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 visiting the company's website at www.graco.com. 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 future. These remarks constitute forward-looking statements for the purpose of the safe harbor provision of the Private Security Litigation Reform Act. Actual results may differ materially from those indicated as a result of the various risk factors, including those identified in item 1A of the company's 2022 annual report on the 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 Chris Knutson, Executive Vice President, Corporate Controller.

Good morning, everyone, and thank you for joining our call. I'm here today 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 commentary. Yesterday, Graco reported fourth quarter sales of $567 million, an increase of 2% from the fourth quarter of last year. The effect of currency translation increased sales by one percentage point, or approximately $6 million. Reported net earnings decreased 13% to $110 million for the quarter or 64 cents per diluted share. In December, the company transferred $147 million of its pension obligations to an insurance company through the purchase of an annuity contract. In connection with the transfer, we recognized a non-cash pre-tax pension settlement charge of approximately $42 million recorded in other non-operating expense. Excluding the impact of this pension settlement loss, certain non-recurring tax provision adjustments, and excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $137 million or 80 cents per diluted share, an increase of 10%. The gross margin rate increased 370 basis points in the quarter, strong price realization, and lower product costs were more than enough to offset lower factory volumes. Total operating expenses increased $10 million, or 8% in the quarter, mainly due to volume and rate-related increases of $3 million, as well as higher sales and earnings-based expenses of $3 million. Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of 2.5 percentage points. The adjusted effective tax rate was 19% for the quarter. Cash provided by operations totaled $651 million for the year, an increase of $274 million from last year, mostly driven by higher net earnings and a reduction in inventory purchases. Cash provided by operations as a percent of net earnings is 129% for the year. Significant year-to-date uses of cash include dividends of $158 million, share repurchases of $102 million which were offset by share issuances of $60 million, debt repayment of $75 million, and capital expenditures of $185 million, including $108 million of facility expansion projects. A few comments as we move forward to 2024. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency as in 2023, movement in foreign currencies would have no impact on net sales or net earnings for the full year. Unallocated corporate expenses are projected to increase to a range of $41 to $44 million with the increase related to share-based compensation. The effective tax rate is expected to be 19.5% to 20.5% excluding any impact from excess tax benefits related to stock option exercises and other one-time items. We expect capital expenditures to be approximately $120 million, with $60 million for facility expansion projects. Since 2018 and through 2024, we will have invested nearly $500 million to expand our global manufacturing capacity. By the end of this year, we will have completed expansion projects for nearly all of our operations, which should set us up for several years of growth. I'll now turn the call over to Mark for further segment and regional commentary.

Thank you, Chris. Good morning, everyone. All my comments this morning will be on an organic constant currency basis. Sales in the fourth quarter were up low single digits, resulting in quarterly and annual records for both revenue and operating earnings. Our industrial and process segments saw record annual sales, and I'm encouraged by the fourth quarter sales growth in our contractor segment. All segments finished the year with record annual operating earnings. Pricing actions implemented in late 2022 and at the beginning of 2023 drove sales growth and gross margin expansion during the quarter and for the year. Our strong price realization across all businesses and regions combined with improved product availability, stable product costs, and favorable product and channel mix and contractor resulted in meaningful improvement in our gross margin rate. These improvements resulted in company-wide incremental margins of nearly 150% for the year. Adjusted net earnings expressed as a percentage of sales was 24% for the year, which is the highest in company history. Pricing actions taken in early 2024 closely resemble traditional levels in terms of size and cadence, with all segments and regions initiating price increases at the beginning of the year. At the end of 2023, our consolidated backlog was $280 million, which was $75 million below last year's ending backlog. Backlogs have returned to normal levels within most product categories, but continue to remain slightly elevated in our semiconductor and powder coatings businesses. Now turning to some commentary on our segments. Contractor segment sales improved in the fourth quarter, growing at low single digits. Soft demand in the home center channel and challenging global construction markets remain headwinds. However, new product introductions and continued strength in the protective coatings and spray foam product categories were more than enough to offset these headwinds in the quarter. Operating earnings were 29% for the quarter and for the year as contractor benefited from pricing actions and favorable product mix by selling larger professional units and fewer home center units. Heading into 2024, we're cautiously optimistic about business conditions based on improving global construction indicators. As affordability improves, New and existing home sales are predicted to increase throughout the year, along with expected growth in commercial and non-residential spending. The industrial segment achieved record sales and earnings for the year, despite a 1% revenue decline in the fourth quarter compared to last year. Growth in liquid finishing and sealant and adhesive product lines were not enough to offset the impact of lower powder finishing system sales in EMEA and Asia Pacific in the quarter. Fourth quarter 2022 represented peak revenue for our powder finishing group as projects delayed during the pandemic were completed and placed into service. Our process segment grew 4% in the quarter and 11% for the year. For the year, we saw growth in all regions and reported record earnings. Increases were posted for the quarter in many business units and across all reportable regions, led by double-digit growth in vehicle services and process pumps. Price realization and increased volume drove incremental margins of 89% in the fourth quarter and 83% for the full year. We had broad-based revenue growth in all our businesses this year, resulting in record operating profit margins for the segment. Moving on to our outlook. As we enter 2024, we're keeping a close eye on incoming order rates and global economic indicators. Despite difficult macro economic environment, we remain committed to our core strategies of launching new products, entering new markets, expanding our global channel and pursuing strategic acquisitions. As a result, we're initiating revenue guidance for full year 2024 of low single digit growth on an organic constant currency basis. That concludes the prepared remarks. Valerie, we're ready for questions.