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 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. 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 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. Please go ahead.

Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheehan and David Vo. 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 we reported second quarter sales of $549 million, an increase of 8% from the second quarter of last year. Reported net earnings were $117 million for the quarter, or 68 cents per diluted share. The effect of currency translation rates was a substantial headwind in the quarter on both sales and earnings, decreasing sales by 4% or 15 million and decreasing net earnings by 8% or 7 million. We expect translation rates to continue to be a challenge for the remainder of the year. At current exchange rates, we expect the full year unfavorable effect of currency translation to decrease sales by 3% and earnings by 7%, with the impact in the second half being similar to what was experienced in the second quarter. The growth margin rate was down 300 basis points from the second quarter of last year and down 250 basis points from the first quarter. During the quarter, material costs accelerated from the already elevated levels of the previous year. Our beginning of the year pricing actions were not enough to offset the impacts of these additional costs on the gross margin rate. Given the cost increases we are experiencing, we are implementing interim price increases across all segments and regions. These pricing actions will begin to take effect throughout the third quarter. At current costs and volumes, we expect that our 2022 pricing actions will offset the input cost pressures on a dollar basis. Of course, the costs of many commodities remain volatile and will be closely monitored. Operating expenses decreased 10 million or 7% in the quarter. Sales and volume-based expenses decreased 6 million against a high comparable in the second quarter of last year. Currency translation rates also decreased operating expenses by 3 million. The adjusted tax rate for the quarter was 20% due to the unfavorable effects a foreign earnings tax at higher rates than the U.S. rate. We anticipate this trend will likely continue and expect our estimated annual tax rate will be 19 to 20 percent. Cash flows from operations are $135 million for the year, a decrease of $85 million from last year, mostly driven by annual incentive payments made in the first quarter and increased inventory purchases to meet demand. For the year to date, we have repurchased 1.7 million shares for 120 million, which will more than eliminate dilution in 2022. We also prepaid 75 million of our private placement debt, made capital expenditures of 89 million, with 48 million related to facility expansion projects, and had dividend payments of 71 million. Finally, our full year estimates for unallocated corporate expense and capital expenditures can be found in the conference call slide deck on page 10. 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. We had a good second quarter with record sales in all reportable segments. Industrial and process experienced broad-based double-digit sales growth in all regions. In contractor, North America remained positive, but EMEA and Asia Pacific saw declines in the quarter. Lost sales to Russia and the extended China shutdown contributed to the modest declines. Product availability remained challenging in contractor due to component shortages and labor constraints at our suppliers. Our consolidated backlog was $430 million at the end of the quarter, which is $65 million higher than at the end of last year, and $190 million higher than the same period a year ago. While we are still experiencing regular supply disruptions, weekly material receipts have increased since the beginning of the year, with nine of our top 10 suppliers either improving their out-the-door performance or remaining consistent. Electronic components, board assemblies, electric motors, gas engines, and certain castings remain bottlenecks. Despite these challenges, factory output was strong, resulting in a $15 million decline in backlog from the end of the first quarter. Since 2018, we have invested $425 million to expand our global manufacturing capacity. This expansion has allowed us to support higher demand with increased output by nearly 30% during the same period. These investments, combined with improving component availability, gives us confidence that we will be able to deliver enough products to reach our 2022 revenue outlook. One more thing before commenting on our segments. Since commodity prices and component costs have continued to rise, we will be implementing another round of price increases starting this August. While we recognize the cadence is different than what we've done historically, our actions are not isolated given the current operating environment. We anticipate resuming our normal pricing cadence at the beginning of next year. Now turning to some commentary on our segments. After a very long, strong second quarter last year and following several years of record growth, the contractor segment was up low single digits for the quarter. Ongoing component shortages in this segment have resulted in delayed shipments to customers in all regions. Incoming order rates have slowed in an environment of rising mortgage rates and lower home sales. However, contractors remain busy and forecasts for commercial construction and remodeling activity remain positive. In addition, we still have an elevated backlog of near $95 million, which is up 10% since the end of last year and is nearly double the same period a year ago. Profitability improves sequentially in the quarter due to lower expenses and earlier pricing actions. The industrial segment posted its sixth consecutive quarter of double-digit growth. The segment grew in all reportable regions and achieved second quarter records for sales and operating earnings resulting in strong incremental margins of 62%. Despite the impact of the pandemic-related shutdowns in China, demand remains robust in multiple product categories. Booking rates in Asia Pacific improved toward the end of the quarter when these mobility restrictions were largely lifted. Backlog is up $30 million compared to the end of last year and $60 million compared to the same time a year ago. The process segment grew sales 27% for the quarter, resulting in records for both revenue and operating earnings. We saw strength in worldwide demand for lubrication equipment, process pumps, environmental, and semiconductor products. Profitability for the quarter was strong despite some negative impacts from cost pressures on key components. Moving on to our outlook. Demand in the Americas remains firm in all segments. Our outlook for EMEA remains cautious due to softening economic conditions and geopolitical uncertainty. Pandemic-related shutdowns in China also affected incoming order rates, however, Once these restrictions were lifted, we saw orders improve significantly. With our backlog near record levels, plus the effects of our pricing actions, we are confirming our 2022 revenue guidance of high single digits on an organic constant currency basis with growth expected in every reportable segment. In closing, I want to thank all of our employees for overcoming the many commercial and operational hurdles we have seen in this difficult operating environment. They make major contributions to our markets and customers every day, striving to deliver A-plus customer service. That concludes our prepared remarks. Operator, we're ready for questions.