Graco Inc.

Good morning, and welcome to the second 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 978-5074. The replay will be available through 2 p.m. Eastern Time, Thursday, July 29th. Graco has additional information available in 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 the safe harbor provisions of the Private Security Allegation 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 2020 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 owner takes 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.

Thank you, Shannon. Good morning, everyone. I'm here this morning with Mark Sheehan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion. Our conference call slides and our second quarter form 10Q are on our website and provide additional information on our quarter. Yesterday, Graco reported second quarter sales of $507 million, an increase of 38% from the second quarter of last year. The effects of currency translation added 4 percentage points of growth, or approximately $12 million in the second quarter. Reported net earnings were $110 million for the quarter or $0.63 per diluted share. After adjusting for the impact of excess tax benefits from stock option exercises, net earnings were $108 million or $0.62 per diluted share. Gross margin rates were up 220 basis points from the second quarter of last year as a favorable effect from realized pricing, increased factory volume, product and channel mix, and currency translation, offset the unfavorable impact of higher product costs. Mix was favorable in the quarter due to the strong sales in the higher margin industrial segment. Supply chain constraints, such as logistics capacity and component availability, had an unfavorable impact in the quarter and will likely persist for the rest of the year. On a sequential basis, gross margin rates were down 250 basis points, as we saw cost pressures such as material, labor, freight, and volume-based costs increase throughout the quarter. The majority of these cost increases impact the contractor segment, as that is our highest volume business. We also saw unfavorable mix on a sequential basis due to projects in Asia Pacific in the industrial segment. At current costs and volumes, we are estimating that realized price strong factory performance, and current production activity will offset higher product costs on a full year basis. Our operating teams are working diligently to minimize the disruptions and have been effective at keeping pace with our incoming order rates. Operating expenses increased $27 million, or 26% in the quarter. Sales and volume-based expenses increased $18 million against a very low comparable in the prior year. New product development and currency translation rates each increased operating expenses by $3 million. The adjusted tax rate for the quarter was 18%. Cash flows from operations are at $220 million for the year, compared to $143 million last year. This increase is due to the improvement in earnings in the quarter, partially offset by increases in accounts receivable and inventories that reflect the growth in business activities. Significant uses of cash are dividend payments of $63 million and capital expenditures of $55 million, including $21 million for facility expansion projects. A few comments as we look forward to the rest of the year. Based on current exchange rates, the full year favorable effect of currency translation is estimated to be 2% on sales and 5% on earnings, with the most significant impact having occurred in the first half of the year. We expect unallocated corporate expense to be approximately $30 million and can vary by quarter. Our full year adjusted tax rate is expected to be approximately 18% to 19%. Capital expenditures are estimated to be $150 million, including $90 million for facility expansion projects. Finally, 2021 will be a 53-week year, with the extra week occurring in the fourth quarter. I'll turn the call over to Mark now for further segment and regional 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 second quarter grew by double digits in every segment and every region. Broad-based growth for the quarter and for the year continued in all major product categories, resulting in record quarterly sales and operating earnings. I would like to thank all of our employees, suppliers, and distributor partners who continue to work long hours keeping up with customer demand while navigating logistical and supply chain challenges. Growth in contractor continues. This is its fourth consecutive quarter with near 30% sales growth. The residential construction and home improvement markets have been strong in North America. Demand in EMEA and Asia Pacific has accelerated, resulting in sales exceeding pre-pandemic levels. We are optimistic that incoming order rates will remain good in all regions during the second half of the year, However, from a growth rate perspective, our comparisons become much more difficult due to the large increases experienced in the second half of last year. The industrial segment grew substantially during the quarter and for the year with sales volume either near or exceeding pre-pandemic levels in all regions. Quoting activity increased throughout the quarter as many of our key end markets continued to recover. Incoming order rates remain elevated as the pace of business accelerates worldwide. Process segment sales grew 29% for the quarter and 17% for the year. Similar to industrial, sales volumes were also either near or exceeding pre-pandemic levels in all regions. And market growth remains broad-based, with key product categories up for the quarter. The strong recovery in both our lubrication and process pump businesses drove sales and earnings growth for the quarter in the segment. Moving on to our outlook. We have reinitiated our revenue guidance for the full year 2021 and are projecting mid to high teens revenue growth on an organic constant currency basis. Incoming orders continue to be robust in all regions with the industrial and process segments now on a solid footing and should finish the year strong. Favorable operating conditions remain in contractor. However, second half comparisons are challenging. Operator, we're ready for questions.