Graco : 4th Quarter 2019 Conference Call Slides

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4th Quarter 2019 Earnings Conference Call

January 28, 2020

Safe Harbor

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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 Item 1A of the Company's Form 10-K, and Item 1A of the most recent Quarterly Report on Form 10-Q and also the Company's Earnings Release dated January 27, 2020.

2

Conference Call Logistics

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The release, accompanying slides and replay webcast are available online at www.graco.com/ir

Telephone replay will be available after 2 p.m. ET, January 28, 2020. The replay by telephone will be available through

2 p.m. ET, February 1, 2020.

• 888-203-1112- Conference ID #8157037
• 719-457-0820- with the same conference ID #, for international participants

3

Financial Results

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Statement of Earnings		Fourth Quarter			Full Year
$ in millions except per share amounts	2019	2018	Change	2019	2018	Change
Sales	$	412		$	406	1 %	$ 1,646		$ 1,653	0 %
Gross Profit		209			209	0 %		860			883	(3)%
% of Sales	50.8 %		51.4 %	(0.6) pts	52.2 %		53.4 %	(1.2) pts
Operating Earnings		104			97	8 %		424			436	(3)%
% of Sales	25.3 %		23.8 %	1.5 pts	25.8 %		26.4 %	(0.6) pts
Net Earnings	$	85		$	74	15 %	$	344		$	341	1 %
% of Sales	20.6 %		18.1 %	2.5 pts	20.9 %		20.6 %	0.3 pts
Diluted Earnings Per Share	$	0.49		$	0.43	14 %	$	2.00		$	1.97	2 %
Diluted Shares in Millions		171.8			170.9			171.6			173.2
					12 %					0 %
Net Earnings, Adjusted (1)	$	82		$	73	$	325		$	326
Diluted Earnings Per Share, Adjusted (1)	$	0.48		$	0.43	12 %	$	1.90		$	1.88	1 %

1. Net earnings and diluted earnings per share for 2019 and 2018 have been adjusted to provide a more consistent basis of comparison of on-going results. See page 18 for a reconciliation of the adjusted non-GAAP financial measures to GAAP.

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Sales

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Components of Net Sales Change

					Fourth Quarter December 2019
			Segment						Region
	Industrial		Process		Contractor		Americas		EMEA		Asia Pacific	Consolidated
Volume and Price	(1)%		(4)%		9 %		4 %		12 %		(19)%		1 %
Acquisitions	0 %		5 %		0 %		0 %		2 %		3 %		1 %
Currency	(1)%		0 %		(1)%		0 %		(3)%		(1)%		(1)%
Total	(2)%		1 %		8 %		4 %		11 %		(17)%		1 %

					Full Year December 2019
			Segment						Region
	Industrial		Process		Contractor		Americas		EMEA		Asia Pacific	Consolidated
Volume and Price	(2)%		1 %		5 %		4 %		7 %		(15)%		1 %
Acquisitions	0 %		2 %		0 %		0 %		1 %		1 %		0 %
Currency	(2)%		(1)%		(1)%		0 %		(5)%		(3)%		(1)%
Total	(4)%		2 %		4 %		4 %		3 %		(17)%		0 %

Sales by Region	2019 Sales by Currency

Fourth	$232M	$112M			Euro
(+4%)	$68M
Quarter
(+11%)		17%	European,
2019		(-17%)
						non-Euro
	$961M					5%
	(+4%)			USD
					Asian
				62%
					12%
		$406M
Full		$279M
Year		(+3%)
2019			(-17%)			Americas,
						non-USD
						4%
	Americas	EMEA	Asia Pacific	Asian currencies include: AUD, CNY, JPY, KRW. European, non-euro currencies include:
	CHF, GBP, RON. Americas, non-USD currencies include: BRL, CAD, MXN

5

Operating Earnings

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	Fourth Quarter		Full Year
2018 Operating Earnings ($M and % of sales)	$ 97		24 %		$ 436			26 %
Translation effect	(2)		0		(15)			0
Price and cost, product and channel mix	3		(1)		0			(1)
Change in volume and earnings-based costs	10		2		14			1
Volume effect on expense leverage	(4)		0		(11)			0
2019 Operating Earnings ($M and % of sales)	$ 104		25 %		$ 424			26 %

Operating Earnings

27 %		27 %	26 %	28 %				26 % 26 %
	26 %		26 %		25 %
						24 %		$436M $424M
$112M $105M	$113M $112M	$115M	$103M	$97M $104M
Q1	Q1	Q2	Q2	Q3	Q3	Q4	Q4	FY	FY
18	19	18	19	18	19	18	19	2018 2019
			$M		% of Sales

Quarter over Quarter Operating Earnings Walk

	($2M)			$10M	($2M)
	($3M)	$4M
$97M						$104M
Q4 2018	Translation	Industrial	Process	Contractor	Unallocated	Q4 2019
		Segment	Segment	Segment	Corporate

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Fourth Quarter 2019

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Sales	Sales increase of 1% in the quarter, up 2% at consistent currency rates
	Acquired businesses sales of $4 million account for 1 percentage point of growth
	Rate down 0.6 percentage point from fourth quarter 2018
Gross Margin		Unfavorable factory volume and unfavorable channel and product mix negatively
	impacting gross margin rate. Realized pricing offset the adverse impact of higher
		material costs, including tariffs
		Unfavorable currency translation rates
Operating	Increased $7½ million, or 8%, from fourth quarter 2018
Earnings		Reductions in volume and earnings-based expenses more than offset increases in
	product development expenses
	Decreased $2 million from fourth quarter 2018
Other Expense
	Gains on investments used to fund certain pension liabilities
	The effective tax rate for the quarter was 16%, down 2 percentage points
Taxes
from fourth quarter last year
		Decrease due primarily to higher excess tax benefits related to stock option exercises

7

Full Year 2019

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Sales	Sales decreased slightly from 2018, up 1 percent at consistent currency
rates
		Acquired businesses had no significant impact
	Rate down 1.2 percentage points from 2018
Gross Margin		Unfavorable factory volume and unfavorable channel and product mix negatively
	impacting gross margin rate. Realized pricing offset the adverse impact of higher
		material costs, including tariffs
		Unfavorable effect of currency translation
	Decreased $12 million, or 3%, from 2018
Operating
	Currency translation rates decreased operating earnings by approximately $15 million
Earnings		Reductions in volume and earnings-based expenses more than offset increases in
		operating expenses, primarily product development
	Decreased $6 million
Other Expense
	Driven by gains on investments used to fund certain pension liabilities and lower
		exchange losses on net assets of foreign operations
	The effective tax rate for the year was 15%, down 2 percentage points from
Taxes	last year
	Decrease due to a tax rate change in a foreign subsidiary and related revaluation of
		deferred taxes as well as an increase in non-recurring tax benefits from other tax
		planning activities

8

Cash Flow and Liquidity

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Net Earnings, as Adjusted, and Cash from Operations

$135M

$119M

$112M

$114M

$113M

$92M

$84M

$83M

$86M$83M

$73M

$80M

$86M

$77M

$82M

$59M

$59M

$51M

Q4

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Q1

18

Q2

18

Q3 18

Q4

18

Q1 19

Q2 19

Q3 19

Q4 19

Net Earnings, as Adjusted

Cash Flow from Operations

Significant Uses of Cash

$M	2019	2018
Net payments on debt	$ 105		$ -
Capital expenditures	128		54
Dividends	106		89
Acquisitions	27		11
Share repurchases, net of shares
issued	-		236
Pension Funding	-		40

Net cash provided by operating activities was $419 million in 2019 vs. $368 million in 2018

Capital expenditures of $128 million, including $97 million related to building expansion projects to increase production and distribution capacity

Debt, including notes payable, was $172 million - down from $277 million in December 2018

• During 2019, prepaid $75 million of private placement debt
• Interest expense down $1 million for the quarter and the year to date compared to 2018

Shares issued, net of shares repurchased, $38 million

No pension contribution in 2019

• In 2018, the Company made a $40 million voluntary contribution to a U.S. pension plan

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Other Discussion Items

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Cap Ex	Capital expenditure expectations of approximately $70 million in 2020,
including approximately $30 million brick and mortar
	Unallocated corporate expenses in 2020 are expected to be approximately
Expenses
$30 million
	During 2019, we repurchased approximately 160,000 shares
Shares
 We may make share repurchases in 2020 via opportunistic open market transactions or
	short-dated accelerated share repurchase ("ASR") programs
	At current exchange rates, assuming the same volumes, mix of products and
Currency	mix of business by currency as in 2019, the movement in foreign currencies
would have an immaterial impact on sales and operating earnings in 2020,
	with a modest unfavorable impact in the first half of the year
Taxes	Excluding any impact from excess tax benefits related to stock option
exercises and any one time items, the effective tax rate is expected to be
	approximately 20% for 2020

10

2020 Environment and Outlook

Constant currency basis and excluding acquisitions completed in the prior 12 months

		Americas	EMEA	Asia Pacific	Total
	Current	Sales	Sales	Sales	Sales
	Environment	Q4 2019 4%	Q4 2019 12%	Q4 2019 (19%)	Q4 2019 1%
	Full Year 2019 4%	Full Year 2019 7%	Full Year 2019 (15%)	Full Year 2019 1%
		Environment Unchanged	Environment Unchanged	Environment Unchanged
	Industrial				Sales
	Segment				Q4 2019 (1%)
	Sales	Sales	Sales	Full Year 2019 (2%)
		Q4 2019 3%	Q4 2019 16%	Q4 2019 (26%)
		Full Year 2019 3%	Full Year 2019 7%	Full Year 2019 (19%)
		Environment Unchanged	Environment Downgraded	Environment Unchanged
	Process				Sales
	Segment				Q4 2019 (4%)
	Sales	Sales	Sales	Full Year 2019 1%
		Q4 2019 (4%)	Q4 2019 (4%)	Q4 2019 (2%)
		Full Year 2019 3%	Full Year 2019 3%	Full Year 2019 (5%)
		Environment Unchanged	Environment Unchanged	Environment Unchanged
	Contractor				Sales
	Segment				Q4 2019 9%
	Sales	Sales	Sales	Full Year 2019 5%
		Q4 2019 10%	Q4 2019 13%	Q4 2019 (4%)
		Full Year 2019 5%	Full Year 2019 9%	Full Year 2019 (6%)
		Outlook Raised	Outlook Lowered	Outlook Raised	Outlook Raised
	Full Year 2020	Low single-digit	Low single-digit	Flat	Low single-digit
	Outlook

Heading into 2020, we expect challenging end market conditions to remain in place for at least the first half of the year in our Industrial and Process segments. Our outlook for the Contractor segment remains positive as favorable conditions continue and demand for our products is solid across major end markets and product categories. Our outlook for 2020 is low single-digit growth on an organic, constant currency basis.

11

Industrial Segment Results

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$ in millions		Fourth Quarter								Year-to-Date				2019 Industrial Segment
											Sales as % of Graco
		2019			2018			Change				2019				2018		Change
Sales
Americas	$	85		$	83	3 %			$	324				$	315	3 %
EMEA		68			60	13					240					234	2
Asia Pacific		42			57	(26)					183					232	(21)
Total	$	195		$	200	(2)%			$	747				$	781	(4)%		45%
Operating
Earnings	$	61		$	65	(6)%			$	247				$	271	(9)%
% of sales		31 %			32 %								33 %				35 %
								Components of Net Sales Change		Environment
										Fourth Quarter Year-to-Date
								Americas
								Volume & Price			3 %			3 %			• Stable: General industrial, truck & trailer, wood
								Acquisitions			0 %			0 %			• Challenging: Automotive, agricultural
								Currency			0 %			0 %
								Total			3 %			3 %
								EMEA
								Volume & Price			16 %			7 %			• Stable: General industrial
								Acquisitions			0 %			0 %			• Challenging: Automotive, truck & trailer, developing
								Currency			(3)%			(5)%			economies
								Total			13 %			2 %
								Asia Pacific
								Volume & Price			(26)%			(19)%			• Challenging: Macro environment
								Acquisitions			0 %			0 %			• Particularly challenging: Automotive, marine, China,
								Currency			0 %			(2)%			project activity
								Total			(26)%			(21)%
								Segment Total
								Volume & Price			(1)%			(2)%
								Acquisitions			0 %			0 %
								Currency			(1)%			(2)%
								Total			(2)%			(4)%

12

Industrial Segment Results

/ / / / / / / / / / / / / / / / / /
Change in % of sales	Fourth Quarter	Year-to-Date
2018 Operating Earnings (% of sales)		32 %			35 %
Translation effect		0			(1)
Volume, product cost, channel and product mix		(2)			(1)
Change in volume and earnings-based costs		2			1
Volume effect on expense leverage		(1)			(1)
2019 Operating Earnings (% of sales)		31 %			33 %

Industrial Segment Sales and Operating Margins

Industrial Segment Operating Earnings QTD

	$250 M		40%
			35%		($1M)	($5M)
	$200 M				$4M	($2M)
			MarginsOperating
Sales		30%
	$150 M		25%
			20%
	$100 M		15%	$65M					$61M
						$61M
							$59M
	$50 M		10%
			5%
	$-		0%
	Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419		Q4 2018	Currency	Volume	Lower Volume	Higher	Q4 2019
	Net Sales	Operating Margins			Translation		and	Expenses
					Earnings-based
							Costs

13

Process Segment Results

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$ in millions		Fourth Quarter					Year-to-Date					2019 Process Segment
		2019			2018		Change		2019				2018				Change
													Sales as % of Graco
Sales
Americas	$	55		$	56	(3)%		$	222		$	216		3 %
EMEA		16			15	5			62				58		5
Asia Pacific		18			17	9			61				64		(4)
Total	$	89		$	88	1 %		$	345		$	338		2 %
Operating																			21%
Earnings	$	20		$	16	25 %		$	76		$	69		11 %
% of sales		22 %			18 %					22 %				20 %
							Components of Net Sales Change	Environment
									Fourth Quarter Year-to-Date
							Americas
							Volume & Price	(4)%				3 %					• Stable: Technology, sanitary, vehicle services,
							Acquisitions		1 %				0 %						industrial lubrication, environmental applications,
							Currency		0 %				0 %						chemical
							Total		(3)%				3 %					• Challenging: Energy
							EMEA
							Volume & Price	(4)%				3 %					• Stable: Western Europe, environmental, chemical,
							Acquisitions		10 %				5 %						technology, sanitary
							Currency		(1)%				(3)%					• Challenging: Offshore oil & natural gas, vehicle services
							Total		5 %				5 %
							Asia Pacific
							Volume & Price	(2)%				(5)%
							Acquisitions		12 %				4 %					• Challenging: Macro environment
							Currency		(1)%				(3)%
							Total		9 %				(4)%
							Segment Total
							Volume & Price	(4)%				1 %
							Acquisitions		5 %				2 %
							Currency		0 %				(1)%
							Total		1 %				2 %

14

Process Segment Results

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Change in % of sales	Fourth Quarter	Year-to-Date
2018 Operating Earnings (% of sales)		18 %			20 %
Translation effect		0			0
Product cost, channel and product mix		(1)			0
Effect of acquired business operations		(1)			0
Change in volume and earnings-based costs		6			2
Volume effect on expense leverage		0			0
2019 Operating Earnings (% of sales)		22 %			22 %

Process Segment Sales and Operating Margins

	$120 M	25%
	$100 M	20%	Operating Margins
	$80 M
Sales		15%
$60 M
	10%
$40 M
$20 M	5%
	$-	0%
		Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419

Net Sales		Operating Margins

Process Segment Operating Earnings QTD

		$5M	$1M
	($2M)
				$20M
$16M
Q4 2018	Volume	Lower Volume	Lower Expenses	Q4 2019
		and
		Earnings-based
		Costs

15

Contractor Segment Results

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	$ in millions		Fourth Quarter					Year-to-Date			2019 Contractor Segment
			2019				2018		Change		2019			2018		Change	Sales as % of Graco
	Sales
	Americas	$	92		$	84	10 %		$	414		$	396	5 %
	EMEA		29				26	10			105			100	4
	Asia Pacific		8				9	(6)			35			38	(10)
	Total	$	129		$	119	8 %		$	554		$	534	4 %	34%
	Operating
	Earnings	$	28		$	18	51 %		$	128		$	121	6 %
	% of sales		22 %				15 %					23 %			23 %
								Components of Net Sales Change		Environment
										Fourth Quarter Year-to-Date
								Americas
									Volume & Price		10 %		5 %			• Stable: Residential and commercial construction
									Acquisitions		0 %		0 %			• Focus Sectors: Pro paint, general construction, DIY
									Currency		0 %		0 %
									Total		10 %		5 %
								EMEA
									Volume & Price		13 %		9 %			• Stable: Western Europe, DIY
									Acquisitions		0 %		0 %
									Currency		(3)%		(5)%
									Total		10 %		4 %
								Asia Pacific
									Volume & Price		(4)%		(6)%			• Stable: Australia
									Acquisitions		0 %		0 %			• Challenging: General construction, equipment adoption
									Currency		(2)%		(4)%			rates, local competition
									Total		(6)%		(10)%
								Segment Total
									Volume & Price		9 %		5 %
									Acquisitions		0 %		0 %
									Currency		(1)%		(1)%
									Total		8 %		4 %

16

Contractor Segment Results

/ / / / / / / / / / / / / / / / / /
Change in % of sales	Fourth Quarter	Year-to-Date
2018 Operating Earnings (% of sales)		15 %			23 %
Translation effect		0			(1)
Volume, product cost, channel and product mix		4			0
Change in volume and earnings-based costs		1			1
Volume effect on expense leverage		2			0
2019 Operating Earnings (% of sales)		22 %			23 %

Contractor Segment Sales and Operating Margins

Contractor Segment Operating Earnings QTD

	$200 M		30%
			25%			$9M	$1M
Sales	$50 M		MarginsOperating	$18M
	$150 M
			20%
	$100 M		15%
								$28M
			10%
			5%
	$-		0%
	Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419			Q4 2018	Volume	Lower Volume	Q4 2019
	Net Sales	Operating Margins					and
					Earnings-based
							Costs

17

Financial Results Adjusted for Comparability

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Certain items have caused fluctuation in the Company's financial results. Excluding the impacts of these items presents a more consistent basis for comparison of financial results. A calculation of the non-GAAP measurements follows:

		Fourth Quarter			Year-to-Date
$ in millions except per share amounts		2019			2018	Change		2019			2018	Change
Income taxes, as reported	$	15.7		$	16.3	(4)%	$	62.0		$	69.7	(11)%
Excess tax benefit from option exercises		2.3			0.2			10.4			10.0
Other non-recurring tax benefit		0.5			-			8.1			5.0
Income taxes, adjusted	$	18.5		$	16.5	12 %	$	80.5		$	84.7	(5)%
Effective income tax rate
As reported		15.6%			18.1%			15.3%			17.0%
Adjusted		18.5%			18.4%			19.8%			20.6%
Net earnings, as reported	$	84.8		$	73.7	15 %	$	343.9		$	341.1	1 %
Excess tax benefit from option exercises		(2.3)			(0.2)			(10.4)			(10.0)
Other non-recurring tax benefit		(0.5)			-			(8.1)			(5.0)
Net earnings, adjusted	$	82.0		$	73.5	12 %	$	325.4		$	326.1	0 %
Weighted Average Diluted Shares, in millions		171.8			170.9			171.6			173.2
Diluted Earnings per Share
As reported	$	0.49		$	0.43	14 %	$	2.00		$	1.97	2 %
Adjusted	$	0.48		$	0.43	12 %	$	1.90		$	1.88	1 %

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MOVE | MEASURE | MIX | CONTROL | DISPENSE | SPRAY

WORLDWIDE LEADERS IN FLUID HANDLING

www.graco.com

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