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Investor Presentation

First Half 2020

Safe Harbor

/ / / / / / / / / / / / / / / / / /

Today's presentation includes forward-looking statements that reflect management's current expectations about the Company's future business and financial performance.

These statements are subject to certain risks and uncertainties that could cause actual results to differ from anticipated results.

Factors that could cause actual results to differ from anticipated results are

identified in Part 1, Item 1A of the Company's Form 10-K, and the current

Quarterly Report on Form 10-Q.

2

Distribution

of Global

Sales

61%

$740 M

22%17%

39%

39%

22%

June 2020

Year to Date

Americas

EMEA Asia Pacific

Industrial

Process Contractor

30%

48%

22%

61%

51%

18%

31%

26%

13%

Industrial

Process

Contractor

Industrial

Process

Contractor

Industrial

Process

Contractor

3

2019 Sales by End Market

/ / / / / / / / / / / / / / / / / /

Wood - 1%

White Goods - 2%

Mining - 2%

Vehicle Services - 4%

Public Works - 4%

Oil & Natural Gas - 4%

Other - 9%

Automotive - 11%

Industrial & Machinery - 16%

Construction - 48%

4

Graco is part of your

everyday life.

5

Graco is part of your

everyday life.

6

Diversified

Fluid

Handling

Business

Niche

5.5%+

~40%

Difficult applications; corrosive,

Organic Revenue CAGR*

Of revenue is parts

viscous, hard-to-move materials

& accessories

*20-year average, constant currency

7

High Customer

Best in Class

Delivery

Material

Supplier

Relationships

End User

Interaction

Value, Strong

Product

Differentiation

Leading New

Product

Investment

Stringent

Product

Requirements

Customer

ROI

Lowest Total

Cost of

Ownership

Niche

Markets

Strong

Channel

Partners

Best in Class

Quality

8

Low Volume, High Mix Delivers Customer ROI

Average Number of Units

No. of SKUs

2019 Sales

Sold Per Day

($ in millions)

0 - 1

63,700

93%

$ 846

51%

2 - 5

2,800

4%

$ 258

16%

6 - 10

800

1%

$ 126

8%

11 - 15

300

0%

$ 51

3%

Greater than 15

800

1%

$ 365

22%

Graco 2019

68,400

$1,646

Highly-valued products

at low volumes

51%

of our revenue

comes from products

that we sell

zero to one

per day

9

Growth Plans and Earnings Drivers

/ / / / / / / / / / / / / / / / / /

Strategic Initiatives

12%+

► New Product Development

10%

  • New Markets
  • Global Expansion
  • Acquisitions
  • End-userConversion

Targeted Revenue

Targeted Earnings

CAGR

CAGR

Through a cycle

10

Growth Plans and Earnings Drivers

/ / / / / / / / / / / / / / / / / /

Acquisitions

Strategic

3-4%

12%+

Initiatives

Price

1-2%

9-10%

1-2%5-7%

3%

Industrial Production

Targeted Organic

Targeted

Targeted Earnings

Average Growth Rate

CAGR

Revenue CAGR

CAGR

Through a cycle

11

Exceptional

Returns

5.5%+

30%

44%

20%

Organic Revenue CAGR

Return on Invested Capital

Return on Equity

Return on Assets

Based on a 20-year average, constant currency

12

Business Model

/ / / / / / / / / / / / / / / / / /

  • Brand Promise
  • Operational Excellence
  • Engineering & Manufacturing Excellence
  • Extensive Reach

13

Our Brand Promise

  • Innovation - Leading with technologically-advanced features, pioneering design, high performance and unparalleled reliability
  • Quality - Our customers invest in high-quality products built to last for years of reliable service
  • A+ Service - We're guided by a mindset of integrity and a customer service view centered on collaboration and relationships, not transactions

14

Engineering

Excellence

Target

Double-Digit

Returns

  • new product

Annual R&D Investment

More than

4.2%*

2.6x

as a percent of sales

*

our peer group

versus peers at 1.6%

* Peers: ITW, CSL, DOV, CFX, IEX, NDSN, WTS, FLS, based on a 5-year average, 2015 - 2019.

15

Manufacturing

Excellence

Goal is

80%

Zero

< 1%

Production based in the US

cost change

Warranty costs

on the same basket of goods (yoy)

16

Service

Excellence

Same Day

96%+

Orders in by noon,

In-stock service level

ship the same day

(goal is > 92%)

17

Extensive Reach

Customers in over

30,000+

100

Installed base

countries

~100

Outlets/Distributors

Facilities in

years old

12

countries

18

Company Segments

/ / / / / / / / / / / / / / / / / /

  • Industrial
  • Process
  • Contractor

19

Industrial

2020 First Half Performance

$292M -22% 29.9%

Segment Revenue

Organic

Operating Margin

- 440 basis points

20

Industrial

Key End Markets

  • General industrial
  • Automotive
  • Res & non-res construction
  • Alternative energy & others

Growth Drivers & Trends

  • Factory movement & upgrades
  • Automation
  • Technology upgrades
  • Energy-efficiencyupgrades
  • Material changes

Select Representative Industry Participants:

Public : Nordson, Carlisle, Exel

Private: Wagner and many other regional players

21

Process

2020 First Half Performance

$164M -11% 18.2%

Segment Revenue

Organic

Operating Margin

-410 basis points

22

Process

Key End Markets

  • Pharma, food & beverage
  • Vehicle services
  • Oil & natural gas
  • Environmental
  • Semiconductor & others

Growth Drivers & Trends

  • Factory movements and upgrades
  • Technology upgrades
  • Energy-efficiencyupgrades
  • Asset life maintenance
  • Commodities extraction
  • Environmental regulations

Select Representative Industry Participants:

Public: IDEX, Dover, Ingersoll Rand

Private: Lincoln, Vogel, Bijur, Hannay, Coxreels and many other regional players

23

Contractor

2020 First Half Performance

$285M 1% 24.5%

Segment Revenue

Organic

Operating Margin

+100 basis points

24

Contractor

Key End Markets

  • Res & non-res construction
  • Res & non-res remodeling
  • Transportation Infrastructure

Growth Drivers & Trends

  • End user conversion from brush and roll
  • Product innovation & channel expansion
  • Housing & new construction
  • Infrastructure spending
  • Regional labor rates
  • New markets
  • Material changes

Select Representative Industry Participants:

Private: Wagner/Titan, Campbell Hausfeld, Bedford, China copiers and other regional players

25

Capital Allocation

/ / / / / / / / / / / / / / / / / /

26

Long-Term Cash Deployment Priorities

/ / / / / / / / / / / / / / / / / /

Organic

Growth

Acquisitions

Shareholder

Return

  • International footprint
  • Product development
  • Production capacity and capabilities
  • Supplement to organic growth
  • Leverage our strengths
  • Solid dividend history
  • Approximately 18.5 million shares remaining on repurchase authorization

27

  • Drive long-term,above-market growth
  • Premium products that deliver strong ROI for end users
  • Leading industry positions
  • Serve niche markets where customers are willing to purchase quality, technology-based products
  • Products perform critical functions
  • High margin, high recurring revenue
  • Consistent investments in capital and growth initiatives
  • Shareholder-mindedmanagement
  • Financial strength

Key Investment Attributes

28

Acquisitions

/ / / / / / / / / / / / / / / / / /

29

Acquisition

  • Industrial

2012

2013

2014

2014

2015

2015

2017

2018

30

Acquisition

  • Process

2013

2014

2015

2015

2016

2019

31

Financial Results

/ / / / / / / / / / / / / / / / / /

32

Minneapolis, MN

Financial Performance June YTD

-11%

51.5%

-42%

-42%

Revenue

Gross Margin

EPS

Net Income

(As Reported)

33

Financial Results

Statement of Earnings

Second Quarter

June Year-to-Date

$ in millions except per share amounts

2020

2019

Change

2020

2019

Change

Sales

$

366.9

$

428.3

(14)%

$

740.5

$

833.2

(11)%

Gross Profit

182.5

227.0

(20)%

381.2

443.0

(14)%

% of Sales

49.8%

53.0%

(3.2) pts

51.5%

53.2%

(1.7) pts

Operating Earnings

44.8

112.4

(60)%

134.6

216.9

(38)%

% of Sales

12%

26%

(14) pts

18%

26%

(8) pts

Net Earnings

$

28.8

$

88.1

(67)%

$

101.7

$

174.9

(42)%

% of Sales

8%

21%

(13) pts

14%

21%

(7) pts

Diluted Earnings Per Share

$

0.17

$

0.51

(67)%

$

0.59

$

1.02

(42)%

Diluted Shares in Millions

170.5

172.0

(1)%

171.6

171.5

0 %

Operating Earnings, Adjusted (1)

$

79.8

$

112.4

(29)%

$

169.6

$

216.9

(22)%

Net Earnings, Adjusted (1)

$

62.3

$

85.9

(27)%

$

127.5

$

166.0

(23)%

Diluted Earnings Per Share, Adjusted (1)

$

0.37

$

0.50

(26)%

$

0.74

$

0.97

(24)%

  1. Operating earnings, net earnings and diluted earnings per share for 2020 and 2019 have been adjusted to provide a more consistent basis of comparison of on- going results. See following page for a reconciliation of the adjusted non-GAAP financial measures to GAAP.

34

Financial Results Adjusted for Comparability

Excluding the impacts of impairment charges, excess tax benefits related to stock option exercises and certain tax provision adjustments presents a more consistent basis for comparison of financial results. A calculation of the non- GAAP measurements of adjusted operating earnings, income taxes, effective income tax rates, net earnings and diluted earnings per share follows:

Non-GAAP Reconciliation

Second Quarter

June Year-to-Date

$ in millions except per share amounts

2020

2019

Change

2020

2019

Change

Operating Earnings, as reported

$

44.8

$

112.4

(60)%

$

134.6

$

216.9

(38)%

Impairment

35.0

-

35.0

-

Operating Earnings, adjusted

$

79.8

$

112.4

(29)%

$

169.6

$

216.9

(22)%

Income taxes, as reported

$

13.2

$

19.7

(33)%

$

22.5

$

33.6

(33)%

Impairment Tax Benefit

1.2

-

1.2

-

Excess tax benefit from option exercises

0.3

2.2

8.0

7.4

Other non-recurring tax benefit

-

-

-

1.5

Income taxes, adjusted

$

14.7

$

21.9

(33)%

$

31.7

$

42.5

(25)%

Effective income tax rate

As reported

31%

18%

18%

16%

Adjusted

19%

20%

20%

20%

Net earnings, as reported

$

28.8

$

88.1

(67)%

$

101.7

$

174.9

(42)%

Impairment, net

33.8

-

33.8

-

Excess tax benefit from option exercises

(0.3)

(2.2)

(8.0)

(7.4)

Other non-recurring tax benefit

-

-

-

(1.5)

Net earnings, adjusted

$

62.3

$

85.9

(27)%

$

127.5

$

166.0

(23)%

Weighted Average Diluted Shares, in millions

170.5

172.0

171.6

171.5

Diluted Earnings per Share

As reported

$

0.17

$

0.51

(67)%

$

0.59

$

1.02

(42)%

Adjusted

$

0.37

$

0.50

(26)%

$

0.74

$

0.97

(24)%

35

Non-cash Impairment

  • In the second quarter, the Company entered into negotiations to sell its U.K.-based valve business ("Alco"), which has significant exposure to oil and natural gas markets, and has accumulated operating losses since acquired in 2014. Alco operations contributed $7 million of sales for the year to date and are included within the Company's Process segment
  • Based on the negotiations to sell, the Company revalued its investment in Alco, recording non-cash impairment charges of $35 million, including $24 million of previously unrealized foreign currency translation losses recorded in accumulated other comprehensive income. The impact of the impairment on net earnings was $34 million or $0.20 per diluted share
  • The sale of Alco was completed in the third quarter

36

Second Quarter 2020 Results

Sales

► Down 14 percent from 2019, down 13 percent at consistent exchange rates

▪

Acquired businesses added 2 percentage points

Gross Margin

► Rate down 3.2 percentage points from 2019

▪

Unfavorable product and channel mix and lower factory volume driving decrease in gross

margin rate. Realized pricing remains strong

▪ Currency translation rates continue to have an unfavorable impact

► Operating earnings, excluding non-cash impairment, down $33M, 29%

Operating

▪ Decline in volume driving lower operating earnings, partially offset by lower volume-related

expenses

Earnings

▪

Unfavorable currency translation decreased operating earnings

► Operating earnings, as reported, down $68M, 60%

Other

▪ Non-cash impairment charge of $35M

►

Decreased $2 million

Expense

▪ Driven by market value gains on investments used to fund certain retirement benefits

liabilities

Taxes

► Effective tax rate for the quarter was 31%, up 13 percentage points from second quarter

2019

▪ Increase due primarily to non-deductible impairment charges

37

First Half 2020 Results

Sales

► Down 11 percent from 2019, down 10 percent at consistent exchange rates

▪

Acquired businesses added 2 percentage points

Gross Margin

► Rate down 1.7 percentage points from 2019

▪

Strong realized pricing not enough to offset unfavorable product and channel mix and lower

factory volume

▪ Unfavorable currency translation accounts for nearly 25% of the decline

► Operating earnings, excluding non-cash impairment, down $47M, 22%

Operating

▪ Decline in volume driving lower operating earnings, partially offset by lower volume-related

expenses

Earnings

▪

Unfavorable currency translation decreased operating earnings

► Operating earnings, as reported, down $82M, 38%

Other

▪ Non-cash impairment charge of $35M

►

Increased $3 million

Expense

▪ Primarily driven by market value fluctuation on investments used to fund certain retirement

benefits liabilities

Taxes

► Effective tax rate for June year to date was 18%, up 2 percentage points from the

comparable period in 2019

▪ Increase due primarily to non-deductible impairment charges was partially offset by additional

excess tax benefits from stock option exercises

38

Financial Results

Components of Net Sales Changes

Second Quarter June 2020

Segment

Region

Industrial

Process

Contractor

Americas

EMEA

Asia Pacific

Consolidated

Volume and Price

(28)%

(16)%

1 %

(11)%

(30)%

(9)%

(15)%

Acquisitions

0 %

8 %

0 %

1 %

2 %

4 %

2 %

Currency

(1)%

(1)%

0 %

0 %

(2)%

(2)%

(1)%

Total

(29)%

(9)%

1 %

(10)%

(30)%

(7)%

(14)%

Year to Date June 2020

Segment

Region

Industrial

Process

Contractor

Americas

EMEA

Asia Pacific

Consolidated

Volume and Price

(22)%

(11)%

1 %

(7)%

(21)%

(13)%

(12)%

Acquisitions

0 %

7 %

0 %

0 %

2 %

3 %

2 %

Currency

(1)%

(1)%

(1)%

0 %

(2)%

(2)%

(1)%

Total

(23)%

(5)%

0 %

(7)%

(21)%

(12)%

(11)%

June 2020 YTD Sales by Currency

Euro

14% European, non-Euro

5%

USD

65%Asian

12%

Americas, non-USD 4%

Asian currencies include: AUD, CNY, KRW, JPY

European, non-Euro currencies include: CHF, GBP, RON

Americas, non-USD currencies include:

BRL, CAD, MXN

39

Other Items

Cap Ex

Capital expenditure expectations of approximately $80 million in 2020,

including approximately $50 million facility expansion

Expenses

Unallocated corporate expenses in 2020 are expected to be approximately

$30 million

Shares

Through June 2020, we repurchased 2.3 million shares. We may make

opportunistic repurchases going forward

At current exchange rates, assuming the same volumes, mix of products

Currency

and mix of business by currency as in 2019, the unfavorable movement in

foreign currencies would have no impact on sales and be a headwind of

approximately 1% on earnings in 2020

At our current estimate of results and mix of earnings, we anticipate the

effective tax rate for the third quarter and the full year to be between 20% -

Taxes

21%, excluding any impact from excess tax benefits related to stock option

exercises and other one time items. Actual results and mix of earnings

may materially impact the expected tax rate for the third quarter and full

year

40

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Graco Inc. published this content on 06 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 06 August 2020 18:38:06 UTC