GRACO, Inc. Q1 2010 Earnings Call Transcript

GRACO, Inc. Q1 2010 Earnings Call Transcript
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GRACO, Inc. (GGG)

Q1 2010 Earnings Call

April 22, 2010 11:00 am ET

Executives

Caroline Chambers - Vice President & Controller

Pat McHale - President & Chief Executive Officer

Jim Graner - Chief Financial Officer

Analysts

Kevin Maczka – BB&T Capital Markets

Mike Halloran – Robert W. Baird

Tom Brinkman – BMO Capital Market

John Franzreb – Sidito & Company

Ned Borland – Hudson Security.

Christopher Glynn – Oppenheimer & Co.

Matt Summerville – Key Bank

Presentation

Operator

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Good morning and welcome to the first quarter 2010 conference call for GRACO Inc. If you wish to access the replays of this call you may do so by dialing 1-800-406-7325 within the United States or Canada. The dial in number for international callers is 303-590-3030. The conference ID number is 4282472. The replay will be available through April 27th, 2010.

GRACO has additional information available in a PowerPoint slide presentation which is available as part of the webcast play. As the request of the company we will open the conference up for questions and answers after the opening remarks from management and instructions will be given in that time. During this call, various remarks may be made by management about their expectation, 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 the result of various respecters including those identified in item 1A of and exhibit 992, the company's 2009 annual report on form 10-K. This report is available on the company's website at www.graco.com and the SCC's website at www.scc.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made.

The company undertakes no obligations to update these statements in light of new information or future events, if you need assistance at anytime during the conference, please press star, zero and then the operator will assist you. I will now turnover the conference to Caroline Chambers, Vice President and Controller.

Caroline Chambers

Good morning and welcome to everyone, it is a pleasure for Pat McHale, Jim Graner and me to be with you this morning. Today, I will provide some comments on the financial highlights of our first quarter and Pat will follow with the additional comment.

As noted earlier, PowerPoint slides are also available to accompany the call and can be access that on our website. As our opening comment, we will open up the call for your question. For our first quarter, net sales were up to 19% to a 165 million. Sales increase in all divisions and regions with significant growth in Asia Pacific and moderate growth in Europe.

We are pleased to report that operating earnings as a percentage of sales increased to 20% up from 4% a year ago with net earnings total in 21 million. Currency translation had a favorable effect on sales of 5 million on our net – and our net earnings of 2 million.

Our gross profit margin as a percentage of sales was 54% as compared to 47% for the first quarter last year. This improvement was primarily due to currency translation, work force reduction cost in last year and higher production volume. Lower material and pension cost, price increases and product mix also contributed to the higher margin rate. Operating expenses were down 3% as compared to last year. As we saw the benefits from cost reduction activities in prior years and lower pension expense.

These improvement were partially offset the by defects of currency translations and increases in bad debt expense. As we expected, volume related items such as incentive accruals are readjusting. The tax rate was 34.5% this quarter. The Federal R&D tax credit has not been renewed for 2010 and no benefit is included in the current rate.

Our first quarter cash flow from operations was 16 million, our primary use of the cash for capital expenditures of 3 million, dividends of 12 million and long term debt repayment of 6 million. Our working capital investment increase in line with our increasing volume, we hire demand inventories increase by 8 million with an improvement in turn and account receivable increase by 18 million with the higher sales level.

Our days of sales outstanding remain consistent with prior period. On the financing side, our credit line totaled 270 million with a 178 million unused at the end of the quarter. With that, I'll turn it over to Pat for additional comments.

Pat

McHale

Good morning. In the first quarter we had double digit revenue growth compared to both Q1 2009 and more importantly compared to Q4. We saw growth in most geographies and business segments indicating a broad based recovery is likely underway. Historically Q1 is been our lost revenue quarter so that increase is particularly encouraging.

The following comments compared Q1 of 2010 to Q1 2009. We had double digit growth in Europe before currency benefit with Eastern Europe and the Middle East growing at strong double digit rates and Western Europe growing at mid single digits. Growth was fairly well balanced across all our product segments. Asia Pacific had a very strong quarter China, Korea, South East Asia had the highest growth rates but we also saw double digit rates in India, Australia, New Zealand and Japan as well.

We benefited from strong car, bus, truck, motorcycle and tier one production in the region as well as rail, energy production, mining, aerial, space and construction. For Asia this quarter was approximately 10% higher than our peak Q1 prerecession. We also saw growth in the America's. In North America we saw nice double digit growth in our industrial business while contractor and lube were essentially flat to last year. The contractor in North America, the Pro Paint business was down mid single digits, offset by the Home Center Business which was up low double digits.

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