Caroline Chambers - VP, Corporate Controller and Information Systems Pat McHale - CEO Christian Rothe - Treasurer and VP.

Evelyn Chow - Goldman Sachs Mike Halloran - Robert W.

Baird Matt McConnell - RBC Capital Markets John Franzreb - Sidoti & Company Kevin Maczka - BB&T Capital Markets Matt Summerville - KeyBanc Capital Markets Charley Brady - SunTrust Robinson Humphrey Joe Radigan - KeyBanc Capital Markets Jim Giannakouros - Oppenheimer Jim Foung - Gabelli & Company Walter Liptak - Seaport Global Securities Mario Gabelli - Gabelli & Company.

Good morning, and welcome to the Fourth Quarter and Year End 2015 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 international callers is 719-457-0820. The conference ID number is 2790548.

The replay will be available through January 30, 2016. Graco has additional information available on 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 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 2014 annual report on Form 10-K, and then Item 1A of the company's most recent quarterly report on Form 10-Q.

These reports are available on the company's Web site at www.graco.com and the SEC's Web site 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.

Please note, today's call is being recorded. I will now turn the conference over to Caroline Chambers, Vice President, Corporate Controller and Information Systems..

Good morning, everyone. I'm here this morning with Pat McHale and Christian Rothe. Our conference call slides are on our Web site, and provided additional information on our quarter. Last evening Graco reported fourth quarter sales of $326 million, net earnings of $54 million, and diluted net earnings of $0.94.

Foreign exchange continue to be a headwind for us, and in the fourth quarter, the effect of foreign translation rates reduced sales by $12 million and reduced net income by $5 million or $0.09 per diluted share.

Sales from businesses acquired in the past 12 months increased sales in the fourth quarter by $13 million, and contributed less than a $1 million to earnings. A reconciliation of our operating earnings is included on Page 10 of our slide deck. For the year, the effect of foreign exchange was offset by favorable volume, price, and lower factory costs.

The effect of acquired businesses reduced operating margins by one percentage point, and increases in unallocated corporate expenses, primarily stock compensation and pension also reduced operating margins by one percentage point.

Results for the fourth quarter also include $1 million from favorable post closing adjustments related to the sale earlier this year of the Liquid Finishing businesses that were held separate. Year-to-date results include after-tax gain on sale and dividend income from the investment of $141 million or $2.40 per diluted share.

The effective tax rate for the quarter was 27%, consistent with the quarter in 2014. The Federal R&D tax credit was reinstated in the fourth quarter, and the company recognized a full year benefit of $3 million.

Cash provided by operating activities is $190 million for the year, this is net of $67 million of divestiture-related expenses, including taxes, transaction cost, and the contribution to the company's charitable foundation. We continue to share repurchases during the fourth quarter, and our outstanding share count is below 56 million at year end.

Fourth quarter unallocated corporate expenses were slightly below last year and for the full year approximately $5 million above the prior year primarily due to increased pension and stock compensation. Unallocated costs related to the new central warehouse were slightly less than $1 million in the fourth quarter, the same as the prior year.

Looking at 2016, foreign exchange will continue to be a headwind for us. At today's exchange rates, and assuming the same volumes, mix of products, and mix of business by currency, we expect to see an unfavorable effect of currency translation of approximately 2% on sales, and 5% on earnings, with the greatest effects in the first half.

Also going into 2016, we expect to realize modest price increases, lower material costs, and improved factory efficiencies. So factory performance is dependent on volume. Capital expenditures are expected to be approximately $40 million, without taking into account possible building expansion for our Contractor segment, which is nearing full capacity.

Full year unallocated corporate expenses in 2016 are expected to be similar to 2015. The tax rate is expected to be approximately 31% in 2016. Since the R&D tax credit has already been extended, the approximately $3 million expected annual benefit will be recognized over the course of the year.

I'll turn the call over to Pat now for further segment and regional discussion..

Thanks, Caroline. Good morning, everyone. In the fourth quarter we posted 6% organic growth on a constant currency basis led by our Contractor and Industrial businesses in the Americas. For the full year 2015, more than 90% of our dollar growth came from these two slices. Clearly we're in a divergence of economics and end markets.

The brightest spots are the residential and commercial construction markets in the United States. Our Contractor Americas business has essentially 100% exposure to those end markets.

In the Industrial Americas, nearly a third of that business has exposure to residential and commercial construction through our spray foam products, as well as implant applications for windows, doors, cabinets, furniture, and white goods.

If you add in automotive manufacturing, the Industrial Americas business has more than half of its sales exposed to consumer-facing end markets. Industrial Americas and Contractor Americas were 46% of our sales in 2015, and three-quarters of those sales have exposure to the consumer-facing end markets of res and non-res construction and automotive.

Those markets have been good and we expect them to continue to be solid as we enter 2016. Excluding acquisitions and on a constant currency basis, our only segment and/or region with a year-over-year decline in the quarter was our Process segment, which was down 2%. This segment has some oil and gas exposure, which has dampened results.

For the full year, we achieved our mid single-digit growth outlook, but just did miss our target of growth in every region and reportable segment as Asia Pacific was down year-over-year by a little less than $1 million.

Our manufacturing, purchasing, and customer support and training operations performed at a high-level during 2015, and contributed significantly to our earnings performance. With moderate volume growth, I believe these organizations are well-positioned to contribute again in 2016.

Despite the challenges we face in many end markets and geographies, we continue to press forward with our long-term growth initiatives. We're focused on growing, and have a great deal of conviction in our business plans.

A few notable data points on the quarter; Contractor Americas grew 21% in the quarter and achieved their second half goal of double-digit growth. Paint store sales were up strong double-digits in the quarter, while sales to the home center channel grew in the low single digits.

If you recall, home center was flat in Q2, up nicely in Q3, and reverted down to the single digits in Q4. Paint store was the opposite, with strong growth in Q2 and Q4, and flat in Q3.

While we are seeing some variability from quarter-to-quarter, the overall double-digit growth for the first half, second half, and full year was an excellent performance. Out-the-door sales for both channels were good throughout the year and were not reflective of the variability we saw from quarter-to-quarter.

In our EMEA region, we saw a little slowing of our growth rate in the developed economies of the West, while the Central Eastern European markets continue to perform well. Russia and the Middle East remained a challenge in Q4, and largely offset our growth in the West.

We expect the large declines in Russia to ease as we move through Q1, but don't expect growth in Russia in 2016. In Asia Pacific, we saw growth in Australia, New Zealand, and India, while China was down high single digits in the quarter. Recall that we grew in China in Q3, so the spottiness of that market remains an ongoing concern.

Moving on to our outlook; please note that we've got additional commentary in our slide deck.

We initiated our 2016 outlook in our earnings release late last night, with an expectation of low single-digit organic constant currency growth for the first quarter, and low to mid single-digit growth for Graco worldwide for the full year with growth in every region and reportable segment.

We continue to operate in a difficult macro environment for a large portion of our business, and with 18 consecutive quarters of record same-quarter sales, nearly all of our comps are tough at this point. Notably we're up against the 27% growth that the Contractor Americas business posted in the first quarter of 2015.

We're targeting a high single-digit growth for Contractor Americas for the full year 2016, but against the tough comps in the first quarter and fourth quarter, I'm expecting that we're going to be lumpy from quarter-to-quarter in Contractor Americas, and I wouldn't be surprised to see a number closer to flat in Q1.

We have some product launches planned for early Q2, which should bring us back to that high single-digit pace for the first half. Regionally for the full year we're targeting mid single-digit growth in the Americas and low single-digit growth in EMEA and Asia Pacific.

Regarding capital deployment, our priorities continue to be organic growth investments and acquisitions, and we continue to be opportunistic on share repurchases. With the recent pullback, we've been more active in the market. This month, we also completed acquisitions in our Process segment.

In total, we spent 49 million, and the acquired businesses have trailing 12-month sales of about 16 million. These businesses expand our QED landfill and groundwater remediation portfolio. With that, operator, we're ready for questions..

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from Joseph Ritchie. Please go ahead..

Good morning. This is actually Evelyn Chow on for Joe, and he sends his regrets for not being on today.

Very nice quarter, I just wanted to dig into Contractor margins a bit, you had very strong incrementals in what I think is typically the lowest margin quarter for the business, and correct me if I'm wrong, but I think it's actually the best 4Q margin you've had in Contractor since 2007.

So maybe what are the puts and takes on the margins as you saw -- as it relates to product launches, maybe potential mix up or just really strong volume leverage?.

Hi, everyone. Good morning. It's Christian. And just a couple of quick comments on that, you're right, it was a very strong fourth quarter for the Contractor business. Really, it's just a convergence of a few different items.

The first one is of course paint store sales were very strong in the quarter, and that's a more profitable business segment for us in the Contractor business. In addition to that, from a launch perspective and Pat talked about the fact that we have some product launches that are happening in Q2.

So some of those costs that normally would come in the fourth quarter have now been pushed back a little bit as we go into 2016. So it was a lighter expense month, or lighter expense quarter, sorry, and on top of that, a strong mix..

Thanks, Christian. That's helpful.

I guess maybe turning to Industrial for a second, I know not to read too much into one quarter of growth or two quarters of growth, maybe just thinking about the exposure there, I think roughly 20-something percent of the segment is auto related and we've seen increasing concerns on potentially peaking North America auto SAR.

Do you guys have any concerns as to the sustainability of growth in that end market?.

So going back to the exposures in Industrial Americas, so nearly a third of that business has exposure to other residential and commercial construction markets, so that's spray foam, window manufacturing, door manufacturing, cabinets, those types of things. And then if you add automotive on to that, that gets to be about half of the sales.

On both of those end markets, we expect to be pretty decent here in 2016 and give us good opportunities..

Thanks, that's helpful. And I guess maybe last one for me, switching gears, I saw you did some acquisitions post year end in Process, I think about 49 million in value.

If you can, what are those acquisitions and maybe what is the strategic rationale for doing them?.

Sure. We started building up an environmental systems business back in 2013 with our acquisition of QED, which really focused on landfill and groundwater remediation markets, and the recent acquisitions that we've done were adding to our product portfolio in that space.

So their landfill gas wellheads, portable and fixed gas analyzers used not only in landfills but also in biogas applications and in some medical applications..

And do you expect these acquisitions to be accretive in 2016?.

Mildly accretive, so they're relatively small..

Okay. Okay, thanks very much guys..

Thank you. We'll take our next question from Mike Halloran. Please go ahead..

Good morning guys..

Good morning..

So let's start with the order rates. The fourth quarter, the growth rates slowed towards flattish year-over-year. Could you just break that out by some of the verticals you're seeing? Sounds like you still have confidence in a lot of the consumer-facing pieces.

Was there a dichotomy between the consume-facing thing and the industrial –- kind of core industrial stuff?.

Hi Mike, it's Christian. So as we went through the quarter, October was a -- we were up. November we were down. December we were up again. And that kind of ended with a flat for the full quarter. From a end market -- or let's talk about segments for a second. On the segment side, Contractor held up okay, in fact pretty well.

If you look at the Industrial and Process segments though, those did take a small step down as we went into the fourth quarter. From a geography and product line perspective it was pretty broad based. Really the variability from week to week continues to happen for us.

And as we look at what's happening January also, we're still seeing that variability. But we are up for the month of January. Again, not that we can deduce a whole heck of a lot from that, let's continue to wait and see how this quarter develops..

Makes sense, and then on the outlook, could you just bucket what's driving the move from low single digits to mid single -- to low to mid single digits as you move from the first quarter guidance to the full year guidance. And by bucket, I mean beyond just comps changing a little bit for you, getting slightly easier.

Are you guys assuming any sort of fundamental improvement from the environment or is this just comps, new product introductions coming forward?.

Yes, we're not assuming any improvement in the environment. Certainly we welcome that, but not really expecting it, and haven't built that into our plans. We've got a big comp in Contractor in Q1, and that's probably the biggest driver that would cause us maybe to be a little lower in Q1 than we're expecting to be for the full year.

We do have new product launches, and all of our initiatives in place. So we've got I think plenty of opportunity to figure out how to have a decent year even in a tough environment..

Makes sense. And then last one on the acquisition. Could you give us some kind of framework for what sort of revenue contribution that would either on a trailing 12 months or what you guys are expecting for '16.

And also, is all that revenue in the Process segment then?.

Yes, that's about 16 million, it's all in process..

Great. Appreciate the time guys..

Thank you. We'll take our next question from Matt McConnell. Please go ahead..

Thank you. Good morning..

Good morning..

Could you just give a brief update on what you're seeing in the M&A pipeline? Do you think this will be a meaningful use of capital in 2016?.

We continue to be active, and we've gotten a number of deals done of course in the last 12 to 18 months. Currently, I don't see the pipeline as being particularly strong. And certainly we'd like to get something done that would move the needle. But looking at it right now I would say it's probably slightly weaker than it has been..

Okay. Okay.

And switching gears just a little bit to Contractor; was there any noticeable impact from weather in the fourth quarter in Contractor specifically?.

No, we don't really pay too much attention to that. I mean the weather is always good somewhere and always bad somewhere, it's a global business. No, we didn't note anything on weather..

Okay.

And what kind of growth in 2016 would necessitate new capacity addition there, and when might you make a decision there and what kind of capital outline might that require?.

So we've been contemplating what to do with space up there since the housing market peaked back in 2006–2007, and we evaluated every year. We did take some action about a year or a so ago to give them some more space, but obviously they had another very strong growth year. So we're close. We don't have a plan. The team is doing their work.

We just wanted to flag for folks that should the team come forward sometime this year with a plan that it's possible, we could move forward..

Okay, great. Thank you..

Thank you. We'll take our next question -- comes from John Franzreb. Please go ahead..

Pat, you kind of highlighted the Contractor business as one of the main drivers of the mid to single-digit revenue growth, can you talk a little bit about your expectations on the process side of the business in the year ahead?.

Yes. So we're expecting the Process business in aggregate to put up growth next year. Obviously it's going to be challenging for them to do that with some exposure to oil and gas, but they have exposure to a lot of other end markets and we've got a lot of initiatives underway.

So we still have confidence at this point that Process number can get some organic growth next year..

And you've kind of highlighted new product introductions over the past couple of quarters, could you give us any of the two things; one, how much did new products add to top line for all of 2015, and maybe you can share with us with the hurdle rates you used internally before you start on a new project?.

Sure. Yes, I can't share with you the number that new products added to the top line. It's obviously not easy metrics. Some products replace other products, some products are incremental.

In terms of the process at Graco that we go through, we have a finance committee that meets every month, and we've got format that people can use to come in and ask for capital. Typical returns on new product, I'll say the actual returns average in the 20s, but there is a fair amount of variability around that..

Okay.

And one last question, on the distribution center costs, are they through, and besides what you said, mention on Contractor, or any of the unusual expenses we should be aware of in the upcoming year?.

So we expect to have additional cost running through unallocated corporate next year associated with additional moves of some inventory. We expect that overall our unallocated corporate will be the same in 2016 as in 2015..

Okay. Thank you for taking my questions..

Thank you. We'll take our next question from Kevin Maczka. Please go ahead..

Thanks. Good morning..

Good morning..

So, Pat, on price, I think it was mentioned that there is some price assumed here in the organic guidance, can you maybe comment on that, quantify that if that's possible and how should we think about the favorable price cost impact on margin next year?.

Yes, we think it should be okay. Our price increase I think should be pretty typical, and assuming that we get some volume, our factories and our purchasing groups are set up I think to have another good year.

Our typical price realization is probably somewhere in that 1.5% to 2% kind of a number, and if we can drive zero cost change, that gives us opportunities obviously to expand margin. So, again, volume will play a key role in that as we move through the year. We can get a little bit of a volume like we did this year.

Our factories generally do quite well..

In terms of incremental margins, they are normally strong, I think we typically start with about 40% and then there is puts and takes on that.

With that kind of normal price increase, but lower volumes, positive but lower, is that still a fair way to think about the incremental margin expectation for next year, or could that be better with price cost so favorable?.

Hi, Kevin, this is Christian. So there is two ways that I look at it. The first one is as you just described, and I think generally that's correct with one exception, right, one or two exceptions; the first being that we do have a more home center business in the Contractor side of our operations and that does have a lower margin profile.

And so, as we get growth on to that side of the business, that does have a little bit of a drag on the incremental. The other portion of that has to do with the fact that we've been spending somewhat more on these regional and product growth initiatives.

And so that took us into the kind of the low-end of the 35% to 45% range for 2015 on an organic comps and currency basis.

As you look forward to 2016 then, I think you're -- when you think about that pieces from an incremental margin perspective, it's probably correct, but if you do then put on top of that the FX, keep in mind we do have that impact that we're expecting now of 2% on the top line and 5% in the net income line.

So that will of course take the incremental if you are looking at it on a apples to apples currency basis. We are going to have a little bit of headwind..

Got it, okay. And then can I just go back to process quick? I know you're expecting at least some growth there even though there is oil and mining and exposures like that that are not favorable right now.

Can you give a little bit more color on what's underlying that? What you think is better because that's the business that only had very minimal growth in '15? And then can you just talk to the margin there? That was the one segment where the margin kind of took a step back in Q4..

I'll talk to the growth piece. We are running the normal vehicle playbook with process. And I'll say the thing that's different there is we've made a conscious decision the last two or three years to build up that business with oil and gas initiatives and some other segments that we think are attractive.

So, we do continue to invest in those businesses from I'll say a short-term expense and a long-term capital standpoint to position them well for when their end markets are better, or run in the standard vehicle playbook. Each one of the business segments has new product development.

We've got our normal growth initiatives and our exposure to oil and gas and the mining markets aren't so great that we think that it precludes us from getting some top line growth next year..

On the margin side of that equation, our expectation is that in the long term this business can be at 20% or better type of operating margin number, but it's going to take some time to get there. And it's going to take some volume to get there.

So, in the short term, if we're not getting volume, we are going to continue to have numbers similar to what you saw in 2015 with the essential of course -- with incremental margins that happened with that volume growth..

Okay, got it. Thank you..

Thank you. We'll take our next question from Matt Summerville. Please go ahead..

Just a couple of quick ones, I think, Pat, in your prepared remarks, you mentioned China was down 9% in the fourth quarter.

Was that a similar experience across the three business segments? And then the other thing you've been talking about the last couple of quarters, you made some management changes I believe in Asia, is that starting to provide any sort of relief to some of the pressures you are seeing there as well as beginning to drive higher conversion rates which I think you have been disappointment with in the recent past? Thank you..

Yes. No, I didn't call it any specific number, but I said China was down high single digits in the quarter. But we also had growth in Q3. So, it's been probably I don't know three years now that China has been pretty spotty for us. We have made a couple of management changes over there that longer term we hope will have some positive impact.

I am not expecting that that impact is going to be in Q1. Those folks are getting their feet on the ground.

Our larger disappointments in China, as we've talked about, has been the conversion rate on the Contractor side, and that's really what we're hoping new management team will get us refocused on, but again, that's the longer term action and we should expect to see progress as we move forward..

Thank you..

Thank you. We'll take our next question from Charley Brady. Please go ahead..

Hey, thanks. Good morning, Pat. Hey, Pat, can we just -- on the industrial side, you mentioned that the third that's kind of construction related and the other chunk in the auto.

Can you just maybe get a little more granular on the 50% that's not those markets? Because I think when people look at industrial, given everyone else in industrial is having a pretty tough go at it, these non-construction, non-auto markets, I think people scratch their head and say where is that growth coming from.

Can you maybe get a little granular on that part of the business in industrial?.

Yes. So our business gets cut into a lots of pieces once you take the big chunks off. I mean our industrial business has exposure to general industrial. We have rail. We've got of course all the resource segments. It's aerospace, pharma, construction. It really gets broad based after that..

Okay.

Can you maybe just talk a minute about Europe, I mean obviously the Contractor guys in particular, I know it's a small piece of that business, but pretty decent growth in Europe in Contractor, is that more a function of a move away from brush and roller maybe accelerating or just kind of broad-based Europe's kind of doing better than it was doing a few months ago?.

Yes, and I don't think there's a broad-based acceleration. That's an opportunity there that will continue to be an ongoing opportunity. I think the team has done a pretty good job.

The new products that we've launched over the last couple of years have been successful, and end markets in the West, particularly in the South are definitely better than they were. So I think it's kind of a combination of factors that have given the team there an opportunity to put up some decent numbers..

Okay, and just one more from me on Contractor, with the second-quarter product launches, given the commentary, you are going to get some push out in expense from Q4.

Would you expect margins to be down year-over-year, or is there enough volume leverage to kind of offset that expense on the year-over-year basis do you think?.

Yes. So I think on the margin side, we feel like there's going to be enough volume, and that we should be okay. And just circling back to your question on EMEA Contractor, just to underscore Pat said, it's still a relatively small business, so you're going to have some movement from quarter-to-quarter.

For the full year, we -- although it was nice growth for the quarter, for the full year we're talking about a 2% organic growth rate..

A lot of that would happen in Russia..

Absolutely. Yes, the West was really strong and Russia was extremely weak..

Thanks..

Thank you. [Operator Instructions] Let's take our next question from Joe Radigan. Please go ahead..

Thanks. Good morning.

What is your gauge on channel inventory in Contractor? And did you benefit from any pull-forward in that plus 21% in Contractor Americas either ahead of a price increase or whatnot?.

Yes. So the channel looks like it's got the right amount of inventory based upon what the end market conditions are. We're not overly concerned at this point. We do get some activity on December every year. I don't think anything that happened this year was unusual.

I would say things were normal in terms of how we finished the quarter in terms of buying activity by the channel..

Okay.

And then just to be clear, did the price increase go into effect January 1 or is that still ahead of us? And do you get the same magnitude of price realization in the home center channel as you do in propane?.

Joe, if you're talking anything specific to Contractor, the price increase did not all go into effect on January 1, and it normally does not. There are some things that happened there from a timing standpoint, either geographically or by a channel that cause a variation there.

Typically what we will see is that if we don't get pricing on in the first part of January or in the first quarter, we're still getting the pricing compared to last year, and that we'll get the new pricing at some other point in time, but no, we can't conclude that was the January 1 price increase for everybody and that that drove a lot of buying behavior in our Contractor business..

Okay..

Typically around the world, our pricing kicks in on January 1, but again there is not a set rule for that..

Okay, that's helpful. And then lastly, in the slides, you mentioned India as being favorable in Contractor. I just -- that doesn't seem like a market that has a compelling equipment ROI given the labor costs.

So just I'm sure it's small, but what's driving that?.

Yes. Some of the year-over-year volume increase that we're seeing, it's off a really small base. So we're just trying to quote from the geographies that we are seeing a favorable movement..

There are other opportunities for us to elaborate our loss that creates challenges for us on conversion, but there are people that are spraying and also line striping over there provides us opportunities, things like airports..

Okay. Thank you very much..

Thank you. We'll take our next question from Jim Giannakouros. Please go ahead..

Hi, good morning. Thanks for taking my question..

Good morning..

As far as China, if you can give us a little more color on the spottiness that you cited.

Can you talk about where you are seeing relative strength and weakness I guess outside of the Contractor segment that you kind of called out earlier?.

We've had some parts of the business that have done relatively better than others, but frankly over the course of the last three years, what we've just seen is we're just seeing -- overall I'm going to say flat to low kind of growth performance, and variation between product lines and countries, excuse me, our product lines and segments quarter-to-quarter.

And so we have a fair amount of exposure to automotive in China and some of that is project-based. So we're watching our project pipeline.

Certainly in '15, we saw some of the projects get pushed up to 2016, whether they'll actually execute on those in 2016 or push them again, I don't know, but it's been hard for us to really get our arms around in terms of predicting what's going to happen in the short-term.

A lot of that business is pretty quick book-to-bill, and we continue to be interested each month in terms of what we are seeing actually come through the door.

So I don't think I can provide you a lot of help in terms of what's happened in China other than to say that the numbers are just bouncing around, but it's bouncing around at a growth rate that's certainly not like it was prior two or three years ago..

Fair enough.

If I can switch over to your Liquid Finishing end markets there, I mean since the sale, have you seen any aggressive pricing there or things pretty rationale in your channel there?.

Also generally speaking, customers in that space are looking to buy products that add the most value to their operation. The capital equipment costs, it does matter, but certainly the quality of their throughput and the speed of their throughput, and their ability to produce them material and energy consumption continue to drive the day.

So generally successful competitors in that space are trying to win on performance and not necessarily on who has got the lowest price, and I haven't seen really the competitive market dynamics change from that standpoint. It tends to be aggressive competition, but really trying to win by having the best product..

That's helpful, thank you. And last one in Contractor, can you update us on the progress that you have made on selling the more highly-engineered or the higher margin equipment there.

How much of an impact that's had in 15, both in sales and to your margin?.

Yes. So we are making progress in that area, and we just looked at the data actually for 2015, and it did have a favorable impact within the paint store channel, but as we talked about before, if you look at the overall Contractor business, it's not really going to come through because of the fact that we are selling more into the home center today.

And so, that is diluting the impact from that. We do have some runway left on the recovery, in particular, the very large high performance units. We are still missing sales that were there back in '06, '07 timeframe. So we are still -- we still have runway left on that recovery..

Thank you..

Thank you. We will take our next question from Jim Foung. Please go ahead..

Hi. Good morning, Pat, and Christian..

Good morning..

I was just wondering, could you separate the growth you saw in your residential construction market versus the non-residential. It seems like the non-residential construction really hasn't picked as much, and I am just wondering if there is more upside, from that market to your business..

Yes, it's impossible for us to sort that out. Remember, we sell our paint sprayer to a channel partner. We sell it to a contractor, and that contractor could be painting the house with it, or he could be painting the church with it, or a barn, or a new apartment complex. We really don't know where they are going to take that product.

We know larger jobs use larger sprayers. So we can take some staffs at whether the painting projects are getting bigger or not, but it's impossible to give that kind of detail..

Okay, but anecdotally you just feel that non-res hasn't really participated much as res?.

Our view is that non-res was okay this year, but again you have to take -- if you are interested in non-res, you can really parse that into a lot of pieces, right? You can take a look at how different segments are doing, but overall we thought non-res was okay in '15 and we are expecting it to be okay in '16..

Okay, good enough.

And then, you have a 6 million share buyback program, it looks like you bought back 3.9 million to-date, you have a time table for the rest of the purchase in your side -- I think your total shares -- your basic shares outstanding in Q4 was 55.8 million, is that correct?.

Yes, that's correct. That's the data we disclosed last night in our conference call slides. So we don't have a specific timeline right now. We are more in an opportunistic mode. So as the market pulls back, we use that as an opportunity to go and buyback shares.

We want to obviously continue to be diligent about that, and we will be thoughtful around the valuation. So we'll just wait for opportunities..

Okay, and then just lastly, I guess to your elevated inventory level, it's just been creeping up because of the acquisitions and the growth in the business, there is nothing more to that thing?.

Yes, I don't anticipate, you see that turning around. Yes, part of that has been acquisitions and part of that's been us trying to improve our overall in-stock service levels. We do think that's a competitive advantage for the company.

And especially with some of the large demand that we've seen in Contractor and some of that demand has been difficult to predict, we want to make sure that we are there to serve those channel partners and customers when they need the product. So we have definitely been investing more..

Okay, great. Thanks so much..

Thank you. We will take our next question from Walter Liptak. Please go ahead..

Hi, thanks guys, and great end to the year. I wanted to ask one question about the acquisitions that you've completed in the last year, year plus. How are you feeling about those? Some of the end markets I think were a little bit more kind of commodity, oil and gas related.

How are they coming along? How are the integrations going, et cetera?.

So, I would say that from being able to do the kinds of things that we think that we can do to improve margin performance and take out manufactured cost, we feel pretty good about the deals and we've got lot of activities under way. We're not really putting anything on hold because of the revenue challenge that some of those businesses have.

In terms of our timing of when we bottomed and what we paid, obviously we got a couple of them at the peak, and it would be nice to have a do over, but that's not going to happen. So I would say given the environment that we have, we're optimistic about the businesses.

We think that they are going to be contributors to Graco's long term profit potential and we are going to keep working..

Okay.

I think in your previous question, you started to get at some of this, but I wonder if you can help us understand the new product spend for 2016 versus 2015, operational improvement efforts kind of going in 2016? And, any other special projects that you guys might be working on that will either be a cost or benefit in 2016?.

We've kind of got a playbook that we follow and I view 2016 as being pretty straight forward in terms of how that's going to move. There may be some incremental spend in product development in 2016, but it's not going to be significant.

We don't have any current plans to make a major investment of a large new team in that space, so there may be cost pressures in terms of wages or whatever, but nothing dramatic. Our cost performance, our continuous improvement in quality and customer service and cost-outs, those things are ongoing. They are not really project based.

Every one of our factories and every one of our engineering groups has got a ongoing list of opportunities in those spaces and they execute those, and we review those on a quarterly basis. So I look forward into 2016. I think kind of the big thing is going to be whether we get little bit of volume.

Because little bit of volume through our factories it really helps us. Obviously if we come up with a cost reduction, we can run it across the higher unit volume, that's nice but also absorption of overhead and other fixed cost. So if we get some volume on, I think 2016 going to be just fine..

Okay. And I think in the opening comments, there was a comment that was made about contractor being at full capacity.

Did I hear that right? And if that's right, what are the implications of that?.

We said nearing full capacity and that's really space. That's not manufacturing output. Although we run our machines pretty heavily five days a week around the clock, we can flex the machines on weekends. And we run our assembly maybe one is a quarter shifts, so we can flex our assembly.

But, ultimately the building just starts to get build naturally where we are at and we've been at. But with the growth we saw in 15, it's really made the situation a little bit worse. So, we can continue to get by for awhile. It's certainly not going to be an issue for us at all in terms of being able to serve the customer. It's not an external issue.

It's completely an internal issue and we'll make sure that we invest in the space that we need, but we are going to do it planned fully and we're going to do it at the right time..

Okay.

Is there any positive or negative for margins if you are in full capacity?.

Obviously, being busy has been better for margins, the growth is better for margins. Yes, nothing beyond that..

Okay. Thanks very much..

Thank you. [Operator Instructions] We'll take our next question from Mario Gabelli. Please go ahead..

Pat, how are you?.

Good.

How are you doing?.

Not too bad. Good numbers. I've been grazing a little.

But the $49 million that you expended for deals, what's the revenue? Did you guys release any financials as to incremental revenues?.

Sixteen..

Thank you. And secondly, to hitchhike on a couple of questions on your capacity expansion and [technical difficulty]..

Field, but we are probably looking somewhere between 10 and 20..

And in terms of 30,000 feet looking down, you've got a highway bill that has been missing for a long time. You've got the military coming back.

But more mundane, assuming oil gets up to X dollars and they start ramping back up on some of these, how quickly do you benefit based on your knowledge of the past three or four cycles in the oil patch?.

Yes. So I have got very little knowledge of the last three or four cycles….

Oh, come on, you are just hiding behind your youthful age..

I am hiding behind my ignorance, that's right. So what we are doing right now is we are concentrating really hard on driving the manufacturing performance improvements and facility consolidations that we had expected to do. We didn't call a time out to those because revenue is down. We're taking the hit. We're putting the new machines in place.

We're consolidating the facilities. We're working on process improvement..

Yes, you are doing your playbook all the time..

We are ready to go, when it comes back..

Got it, and -- but no sense of how quickly, where you are in terms of that recovery, let's say, in the spring of 2017 or something like that, I am just -- got to look for the other side of this curve..

Yes, I have no idea..

And highway bill?.

The highway bill should be good for us [technical difficulty] several different business segments. So it should be a positive..

Yes, have a great year. Thanks, Pat. Thanks, Christian..

All right, thank you.

You bet..

Thank you. And it appears we have no further questions at this time. I will now turn the conference back over to Pat McHale. Please go ahead..

All right. Well, thanks to everyone for joining our session this morning, including the lively Q&A. Have a great rest of your day..

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