Graco Inc. (NYSE:GGG) Q4 2022 Earnings Call Transcript

Graco Inc. (NYSE:GGG) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: 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 visiting the company's website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. 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 2021 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q.

These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Kathy Schoenrock, Executive Vice President, Corporate Controller and Information Systems.

Kathy Schoenrock: Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief summary of our results and then turn the call over to Mark for additional discussion. Yesterday, we reported record fourth quarter sales of $555 million, an increase of 3% from last year. As a reminder, the fourth quarter of last year included 14 weeks, as compared to 13 weeks in 2022. Net earnings in the quarter were $126 million or $0.74 per diluted share, an increase of 7%. Currency translation rates continue to be a challenge in the fourth quarter, decreasing sales by $23 million and net earnings by $12 million or $0.07 per diluted share. The gross margin rate decreased 2 percentage points in the quarter, due to the unfavorable effect of foreign exchange.

During the quarter, our pricing actions more than offset increased cost and had a favorable effect on both the gross margin rate and dollars. At current costs, we expect a favorable price cost dynamic to continue as we move into 2023. Operating expenses decreased $10 million or 7%. Reductions from lower sales and earnings-based expenses and translation rates were partially offset by volume and rate-related increases. Other expenses decreased $15 million in the quarter as last year included a $12 million pension settlement charge that did not repeat. The adjusted tax rate for the quarter was 19%, due to the unfavorable effects of foreign earnings taxed at higher rates than the U.S. rate. We anticipate the effective tax rate for 2023 will be between 19% and 20%.

Cash provided by operating activities were $377 million for the year, a decrease of $80 million from last year. Contributing factors include increased annual incentive payments and investments in working capital. I'll take a moment now to cover a few items as we look forward to 2023. As we discussed in our materials issued last night, we are initiating a revenue outlook for the full-year 2023 of low single-digit growth on an organic constant currency basis. Slide eight of our conference call slides, however, incorrectly stated with growth expected in all segments and regions. A corrected presentation will be uploaded to our website following today's call. We have been and will continue to monitor changes in currency translation rates. More recently, we have seen improvements in our core rates and at the moment, anticipate the full-year effect of currency translation would increase sales and earnings by 1 percentage point in 2023.

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Unallocated corporate expenses are projected to increase and fall within the range of $31 million to $34 million. This increase is related to stock-based compensation. We expect capital expenditures to be approximately $200 million with $130 million for facility expansion projects at our Minnesota, South Dakota, Switzerland and Romania locations. I'll turn the call over to Mark now for further discussion.

Mark Sheahan: Thank you, Kathy, and good morning, everyone. All of my comments this morning will be on an organic constant currency basis. Sales in the fourth quarter were up mid-single-digits, resulting in quarterly and annual records for both revenue and operating earnings. We achieved these records in each quarter of 2022. Contractor was the only segment that did not realize a record in the fourth quarter. However, the segment did reach record annual revenue and ended just shy of $1 billion in total sales. Our consolidated backlog was $355 million at the end of the quarter, which is approximately where it was last year at this time. Slowing demand in Contractor along with strong project completion in our powder equipment business reduced backlogs from what we reported at the end of the third quarter.

We also experienced areas of improvement in component availability during the quarter. While some shortages of key items like electronics and castings persist, supply chains have improved from earlier in the year. The pace of incoming orders has slowed, compared to a year ago. However, year-over-year comparisons are heavily influenced by the magnitude and timing of our price increases in 2022 versus the fourth quarter of 2021. Many of you will remember that in 2021, we held pricing flat throughout the year after a modest increase in January. In the fourth quarter of 2021, we announced that we will be implementing a substantial price increase early in 2022, which led to heightened order activity in last year's fourth quarter. We have factored these things into our outlook, which I will cover later.

Now turning to some commentary on our segments. The Contractor segment had a mid-single-digit revenue decline in the fourth quarter, driven by less demand in the home center channel, limited pro paint product availability in EMEA and Asia Pacific and the effect of lost sales, due to discontinuing our Russia operations earlier this year. The North American pro paint business remained strong, with revenue growth in the high-single-digits for the quarter and out-the-door sales were equally strong. Component availability improved, but we are still on back order, especially in our pro paint business. We continue to monitor global construction indicators. However, given the broad nature of our short-cycle business, which has multiple product categories, it is difficult for us to accurately predict the ultimate trajectory of revenue.

Simply put, there is no silver bullet in terms of expert consensus or leading indicators that guide us to a certain revenue outcome. Our products are used in many things such as new construction projects for single-family residential, multifamily residential and commercial construction. Contractors also have repainting and remodeling projects covering these categories. In addition, we support specialty contractors doing things like spray foam insulation, line striping and pavement maintenance, texture spray applications and high-pressure protective coatings jobs that are often seen in infrastructure applications like bridges, pipelines and commercial shipping. Most contractors working in the aforementioned categories report project pipelines that go through much of 2023 and even into 2024 for commercial applications.

Experience has shown us that as long as contractors have solid project pipelines, they will continue to buy both spare parts and new equipment. These factors, combined with new products being launched and our channel expansion initiatives, puts Graco in a better position than if we only had to rely on the economy to determine our revenue fate. In the Industrial segment, sales were up 17% in the quarter with positive results in all reportable regions, and they achieved fourth quarter and annual records for both sales and operating earnings. This segment is the most global of our businesses and experienced solid growth in all regions for the quarter and for the year. Key product categories such as finishing systems and sealant and adhesive equipment were the main drivers of this growth.

Profitability continues to be strong with incremental margins of 55% in the quarter and 61% for the year. Checking with our teams, project activity remained good as we finished the year. The Process segment grew sales 16% for the quarter, resulting again in both quarterly and annual records for both revenue and operating earnings. This is the fifth consecutive quarter that process has set these records. Increased volume drove profitability improvements as the year went on. Incremental margins were 48% in the fourth quarter and 36% for the full-year. Broad-based sales growth in lubrication equipment, process pumps and semiconductor pumps, heaters and fittings, drove the strong performance. As we finish 2022, we have large backlogs in semiconductor, decent project activity in lubrication and process pumps, and we are excited about both recent and upcoming product launches in these businesses.

Moving on to our outlook. As we enter '23, we're keeping a close eye on order trends and business tempo. At this time, we remain cautiously optimistic that we can drive another year of growth in both sales and net earnings. As such, we've initiated a low-single-digit organic revenue growth outlook on a constant currency basis for the year. Our teams performed extremely well over the last two years, and we are ready to react if conditions differ from our expectations. I am confident that our performance will reflect this in 2023. Our core strategies of launching new products, investing in our manufacturing capabilities, expanding our global channel and pursuing strategic acquisitions will facilitate growth not only this year, but also in the future.

That concludes our prepared remarks. Operator, we're ready for questions.

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