Q4 2022 Graco Inc Earnings Call

January 31, 2023

The conference will be.

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 website at Www Dot Great go Dotcom Grieco has additional information available in a power.

Your point 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.

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 rig.

Salt of various risk factors, including those identified in item one a of the company's 2021 annual report on Form 10-K, and then I don't want a of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at Ww.

<unk> got great co dot com and the SEC's website at Www Dot S E C Dot 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 Sherwin Rock Executive Vice President corporate controller and information systems.

Good morning, everyone and thank you for joining our call I'm here today, with Mark Sheahan and David though.

I'll 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 <unk> 74 cents per diluted share an increase of 7%.

Currency translation rates continued to be a challenge in the fourth quarter decreasing sales by $23 million and net earnings by $12 million or seven cents per diluted share.

The gross margin rate decreased two percentage points in the quarter due to the unfavorable effect of foreign exchange during.

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 cost, 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 right.

Anticipating 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 2020 threes.

As we discussed in our materials issued last night, we are initiating our 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 with increased sales and earnings by one percentage point in 2023.

Unallocated corporate expenses are projected to increase in fall within the range of $31 million to $34 million.

This increase was 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 in Romania locations I'll turn the call over to Mark now for further discussion.

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, and our powder equipment business reduced backlogs from what we reported at the end of the third quarter.

We also experienced areas of improvement and component availability during the quarter.

While some shortages of key items like electronics and castings persist.

Apply 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 would 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 propane 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 Girl paid business remained strong with revenue growth in the high single digits for the quarter and out the door sales were equally strong.

Ponant availability improve but we are still on back order, especially in our propane 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.

<unk> 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.

Tractors also have repainting and remodeling projects covering these categories. In addition, we support specialty contractors doing things like spray foam installation line striping and payment maintenance texture spray applications and high pressure protective coatings jobs that are often seen in infrastructure.

Patients like bridges pipelines in commercial shipping.

Most contractors working in the aforementioned categories report.

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.

These factors combined with new products being launched in our channel expansion initiatives puts <unk> 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 achieve 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 team's 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 processes set these records increase.

Increased volume drove profitability improvements as the year went on.

Incremental margins were 48% in the fourth quarter and 36% for the full year.

<unk> sales growth in lubrication equipment process pumps, and semiconductor pumps heaters and fittings drove the strong performance as.

As we finished 2022, we have large backlogs in semiconductor decent project activity and lubrication and process pumps.

And we are excited about both recent and upcoming product launches in these businesses.

Moving onto our outlook as.

As we enter 'twenty three we're keeping a close eye on order trends in business Temple.

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 team 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.

Thank you the question and answer session will begin at this time to ask a question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is range.

<unk> withdraw your question. Please press star one one again.

Your question will be taken in the order that is received please standby for your first question.

Your first question comes from the line of Deane Dray from RBC capital markets.

Thank you and good morning, everyone.

<unk>.

Can we start with.

There was a lot of worry here.

Regarding one of your propane customers being.

Having an earnings Miss and lower guide and everyone goes there's immediate negative read through to Graco and the reality is you are not as dependent as well.

People think and there's other applications, but just take us through that.

Misperception and you and I have been through this before but just kind of frame for us.

The relationship.

And that the end.

The end market exposure et cetera.

Yes, so I would say that overall, we haven't really seen any kind of a decline in our propane business and I think that's reflective of the fact that contractors are busy they still got projects they buy stuff when they feel good about the outlook on different things.

But notwithstanding that we do sell into some of the newer construction markets that have been particularly hit by.

The increase in interest rates and housing activity overall.

I tried to point out in the opening remarks that this is.

A pretty broad business when youre looking at our contractor business Theres a lot of different applications a lot of different product categories.

And we are as you said tied into one specific macro thing that you can really use to guide what we see on the revenue growth side. So when we looked at everything and what we're experiencing right now.

We feel okay about CBD and as the year progresses.

Visibility will be much better because we are we are pretty short cycle as you know.

Orders come in we get them out as quickly as we possibly can it's good for our customers, but it does create some issues for us in terms of just having the clear visibility on where things are going.

I was at a trade show.

Last week bye.

By a large paint organization, it's their annual Tradeshow and was very well attended our booth was extremely busy they bring in their store managers from around the country. There was a lot of interest.

Our new products that we're launching.

And I would say overall that.

It was a fairly positive takeaway for me being able to walk the floor and talk with different participants in that industry. So again, we'll see how it plays out but.

Things are things are hanging in there pretty good for now.

That's all good to hear and then just on pricing outlook for 2023.

You're going back to at least you had said you go back to one price increase or that's the plan what is the price increase expectation for January .

What kind of realization are you expecting and what does that mean for price cost.

Yes, it really depends on the business unit in the region, but generally speaking there will be a more of a normal price increase I would say in line with what you might've seen in 2018 2019.

Each segment is implementing that here in the first quarter and some of the some of the regions are going to wait until a bit later on because we did just pushed through a fairly healthy price increase.

At the end of the third quarter.

In contractor I think given that they have raised their prices already twice, we're going to we're going to hang tight for a while I think we're in better shape than we were you actually saw price cost.

Neutral to slightly favorable in Q4.

Hopeful that the actions that we've taken will continue to play out that way for the rest of the year.

Great. Thank you.

Yep.

Thank you one moment for your next question.

Our next question comes from the line of Michael Halloran from Baird.

Hey, good morning, everyone.

So so.

Maybe just I think you kind of gave us all the pieces there mark but.

Maybe just talk about where you're expecting growth this year by segment, where you're not and where the pressure points might be and then.

Then on a related basis set as a second question, we'll start there and I'll keep it separate.

Yes so.

We didn't really break out as you can see.

What the outlook is by segment or by region.

For.

A lot of different reasons, probably the biggest one that our visibility isn't that great, but I would say generally that we feel really good about product launches and.

Channel expansion initiatives going on in the process segment as well as that particular group has a lot of backlog still from orders that we took particularly in the semiconductor.

Part of the business, which should really help them.

Full year revenue basis so.

And that in that segment things are feel like they're in pretty good shape.

On the industrial side.

A lot of the growth that we saw here at the end of the year and really a lot of the growth in 2022 came from both our sealant and adhesive businesses as well as our <unk>.

Powder equipment business and Fortunately with regard to the ladder. They do have backlogs and they do have some better visibility on orders and how the year might play out versus some of our other short cycle businesses. So when you put those two things together again I feel like we're in.

Pretty good shape with respect to being able to grow in industrial in 2023 without getting into details on regions and those types of things.

And as you know contractors sort of a wildcard as we sit here today orders had been okay. The pro side is better than the home Center side as you know Pro center or <unk> side is more profitable for us than the home center side. So.

From that standpoint, if you had to have one that was weaker than the other.

So having a good strong pro side of the business should help us on the profitability front, so hopefully that helps but.

All in all when you roll it all up I think we feel pretty comfortable with the low single digit guidance.

No that makes sense and then.

Maybe talk a little bit about the cadence and then as you work through the year some of the comments in the prepared remarks about.

Little bit of pre buy ahead of some of the price increase in the fourth quarter, given kind of the timeframe that tends to imply maybe a little more outflow in the front part of the year visibility better front half versus back half as some of that reflected in guidance or is there an element of it.

<unk> relatively normal seasonality embedded in that in that outlook.

Yes, I think we tried to do the best job that we could factor all that in to give you. The full year guide, there's probably going to be a little bit of volatility in terms of order rates and those types of things. We certainly saw that in Q4, just from a comparison standpoint from a year ago.

But we also raised prices in Q3 of this past year. So you might see a little bit more order volatility around that as well.

All in all though.

I think that the.

<unk> that we gave this kind of low single digit number for the full year, we feel pretty good about David do you have anything to add there I think that the when we talk about the industrial and process space.

I'm generalizing, but the.

Channels really don't stock a lot there.

Their demand varies all over and quite frankly.

Many of them wouldn't know what to order to do a plan ahead in terms of a price adjustment as mark touched on certainly the CBD is probably if we looked at if we go back to 2019, we did a little work on this is certainly the shorter cycle of all of our short cycle businesses and I feel that there.

To some degree what we could be experiencing at this point is a return to normalcy or more normal C.

Better better quality supply chains still some gaps in electronics and chips, but I feel pretty good that what we're seeing is.

I would say getting to a situation getting closer to a situation where the channel partners order with confidence knowing that we're going to ship promptly.

Got it so it sounds like what Youre, saying is the seasonal patterns are reasonably normal, but theres going to be some volatility expected two years or so.

There's can be some variance in my thought process as we move forward.

Yes, it could be some order volatility hopefully the factories are a better spot where what we actually get out the door is a little bit smoother than the order rate volatility of course, we still got big backlogs right. So I mean, a year ago. When we were talking with you guys or lamenting. The fact that we had $350 million of backlog and that's where we're at here.

Today too so.

Thanks, Mark Thanks, guys I appreciate it.

Sure.

Yes.

Thank you one moment for your next question.

Your next question comes from the line of Sarah <unk> from Jefferies.

Hi, good morning, So gross margins are up a little bit sequentially, but still remain under pressure what do you need to see to get gross margins back above that 50% level.

Yes.

Hi, sorry, this is cathy.

I think you know what.

<unk> experienced in the quarter as I said in my comments, we really saw the unfavorable effect of that current foreign currency exchange.

Thank you.

Where rates are at right now, we don't expect that headwind to continue into 'twenty three I mean, obviously.

Rates could change.

And given that we did have a favorable price cost dynamic.

In.

In the fourth quarter I think we're optimistic about how we enter 'twenty three and beginning to see some gross margin rate expansion of course.

That we need volumes to remain the same and costs Jeremy in the same so it will be the two factors that we continue to monitor here in.

In the first quarter and throughout 2023, I would just add that.

After really about a half a dozen quarters of serious price cost pressure really going back to early in Q2.

Gosh, I guess, we Gotta go back quite a ways maybe at the beginning of even in 'twenty two.

The.

Progress that we made here in Q.

In Q4, I think was impressive.

I would say it reflects the impact of pricing that we did at the beginning of the year and the buy now famous interim price increases.

That we completed throughout the summer months.

And anticipating a question.

The lesson is not lost on us.

Yeah. If you look at Q4, if currency were neutral we would've been above 50% so.

I think that let's hope that stays neutral that our price cost gets in better shape.

Input costs come down at some point, we may see some of that starting to creep in and then.

Nothing is broken here. So we should we should get back up to those rates that you were talking about.

Great and then obviously some positive on the outlook for industrial next year.

Can you just talk about what drove the strength in the quarter and how do you think about those markets going into the year.

Yes.

Just say that all in all was a great year for that team.

Good.

Two of the things I said before I think our adhesive dispensing business. Our sealant business is on solid footing across multiple industries, including general industry aviation solar they have automation projects going on.

Both in that business as well as on the paint circulation side, they've got really good channel initiatives for expanding their channel. We've got engineering teams now located in the regions that are doing special projects for customers that lead to a more robust product plan.

So overall I think we feel like things are in good shape. There and then you throw in like E mobility battery production.

We're trying to build our business in the packaging space and a really good powder equipment business, which has performed extremely well over the last couple of years and they've got nice backlogs heading into 'twenty three all of that really makes us feel pretty positive about what's going on in our industrial segment.

Great. Thanks for taking my questions.

Yep.

Thank you one moment for your next question.

Your next question comes from the line of Matt Summerville from D. A Davidson.

Good morning, this is Jonathan on for Matt today.

Wanted to ask you.

In addition to the facility expansion plans, you've laid out for investing organically in the business I was curious as to.

You're thinking about investing inorganically in the business and whether or not you have a pipeline that you believe is actionable at the moment and what kinds of businesses you would be interested in adding to the great co portfolio.

Part of that process.

Yes. So good question. Thanks for asking it I mean for sure. We're trying to put every penny back into this business that we possibly can.

In good times and in bad we're going to keep investing in product development and upgrading our facilities, making capital investments that have good returns on investment associated with them and everybody that follows the company knows that notwithstanding that we still generate enough cash to be able to look at things like acquisitions, I would say that the.

The teams over the last year have done a pretty good job of working with the corporate team in developing pipelines and looking at various applications both within their existing markets as well as Adjacencies, where we think we can drive some value.

For us the value is really on the production side, we've got great manufacturing on the engineering side I think we bring some skills there and then of course channel.

Sales marketing and the infrastructure that we have around the world. So I feel really good about that.

Where we're at in the journey here.

You kind of step things up last year, all the business units now have decent pipelines, there's activities going on we'll see what happens the market has been a bit frothy as everyone knows over the last 18 months or so but with rates coming up and.

Multiples coming down.

I think that could create some opportunities for <unk> to help add some growth through good strategic acquisitions, Yes, I would just add to Mark's point that the corporate group has spent a lot of time with the operating teams and really is flushed out.

Attractive segments and from there attractive what I would call.

Our prospect list with an E.

Towards.

Reaching out.

Perhaps building up a relationship with <unk>.

<unk> about their businesses.

For there is a day, where there is an event.

We've been in those situations before when we're going to reactive mode.

And that's not the greatest.

As far as just.

Not getting specific on applications I would say that things that we liked markets. They have characteristics we like.

We like niche markets.

We like markets that are business to business we.

We like markets that have large installed base because that.

Long term participants in extremely.

Strong positions of course, we like recurring revenue.

And there is no doubt about it markets that will pay.

Our supplier for quality and innovation.

As important to us because it's central to our value proposition.

That's great. Thank you for taking my question.

Thanks.

Thank you one moment for your next question.

Your next question comes from the line of Joe Ritchie from Goldman Sachs.

Thank you and good morning, everyone. Good morning.

So I just want to make sure I understand the framework for the low single digit guidance for 2023, I guess the expectation is.

Thing is going to come in.

Pretty much low single digits, the volumes, maybe flat to down.

Is that is that did I understand that correctly.

Yes, we didn't really break out price versus volume and our outlook, but when you roll. It all up that's where you get the low single digit guide, we do have a lot of.

Built in price realization in.

And the outlook because of course, we raised prices a couple of times last year and those as we kind of roll through 'twenty three versus 22, there should be some favorability there, but we didn't really break out volume and the overall outlook.

Okay, then maybe maybe just on the pricing comment as you're as you're exiting 2022, how much of that pricing carries forward into 2023.

Well again last year, we started the year.

Kind of let's call. It ground zero, we'd had a big price increase that came through in January and then another one in.

The September time frame, so at least for the first nine.

Nine months or so you will you kind of get that double effect of those two price increases that we do get to September we should be on par with where we're at at that time a year ago.

And when you age our backlog the vast majority of our backlog.

Flex.

<unk> 'twenty to 'twenty, two pricing either in January or the interim adjustment, we made at the middle of the year.

Got it yes.

Yes that makes sense I guess, maybe just focusing on the contractor segment for a second.

This segment, it's really incredible the growth you've seen.

Over the last several years.

It's almost shocking that it's almost 70% of your revenue base is at the end of last year.

Yes.

You mentioned that the pro is continuing to stay pretty healthy demand outlook and theres been a divergence between the pro and the home Center I guess just in your experience is that is that typical that.

When you have cycles in that business that there is divergent trends and what youre seeing on the pro side versus the home center side or would you expect that to start to converge at some point if the demand outlook.

We can.

Yes, I don't really I don't really know I mean, what I would tell you is that at least with regard to the home center over the last couple of years has been kind of crazy rate with all the stimulus money and people working from home and.

Hanging out at home depot doing projects that kind of a thing so it probably doesn't really line up with.

What we may have seen historically money was free for a long time now monies that free anymore. So.

I do believe that the consumer is going to retrench, a little bit and that likely would show up on that side of the business.

On the pro side again, our experience has always been that if they've got jobs. So they've got a pipeline and they're busy and they can see projects going out they buy new equipment. Typically if you are a painter and you buy a new sprayer and you're busy you can pay for that thing like within one or two job. So it's a really quick payback plus you get all the.

The benefits of having a new tool and a new piece of equipment. So it's sort of a confidence thing for them and with all the different projects and things that they get involved with at least for now appears to be on fairly good footing.

Got it and if I could sneak one last one in on contractor.

I don't think about normalized margins for that business.

Because I remember a time when the margins were in the low <unk> and there were there was there.

There is an opportunity for them to.

Really expand as you mixed up.

Sure.

Product.

They are being sold higher price sprayers.

How do you guys think about normal margins for the contractor segment overtime.

So one thing I'd just point out is if you go back historically never had the.

The protective coatings or the spray foam.

Their numbers and those are those are in our industrial business. So it's a little bit hard to go back and compare what I will say as we we don't really have a target.

For our teams when it comes to <unk>.

Margin increases and what we're trying to get to I think that if the volume is there.

And we can get a little bit of relief on the price cost equation, which we've really not seen much in contractor that their margins.

<unk> can trend higher so.

A couple of years ago somebody would probably have said well gosh. Your industrial margins are so high where do you go from here and if you look at what we did this year I mean, we went from 33% operating margins last year to 36. This year and we were at 37 in the fourth quarter. So we don't really put a lid on these things for our people.

<unk>.

They get incentivized to grow the business, both on the topline and the Bottomline and.

We find ways to do it.

Super helpful. Thank you.

Thank you Joe.

I'll ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised.

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One moment for our next question.

Our next question comes from the line of Jeff Hammond from Keybanc Capital Markets, Inc.

Hey, good morning.

Yes.

In the presentation. You said you said you change something in the presentation I don't know if you. If you clarified what is changing I think you said.

You're changing from our growth in all markets and regions, maybe just some clarification on that.

Sure.

We are taking out the quote with growth expected in all segments and regions and just leaving it to be.

<unk>.

Full year.

Both in the low single digit range.

Organic constant currency basis.

So does that imply that there is a there is a geography or segment that you would expect to be down.

It's just the overall comment we couldnt really get real like I said, we can't really fine tune, our micromanage, where things are going to come from so we wanted to make sure that we put that clarification in there. Unfortunately that little note at the bottom was a carryover from the.

The slide that we had published previously it just didn't get.

Didn't get modified so I wouldn't read too much into it.

Unfortunate.

Clerical error, but we're still really confident in the overall guide of this low single digit for now.

Okay perfect.

I think you mentioned you've been mentioning I think pretty consistently.

Process semi conductor and maybe this quarter just can you just remind us what your focus is there and then theres been a lot of that market's been strong, but theres been a lot of capex cuts.

And worries around semi I'm wondering if you're seeing any of those cracks and just.

Maybe even as we go longer term, how you think the chips act and some of the longer term growth kind of plays into that market.

Yes, we like the business, it's been really strong for us its growing I think 10 times since we bought it so there's not much negative to say about it.

There is still.

Business happening there.

We make these high purity components and pumps that go into the equipment, that's used to actually manufacture chips.

So if they are putting in a new fab somewhere they're going to need the equipment to go inside of the fab that's being that's being built so you've got the.

The backlog that was created by all the business that's happened over the last couple of years and then now is.

Manufacturers are looking to move locations around the world that creates opportunities for us to go in and sell them new high purity equipment.

We bought some other businesses kind of around that do things like Keating and then some of the.

Some of the <unk> that are used to actually how is the chemicals before they get pumped and put in so although we like the space, we're in a nice niche and.

Feel pretty good about it and I would just add that in terms of the capital investment spend.

The big Fab investments that you read about it and actually we've been reading about for a couple of years now.

The ones.

'twenty, one and 'twenty two they're going to play out over the next couple of three years. So there is.

Theres some legs in this space, because it's let's say longer cycle than the <unk> average.

Okay. Thanks.

Thank you one moment for your next question.

Your next question comes from the line of Thomas Jonsson from Morgan Stanley .

Hi, Thanks, I, just wanted to revert back to the contractor segment here.

I know in your comments you had noted limited pro paint product availability as a headwind in the EMEA business.

So it would just be helpful. If you could get some incremental color on exactly how that headwind, it's impacted the business and maybe what you've seen in terms of improvement or easing availability there.

Yes, So I think the comment was about EMEA as you said and in the quarter were actually down, but if you were to add.

Back out the Russia business that we had a year ago and currency. It was actually sort of a flat environment for us in <unk>.

Contractor EMEA, but as you noted and we mentioned part of that we also believe it would've been a better quarter for us and a better year. If we were able to get some of the more higher end pro units over to Europe .

In a more timely manner.

As you probably know we've been battling electronic components and different <unk>.

Aspects of the.

The things that go into our higher end sprayers throughout the year and our team over in EMEA believes that if we had better flow of those products that they would've posted better numbers.

Great.

That's very helpful. And then just in terms of.

What you've seen from improvements in availability and.

I know not looking for a region level outlook, but obviously is it fair to assume that those headwinds on a year over year basis will be easing in 2023 for that business in the region.

Yes, I think we saw a pretty good improvement as we got through the back half of last year.

We're still faced with some component shortages in things like electronics, but I would characterize it overall as we're in a better spot today than we would have been in the past.

Great. Thank you.

Thanks.

Thank you one moment our next question.

Our next question comes from the line of Walter Liptak from Seaport Research.

Hey, good morning, guys alright. Thanks.

Thanks for the clarity about EMEA.

The contract excuse me contracts are part of the business I Wonder if you could just talk maybe a little bit more generally about.

About what.

We've seen some macro data get a little bit better recently.

What's been your experience there industrial and process.

Well I would say that if we're talking EMEA.

On the I'll call it macro data side certainly the.

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The economic outlook picture for Germany, which is.

Europe's largest industrial industrial market I would say bodes.

Maybe if you call it a bright spots in exaggeration, but is.

Is.

Favorable.

Favorable attribute.

Our people on the ground in Europe .

Indicate that.

That we have had.

A milder winter than.

I guess than some people were projecting and which we've which we've had in which we've had in prior years and that really and that really helps so the fact that energy prices have stabilized.

And I think that also work with the Europeans youre doing around conservation.

Some new sources of natural gas and.

And even extensions of nuclear and coal.

Probably help people in our space quite a bit.

In terms of natural gas prices were down about 50% from peak our people tell us and electric prices are down about 30%.

Those are still at elevated levels, but a pretty a pretty dramatic change and I guess lastly, always an important market for Europe .

Automotives automotive has had a couple of tough years, there along with here in North America, but retail auto sales are improving as well.

Okay great.

Similarly, China it looks like its beginning to open up.

<unk> were a little bit better can you talk to us about just your exposure there.

Is it mostly supply chain or do you benefit from an improving economy.

Yes, we should we should benefit in China from an improving economy, hopefully now that they are opening things up I think they are still going through this.

Covid wave over there, but the people that we talk to our team basically says things are getting better literally by the week. So as they as they open up more it should be more activity for us big part of that business is industrial.

All the factories that we serve.

And obviously all of the alternative energy stuff that we've talked about with batteries solar wind energy all that all those applications are.

Our important for graco, along with automotive so.

Hopefully.

I'll always say this with the greater salt, but hopefully.

Once we work our way through Covid in China that should be some potential upside for the company.

Okay, great. Thank you.

Thank you if there are no further questions I will now turn the conference over to Mark she hands.

Okay. Thank you everyone I in closing I'd like to.

Thank our employees our suppliers our distributor partners around the world.

Their strong contributions in helping us close to another record year at Graco.

Yes, it's been a challenging year, but in true <unk> fashion, we have been able to overcome the hurdles and deliver significant shareholder and customer value.

While there are many things that contributed to our strong performance, it's really our loyal and hardworking employees that make this company great.

That concludes today's call thanks for participating and have a good day.

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

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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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 website at Www Dot Graco Dotcom Graco has additional information available in a Powerpoint slide presentation, which is.

Available with 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.

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 one a of the company's 2021 annual Roth.

Poor on Form 10-K, and then I don't want any of the company's most recent quarterly report on Form 10-Q.

These reports are available on the company's website at Www Dot Graco dot com and the SEC's website at Www Dot SEC Dot Gov.

We're 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 Sherwin Rock Executive Vice President corporate controller and information systems.

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 <unk> 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 <unk> <unk> per diluted share.

The gross margin rate decreased two 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.

Current cost, 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 rate 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.

Our foreign earnings taxed at higher rates than the U S rate.

We anticipate the effective tax rate for 2023 will be between 19% and 21st.

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 our 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.

This 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 rate and at the moment anticipate the full year effect of currency translation with increased sales and earnings by one percentage point in 2023.

Unallocated corporate expenses are projected to increase in fall within the range of 31% to 34 million.

This increase was 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 in Romania location.

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

Q4 2022 Graco Inc Earnings Call

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