Graco Inc.

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 855-859-2056 within the United States or Canada. The dialing number for international callers is 404-537-3406. The conference ID number is 516- The replay will be available through 2 p.m. Eastern Time, Tuesday, February 2, 2021. Graco has additional information available in the PowerPoint slide presentation, which is available as part of the webcast player. At the request of the company, we will open the conference up for questions and answers after the opening remarks from management. During this call, Various remarks may be made by management about their expectations, plans, and prospects for the future. These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the Company's 2019 Annual Report on Form 10-K and an Item 1A of the company's most recent quarterly report on Form 10Q. These reports are available on the company's website at www.greco.com and the SEC's website at www.sec.gov. Looking forward 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 the new information, or future events. I will now turn the conference over to Kathy Schoenrock, Executive Vice President, Corporate Controller.

Good morning. I'm here today with Pat McHale and Mark Sheehan. Our conference call slides have been posted on our website and provide additional information that may be helpful. Sales totaled $470 million this quarter, an increase of 14% from the fourth quarter last year, and an increase of 12% at consistent translation rates. Net earnings totaled $115 million for the quarter, or 66 cents per diluted share. After adjusting for the impact of excess tax benefits from stock option exercises, net earnings totaled $106 million, or 61 cents per diluted share. Gross margin rates increased 130 basis points from last year's fourth quarter. Realized pricing and foreign currency were favorable in the quarter. Mix was also favorable as we saw the margin impact of sales growth in our higher margin industrial segment more than offset the continued strength in our lower margin contractor segment. Operating expenses increased $7 million in the fourth quarter as compared to a year ago due to increases in sales and earnings-based expenses and higher product development costs. The reported income tax rate was 11% for the quarter, down 5 percentage points from last year, primarily due to an increase in tax benefits related to stock option exercises. After adjusting for the effect of stock option exercises, our tax rate for the quarter was 18%, slightly lower than the fourth quarter last year, due to additional foreign income taxed at lower rates. Cash flows from operations totaled $131 million in the fourth quarter, and 394 million for the full year. Discretionary cash outflows in the quarter included the final repayment of 125 million of the 250 million borrowed on the revolving credit facility in the first quarter. We also made a voluntary contribution of $20 million to our U.S. pension plan. For the full year 2020, dividends paid totaled 117 million and capital expenditures were 71 million. A few comments as we look forward to 2021. Based on current exchange rates and the same volume and mix of products and sales by currency, the effect of exchange is currently expected to benefit sales by 2% and earnings by 6% for the full year, with the most significant impact coming in the first half. Unallocated corporate expenses are projected to be 30 million and can vary by quarter. The effective tax rate for the year is expected to be 18 to 19%, Capital expenditures are expected to be $115 million, including $80 million for facility expansion projects. We may make share repurchases in 2021 via opportunistic open market transactions or short-dated accelerated share repurchase programs. Finally, 2021 will be a 53-week year, with the extra week occurring in the fourth quarter. I'll turn the call over to Pat now for further comments.

Thank you, Kathy. Good morning, everyone. All of my comments this morning will be on an organic, constant currency basis. The second quarter in a row, the contractor segment exceeded 30% growth and ended the year with record sales and earnings. Contractor grew in all regions during the quarter and for the year. Residential construction activity remained solid and the home improvement market robust. Contractor North America saw strong out-the-door sales in both propane and home center. and we continue to work hard to maintain adequate channel inventory. The industrial segment grew mid-single digits for the quarter, but still ended the year down 10%. Compared to the previous three quarters, activity improved in some key end markets like spray foam, electronics, and battery. Access to industrial facilities remains limited, but quoting activity has improved. The Asia-Pacific region was up versus last year's Q4, which was particularly weak. Price realization, solid factory performance, and good expense management combined with improved sales resulted in strong industrial operating earnings for the quarter. Process segment sales declined 10% for both the quarter and the year. A number of markets in our process segment remain challenged, particularly those related to the vehicle lubrication or oil and gas sectors. Heading into 2021, we expect challenging end market conditions to remain in place in our industrial and process segments for at least the first half of the year as lockdowns persist and access to customers remains limited. Our outlook for the contractor segment remains positive as favorable conditions continue and demand has been solid to start the year. Thanks to our outstanding employees, suppliers, and distributor partners, we were able to keep our factories and distribution centers fully operational avoid layoffs and wage reductions, and fully invest in our core long-term growth strategies of new product development, channel expansion, and new markets. A special thanks is in order to our contractor employees and the employees from other factories who relocated to the contractor factory to assist with the large demand spike in the second half. From the sales team to the shop floor, the contractor team worked incredibly long hours, maintained a positive attitude, and were committed to doing whatever it took to get the job done. Culture matters, and they are winners. We exited the year with momentum and look forward to the fight again this year. Operator, we're ready for questions.