Graco Inc, (GGG)

Q2 2010 Earnings Call

July 27, 2010 11:03 am ET

Executives

Caroline Chambers - Vice President

James A. Graner - Chief Financial Officer

Patrick J. McHale - Chief Executive Officer

Analysts

Kevin Maczka - BB&T Capital markets

Charles Brady - BMO Capital markets

Michael Halloran - Robert W. Baird &Co Inc

Ned Borland - Hudson Securities

Matt Summerville - KeyBanc Capital Markets

John Francis - Sidoti & Co.

Eddie [Theo] - Goldman Sachs

Presentation

Operator

Good morning and welcome to the second quarter 2010 Conference Call for Graco Inc. If you wish to access a replay for this call, you may do so by dialing 1800-406-7325 within the United States or Canada. The dialing number for international callers is 303-590-3030. The conference ID is 4323044. The replay will be available through July 25 th, 2010.

Graco has additional information available in PowerPoint Slide presentation which is available as part of the webcast player. At the request of the company, we’ll 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. Due to those identified in item 1A of exhibit 99 to 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 SEC’s website at www.sec.gov.

Forward-looking statements reflect management’s comment piece and speak only of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. (Operator Instructions). I will now turn the conference over to Caroline Chambers, Vice President and Controller; please go ahead.

Caroline M. Chambers

Good morning and welcome to everyone. I’m here this morning with Pat McHale and Jim Graner. I’ll provide some comments on the financial highlights of our second quarter and Pat will follow with additional comments.

PowerPoint slides are also available to accompany our call and can be found on our website. The slides include information about our consolidated financial results and each of the segments.

After opening comments we will open up the call for your questions.

Net sales were up 30% to 192 million for the quarter. There was increase in all divisions and regions with significant growth continuing in Asia Pacific and solid growth in both the Americas and Europe.

Operating earnings as a percentage of sales were 20% up from 12% a year ago with net earnings totaling 25 million.

Currency translations did not have a significant effect in the quarter as changes in the Asian currencies and Canadian Dollar offset changes in the Euro.

The overall year to date growth rate of 25% included 2% points from translation primarily from currencies in Asia Pacific.

Our growth proper margin as a percentage of sales was 53% as compared to 49% in the second quarter from last year. The improvement from last year was primarily due to higher production volumes. In Q2 our factories were running at about 85% of prior peak production as compared to approximately 55% a year ago.

Approximately $1 million of additional production costs were incurred in the second quarter related to new products primarily in the contractor segment.

Operating expenses for the quarter increases by 8 million as compared to last year. As a percentage of sales, operating services were 4% lower than last year.

As expected, volume related items are receding from last year. Strong operating results drove higher incentives and bonus provisions in the second quarter with expense approximately 3 million higher than the first quarter of this year. For the full year, we expect that the incentive and bonus expense will be 15 to 20 million higher than last year.

Marketing and selling expense related to new product launches increased by approximately 1 million as compared to the prior quarter primarily in the contractor segment.

In the industrial segment we did not see the same [tailment] from currency translation in the second quarter that we saw on the first quarter. With continuing acceleration in sales growth we also saw increases in volume-related expenses primarily incentives and bonus provisions.

Year today tax rate was 35% as compared to 32% last year. Several [R&D] tax credit has now been renewed so far in 2010 and no benefit is included in the current rates. We currently continue to have a full-year expectation of a tax rate of 34%.

Year today cash flow from operations was 28 million as compared to 69 million last year.

Our working capital investment increased in line with our increasing volumes. Year to date inventories have increased by 18 million with an improvement in turns and accounts receivables have increased by 37 million with consistent days of sales outstanding.

Year to date primary cash uses have been capital expenditures of 6 million, dividends of 24 million and repayment of long-term debts of 6 million. The overall had share re-purchases in the second quarter that totaled 10 million including 6.5 million that actually settled in the third quarter. We will continue to re-purchase shares on an opportunistic basis going forward.

On the financing side a long term debt total of 80 million at the second quarter with unused credit lines of 117 million. With that I’ll turn it over to Pat for additional comments.

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