Graco (GGG) 28 Jan 202019 Q4 Earnings call transcript

Good morning and welcome to the Fourth Quarter 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 8157037. The replay will be available through 1:00 PM Eastern time, Saturday, February 1, 2020.

available part PowerPoint of information is presentation additional as available the has in slide a which Graco webcast player. of questions-and-answers remarks request conference the the will we At open up for management. after from opening the company, the

differ available Private During those Actual of risk factors, management their from this provisions XX-K, www.graco.com at the in various Xa the These recent materially the These of Safe expectations, SEC's on by of the the statements on results forward-looking the for and about are company's remarks prospects Harbor call in annual constitute including as may of Securities and at the for Form indicated identified on made company's report www.sec.gov. Act. Item most company's XX-Q. a remarks future. quarterly report website various Xa may Litigations be website Reform plans the those the Item XXXX of purposes result Form and reports

reflect management's The company Forward-looking made. only statements update obligation to future information the no in events. are current these of or speak statements of they undertakes new time views and light as

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

Good morning.

McHale Pat with morning Mark this here Sheahan. and I'm

have our be additional information helpful. Our been that posted conference website call may slides on and provide

year. quarter Sales totaled $XXX million this of X% last quarter, the fourth increase from an

added X of in decreased X point rates sales point, translation percentage While acquisitions currency growth approximately changes this by revenue quarter. percentage

$X.XX items, exercises diluted for excess nonrecurring net benefits After for of adjusting Net other the tax million totaled or $XX share. share. diluted option stock the earnings quarter or earnings totaled $XX $X.XX per million per from impact and

tariffs. to quarter basis pricing margin points year. XX and higher offset as by Realized Gross material the costs decreased fourth compared more than last rates

factory the rates margin currency year. unfavorable decline effects channel changes in the lower of resulted prior gross rates mix product translation from and So and a volume, in in

offset fourth the a million reductions cost. lower and ago were as volume expenses quarter product in in year than to as Operating $X higher more development compared expenses earnings-based

tax was X option Reported in due approximately quarter, After rate benefits quarter for to effect stock to adjusting points income essentially than tax option our last tax stock year, excess rate of XX% quarter XX.X%, same other lower benefits the for exercises year. primarily from an related as the benefit, and increase exercises. the fourth the the excess tax last for was tax percentage nonrecurring

XXXX. expenditures million million for the $XXX Cash million $XXX flow in of $XXX $XX dividends and from million our for current and the totaled totaled quarter operations We fourth year. full totaled in debt $XXX paid repaid Capital million the XXXX. mid-year long-term in portion

and Based A is mix as year. exchange XXXX. by products few we exchange expected currently volume current look sales next on forward of effective same and the and comments be the currency, to rates, into for immaterial

volumes sales and expect factory continue at factory to headwind effect by be the a will realized to tempered us, operating Although we outlook, level by be performance, indicated pricing. our for the

can vary and $XX approximately expected million quarter. approximately rate for expected be approximately $XX by is XXXX, expansion million be are to to project. facility expenditures Unallocated $XX including Capital million corporate effective are expenses The be expected in approximately to tax XX%.

repurchase repurchases transactions share share Finally, we accelerated opportunistic short-dated may program. make in via open market or XXXX

further turn comment. I'll to call over for the Pat now,

Carol, you, and good morning, Thank everyone.

to the happy most slightly that above be try will to I the Sales the XXXX our year comments this flipped calendar basis. morning on and so a organic for was modest again. rate the outlook we currency of my constant year. an and tough X%, quarter year of recent XXXX grew All can full for was have a

end and all thank did results Aggregate, distributor in hard users and for work have of your bright spots I disappointing and our we partners Despite support. employees,

some year. single low for digits for the for the segments. quarter the color and declined Now, segment Industrial The on

systems particularly Process for those declined equipment demand low our Asia the quarter related single soft sales the in Pacific. Positive the worldwide demand digits and segment for year in construction quarter mid-single performance to digits. the was The manufacturers by bringing organic by for offset continued

the varied market organic for Sales energy significantly growth Contractor results digit growth have with digits markets with weaker. by continued industrial the environmental finishing semiconductor and mid-single and streak its The markets high-single and year. end for solid, quarter, segment

paint stable center A both demand America products, with XXXX good remained sales the and positive Out-the-door in to sales both with and new home channels. EMEA, growth. North construction contributed store environment in along topline

Moving perspective. to our regional on

Asia-Pacific across systems resulting this in notable demand EMEA remained for general, and negative particularly a remained manufacturing, in in markets, end and region weak in the of and was decline year. the demand the with China for sales strength the automotive double-digit painting positive quarter quarter equipment. in plant and contractor

demand American favorable. Automotive market remained a remains be and to and industry demand soft concern. construction North continues

regarding customers see However, we cautious spending. manufacturing CapEx do

A comment and expenses lower tied for rebates a as discretionary the control, volumes, incentives, well such expense customer the as positive on In to good had on impact quarter. profitability. as earnings quarter, sales operating

incremental the year finished in margins for in expectations our result, the low-single growth a better digit than a environment. XXs, As slightly

in in year. and leverage favorable remained in We Process segments. continue and to realization our quarter Contractor year see both the Price the for positive the

outlook. at XXXX, in segments. year Process to our conditions challenging Industrial our expect first to of we the market on least Heading the end place and Moving in half remain into for

product positive continue for Our as categories. major remains product across outlook our demand the Contractor and markets is solid for favorable segment conditions end and

digit for outlook currency As constant an low-single is on a our basis. result, revenue organic XXXX growth

ready for questions. we're Operator,

from Goldman Ritchie We'll Instructions] Joe with question Sachs first our Research. take [Operator

products incredible the quarter? about EMEA. new maybe about that to to little how how talk contractor added segment it just and growth growth both Maybe see in pretty in maybe new bit that was just the fourth introductions you talk Can and about into and a product you're in the the rate XXXX environment, much US thinking the

really year benefit new products even this new later new see the XXXX, starting on to that the accepted the products markets. but overseas XXXX we on in the were we get I they would that than and you'll time remember well normally than of the so were and later launched late didn't in products mean,

product to the of which for going So be I stuff last think to that us in us year incremental coming the timeframe. the main year make the that and to have products kind then is on we the we throughout of the XXXX, here XXXX. more we here this focus harvest months incremental into of for an we sure to sales new move and season opportunity to XXXX the we'll first released I that begin to get launching new few continue didn't there's year as think get products But April/May continue XXXX

margins That always guys curving and know XXXX? really relates good Industrial with margins I decrementals grow business about thinking had how just guess as turn the makes sense inflation this head in potentially just coming I Year. thinking are ability zero-based some as it down. and budgeting we about the calendar XXXX year as segment, like you about you the your this to that New the to into guess, in in are I we

have more margins. a Industrial. businesses, we We've particularly can So very top earnings if high rate get incremental any of in growth and line said historical nice in got before, I of we think leverage we’ve our

a decremental have We heavy also pretty margin.

going some environment be but line. going to it to self-help the not We Industrial, top dependent go going So best, margins headcount on finding We're globally into going call make muted. opportunity to upon do I'll or to expand XXXX We're and have change our major major our really strategies. reductions don't any the is initiatives.

cost into part addition year and we to is make line run our of every we our going course expenses get increase that XXXX. manage We like to continue pricing sure good we that try modest but is - and goal we're like to be in we'll get our programs typical to our to And that top control in our coming important. discretionary of to expect them to

last And one maybe Pat. for you one

in clearly you've through you year, election this a gone As few think point. cycles election of kind at through,

had some generally cycle? see an you decisions election You – commentary second years? CapEx generally half around do just in typically during what things about there to expect feel you election muted good do you some potentially CapEx do Like backdrop. risk typical or Is the or and

my give you in. or So and then view Caroline chime I'll can Mark

created the .and will strongly before the or U.S. something be all Brazil economic a and travel fair I or to the that it really distributors of As the users talking an influence world and Never when about would in or felt I go India amount elections I here to of after doing year, about election. election that uncertainty was historically, go somewhere, the end

results China summer republic Chinese coming little a we're we've could evolved of influence into for where we not with there different trade with banana polling the the haven't late think terms I be here up an spend election. agreement. in and to trade waiting the But going a potentially to dynamic may what bit that potential for money hopefully, particularly be looming got

for Okay, enough. Thanks fair that.

Mark me. at can you speak, he laughing is

in. I anybody who could didn't chime else know whether

no just than more one me. There's there. There's

question next from Saree Jefferies. our take with Boroditsky We'll

we Could the cost think price you about should color provide from on XXXX. in how some benefit

you of that believe did as same headwinds XXXX? you material don't contributor this tariff have a year I type stronger should As that the in be and

really did on price Yeah, this we it’s did. We cost well Mark. Saree, year.

I factories. the we had pressures offset than the think tariff impact that material cost we in more that and

more this XXXX, somewhere it that our we've challenge X.X% into I increase. in the the And think historically, think for I real price that said to X% side intend course, for we full the realize to pricing comes year. year to we And volume us will when implement gross the heading between margin. XXXX of on was

that price as XXXX think shape good on in I So, well. the heading cost into we're dynamic

that be Could be say in XXXX? you - a larger to price would it fair to that contributor accept say cuts you

half, business new It in topic. now new little margin least those - launches and I their got it, where But might in that rates. pricing we've at shape with - good that I a to so we're speaking, for on out the products things through respect generally got decent with pushed the XXXX get of like think like some coming think contractor bit this said actions the be the we've I as that, first

organic in you Could growth also Americas and highlight in pickup came Industrial third EMEA quarter? stronger then the versus just the expected. than what growth then drove And

question say Saree, I'm sorry. again? Could your you

Could Sorry. the organic stronger came Industrial you versus growth in EMEA expected. what drove quarter? third growth highlight the just Americas in than and pickup

- on does what we surge some driven more in as side, was and finishing by as business be more to think the notable system a don't and the the that from we are much think results our that particularly by EMEA It of finishing I Yes. lumpy saw a a timing lot potential little in bit in I that in was had was systems the EMEA work our sales time-to-time. and But good folks industrial selling there. activity massive good some have of that

Inc. from Markets We'll Capital Hammond take KeyBanc our question Jeffrey next with

a is Asia headwind continuing guys. just you to be for

Just any indications certainly, there anything any any improvement starting that a the to comps of stabilization see easier? you're signs get - or lot

Yes.

second the try the deck the We set flat optimistic I to which number. in half, able rapidly extent its can slide half. we the that team uncertain It’s get out that think being about AP over to in were I to get achieve second feeling Particularly half, in is first sure. back to near to year. for the there. an our Things say the pretty XX negative that anywhere change slide in is really goals we of would but easier. were the comps the not For

how as affect the got gone can but or thing not three not weeks if they we've the We into things and the positive over topic quickly three that's to negative. going going might and virus in to did business. Now as can spreading in turn bake sure that it's turn just be forecast, we're weeks our be that there,

our just we're I look just kind so, is to to do a And thing. way at XXXX, flat of going and think smart

we more a XQ of that maybe Okay. in normalizes And introduction product about then then contractor, thinking forward? think should as just out cadence you cycle, normal and move

that - looking as it And way that's that think their part, it the I basis. the for year-over-year should decent we're have quarters, growth expecting guess, a mean, most year. be through the pretty rates quarters business I go I I growth the through and be year consistent. think should at through you the the Yes. on to for we're

perspective, starting use Anything that capital then or pretty some on otherwise? an guys and and been itchy free Okay, Thanks. to M&A you from allocation. just, you are certainly to getting buybacks quiet cash of have break on you

I the here We're that still and It we've pricing past, in for to on deals, said about. nice us that difficult We think niche of pipeline some looking are smaller a is they're do pretty as some the of it the Yes. the did there. maybe for the in and work M&A pursuing businesses were math but process more opportunities, high. the that makes always still XXXX, teams excited which activities deals make

So to predict stuff some everyone but hard get it's there. hard future, working is the done to

we've share opportunistic the there. that said On be think side, buyback again, we'll I

We types potentially of those things. to share looking are buybacks, continually look opportunities at accelerated at

and and let wait to for got So out and the here see we’ll kind of speak the year numbers themselves. plays how

with Deane from question RBC We'll Capital take Markets. next our Dray

world, to you’re something traveling to me travel anytime soon. Pat, tells be right? the when China say Is going you not you that

of getting have not stay have still So people lot old. concerned. sick dying to at I really - breathing a I prohibiting shape, it I'm - stay. to and we or particularly I'm a of It's breathing was times to trip we wouldn't tomorrow there play so on. going are out. going what's or are new that problems it tell ban. I of or unless travel go stranded things get I anybody go that mean this get nor these We're from let scheduled forcing If China the panic not hard the we cycle canceled going haven't to to And point. in either do the because anybody had to

know. We'll I don't So see.

Is The there the perspective you holiday. that tell? wasn't to - disruptions. early a are disruptions but it touch, flip government extending see the to is just it just business beginning just comment, from there and/or you national idea is And businesses are too your

here the disruptions starting think couple maybe be not get I of at a they us some short reasonable directly for we're I yet. back see of long shut it time. here area and of and important be that to of directly last Well, just think to can't somebody supply for that issues things it sure to get our thing We're to starting But be impact need before when Graco, doesn't we be needs a right now. closings. Otherwise, chain take and partner term in can concerned days think But could think extension up starting see of an world of not ones that's will but some one. down the within the in customers running and you will another the announced there I don't too and period disrupted

the quarter decremental made through see So in fall on kind I'll this anything to Is then in that really just watching XX% there be any industrial volume drop? over you that or that. you decrementals. on comment a - the earlier that pure And of is we on one-timers saw that that

in we quite aren't more would what well. decrementals more say I bad. they're But some mix as XX you'd of the had that in see. typical Our be that would there But probably

mix It worse have and any color would was just it that there… just made

business for Systems Asia-Pacific that as and example. sales may be sales margins good, are systems tend gross that industrial have we we not good have but typical - to that

in of And for driving from impact quarter so, have some growth the us. system out a on just a Europe Asia sales shift into mix does the

and talk usually call it’s When typically there. when in we see we mix, out that it about channel We product Yes. in.

pre-buy all get people around going a year And when trying and on then there interesting just tariffs. was this to ago it was

you say and clamoring price was the out you everyone why to you increase not - a didn't seasonality. don't You guys you're do impose it going remember of normal

the that X%, does product expectation of change X.X% introductions the to of new this that So, terms in year? the cadence

think I we remain our - prior increase should price stable No should years. cadence with

Davidson Company Matt from with Summerville our next question take D.A. We'll Research.

a function mentioned a behavior more the relative think bit I I is same? being industrial, your you continuation you're wondering, CapEx. Just a quarter. Pat in North manufacturers American last Is step change a to seemingly more on the on dialogue I'm that that of guess or remarks, having cautious in prepared follow-up And of

think same. more the of I continuation No, it's a of

to the on is are a you you. sell industrial is the talk paint end the in both And between what And follow-up thoughts about center pictures your anything construction bigger just contractor, view there residential? want your that and to on then out trends business, and pro markets Thank XXXX commercial serve of if you're pertains to no seeing contractor the sort sell-through you home for or versus then split between either what channel?

Yes, first piece. take I'll the okay

sell think In overly film XXXX a as customer dramatic online terms channel of out, or new through anybody inventory there I huge dramatic. the was giant sell was we went in, reductions. order do we that didn't We have see don't anything come a

out So, normal we flow saw activities in on in and as I in year. flow channels America the sort through of progressed North contractor we both would say

here is later I residential well bode your come commercial was And on on really And second question for I certainly it which pretty just think, December months the regarding going that looks our you some side see. the note that painting six number - market. came the front, would than out positive. I’ll say, construction Nothing of of the to or starts more in nine outlook that

around the number. I commercial think But more probably there's variability

I that pretty I modeling, that. good looks pretty about good. feel about For it pretty feel good residential.

anyway. do commercial what be is. same look the all depending upon numbers think We the I category you mixed might that at

and next We'll take Research. with question Blair our from Oppenheimer Co. Bryan

for sales contribution the parse there set mid-teens to the to help us to organic industrial second. a level out just just and from Could back circle EBITDA? system you to EMEA [ph] number I wanted relative the

of we in number, But influences No, in quarter. product out we for EMEA the the publicly bunch terms. of don't when let were sales in by fourth our category whole sales general it general the break kind know in terms, a reasons. strong you And

quarter that’s volume for of XXXX, margin the performance, should Okay set margin particular range think than we thinking about there we with fair. XXXX, good XQ was segment? even in higher And into the contractor fourth How that there in going then lift. for really expected strong profitability about realistic was

at look to look where couple our that stopped you terms profitability would I number. look I the we of think So contractor. at when in of a flow-through a quarter had feel of mean thinking XXXX sort and I XXs chime we quarters like. in you'd kind from year-to-date can get in if they you XX% versus you decent away be And a And we're XXXX, ought like for range. kind Caroline, of to XXXX. that's that I lower of you right in number about

Yes expenses for - heavier XXXX, year a was in quarter the of product by probably a fourth the the that contractor the launches following influenced were so they getting ready load year. ago, contractor development

the issue comp bit little of too. a of probably a So XXXX - also was quarter fourth

one quick Then one, if I can.

should You've the there part that CapEx XXXX of up radar other XXXX called we keep could brick-and-mortar or latter hit Are projects XXXX. on million any in incremental $XX in mind? that for the

the in operation up there those there are building likely we're contractor think as the then to the really where encompassed with do what's left to Switzerland $XX group do in and million. It’s well. our I something

Liptak from Securities question with Seaport next Global our Walter LLC. take We’ll Instructions] [Operator

now other update then Let Could XXXX been me some work you the completed and on that in ask the on and XXXX CapEx done? what's for was the are last in benefits there you just XXXX, follow-up from one. us

Dakota, through gotten to and floor complete, we think I most for bit we - here except we’ll of have I first we production Sioux think little quarter, are the purchased into in the we Falls, less [ph] in But office some the as in said, Factory work build-out some QX. go through major kind that Erie, other projects we've all maybe in South in still do, I and the the property. in have the projects contractor. a Utah, the swap demo where for areas of a Pennsylvania, where XXXX did factory more or areas but factory

addition GEMA then we've few good a done the all XXXX, said, powder beyond need And trajectory facility and revenue there. they strong the are Switzerland, last Those we completed. going they've into our are as They're of in operation. really evaluating years. [ph] in here have had And facility in space, that, and a new

machine The factory would other of CapEx things improvements. more have our equipment, next is that the efficiency we buy part that for year tools,

terms associated of the invested from buildings, pretty thorough them. out of what we going have It's for We on expect factories the a each those payback don't stuff those that's to do to types investment but with really on we analysis of all return break year, in capital but for get good the do into projects. harder rates those

And get is but what didn’t think the just it was mentioned CapEx I number? call, the in it? earlier I

stuff. $XX million factory million year, equipment brick-and-mortar for of million the full and of $XX $XX

the in the so better the margins, already that XXXX? to better benefits or working looking part is starting throughput And get better you contract, for capital XXXX, were that especially are of and accounts, projects are that in reason with done the

tend run ROI. try use some try to time an brick-and-mortar when Mark hard to we mean, so us have and of years’ to growth. is it’s to for our we that As expand, I pretty the of number we expand said, efficiently, worth to space

on So, say short-term a for us necessarily us, while. not got brick-and-mortar additional would to weighs we probably depreciation. It's and a actually the I benefit

see we The less that kind range. buy in cycle they're based reductions, And those to closer factories we generally, that the quality justified them nice is and ROIs XX% have upon teens. cost improvements, rarely that time for generally equipment improvements, throughput than all our of do

positive buildings because the the quarter profitability. the we're the the I there. fourth contractor that our building machines to the weigh believe don't yes, that fact the no, of building up And on So, had influence any but real

it the we been on in a that you price has - normal last it Is And the than than which thinking year? characterize do leaner is the bit. it little cost industrial? the they were had, It Are I given one cautiousness prices that's XXXX? about think channel for the in stabilized how past? have last you inventory guess like conversation how more seems around the you would the commodities’ then And are inventories started

So, you just to from pricing recall that price bit and have last that the But going typically, the harder to consistent up order we we that year year-to-year tried push a tariffs. X.X% we’re Mark to basis pretty cover in little X% looks were to like referenced a impact our realized. with what on

period a and where expect over kind we that's XXXX. targeting So for that longer where That's of we're at, time. of we're that's

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

All your Thank this you. hopefully, have morning. And right for you, better we'll XXXX. time everyone, well thank a

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