty good string of double-digit organic growth there. I mean, obviously, you have had a nice run with new products, but it sounds like you think double-digit growth, organic growth is sustainable based on your prepared comments.

I mean, is that primarily an Americas comment or is that for the segment overall..

It’s primarily an Americas comment. And I don’t about sustainable, but certainly the housing market has got some significant recovery left in front of it and the non-res that should be a plus to us going forward here the next couple of three years as well. And it’s an aggressive group up there from a product standpoint.

So, in addition to having a good market environment in terms of year-over-year activity growth here in the Americas, they continue to do a great job launching products that convince contractors that they ought to buy.

So that organic growth double-digit year-over-year they have had a nice run, but I think that we can keep that going at least here through 2015..

Great. Thanks Pat..

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

Alright. Well, again, I thanked all of our employees and partners for a good fourth quarter. And while we have some challenges here that we have discussed going into 2015, we also have done a lot of work to set the table for pursuit of opportunities. And I am not anything, but excited about the next 11 months ahead of us.

So, thanks for your time today and we will talk to you again in a few months..

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