Good morning, and welcome to the First Quarter Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. 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, including those identified in Item 1A of the company's 2022 annual report on 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 Kathy Schoenrock, Executive Vice President, Corporate Controller, and Information Systems.

Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion. Yesterday, Graco reported first quarter sales of $530 million, an increase of 7% from the first quarter of last year. The effect of currency translation decreased sales by 3 percentage points or approximately $11 million. Reported net earnings increased 28% to $129 million for the first quarter. Diluted earnings per share were $0.75, an increase of 29% over last year. The gross margin rate increased 230 basis points in the quarter. This improvement was primarily the result of the pricing actions we have taken over the past 15 months as well as improved product and channel mix, which is mainly coming from our Contractor segment. Input costs remain elevated. However, our pricing actions have taken hold, and we are seeing improvements in our gross margin rate as a result. At similar costs and volumes, we expect that the gross margin rate improvement we experienced in the first quarter will continue throughout the remainder of the year. Total operating expenses increased $2 million in the quarter. Operating expense leverage, along with top-line growth and gross margin rate improvement led to operating earnings growth of 22%. Interest expense decreased by $4 million in the quarter. This decrease relates to the prepayment of $75 million of our private placement debt that occurred in the first quarter of last year. The adjusted effective tax rate was 19.5%, which is comparable to the fourth quarter of last year. Cash provided by operations totaled $91 million, an increase of $60 million from last year, primarily driven by net earnings improvement and a reduction in inventory purchases. We also made dividend payments of $39 million and capital expenditures of $38 million. A few comments as we look forward to the rest of the year. Based on current exchange rates, we expect the effect of currency translation would have no impact on net sales or net earnings in 2023. The unfavorable effects of currency expected in the first half will be offset by favorable impacts in the second half. We now expect unallocated corporate expense to be approximately $34 million to $37 million. This updated range reflects higher stock compensation as a result of changes in market-based valuation assumptions. Our full-year tax rate is expected to be approximately 19% to 20% on an as-adjusted basis and finally, capital expenditures are estimated to be $200 million with $130 million related to facility expansion projects. I'll turn the call over to Mark now for further segment and regional discussion.

Thank you, Kathy. Good morning, everyone. All of my comments this morning will be on an organic constant currency basis. Sales were up 10% for the quarter, and we achieved record first quarter revenue and operating earnings. We saw revenue growth in all segments and regions with the exception of Asia Pacific, which had soft demand at the beginning of the year in both the Industrial and Contractor segments. In Asia Pacific, many of our key end markets remain strong, such as e-mobility, battery, alternative energy, and electronics. However, these are more than offset by softening sales in construction and powder finishing. As the quarter progressed, incoming order rates rebounded and we anticipate growth in the region on a full-year basis. Pricing actions implemented this year drove sales growth and gross margin expansion during the first quarter. Our strong price realization across all businesses and regions, along with favorable price mix in contractor, resulted in a meaningful improvement in our gross margin rate, which has risen to normal Graco levels that were last seen in the first quarter of 2021. These improvements, along with good expense management, resulted in company-wide incremental margins of 80%. Operating earnings, expressed as a percentage of sales, were 30% for the quarter, which is the highest in company history despite continued foreign currency pressures. Our pricing strategy over the past couple of years has been to cover rising input costs and to restore the gross margin rate to pre-inflationary levels. With similar volumes for the rest of the year, we should see continued strong margin performance. Our consolidated backlog was $350 million at the end of the quarter, which is consistent with where it was when we ended last year. While supply chains are improving, we still have shortages in key components, such as electronics and castings, which have prevented our backlog from returning to more normalized levels. Now turning to some commentary on our segments. The Contractor segment had mid-single-digit revenue growth, resulting in first quarter records for both revenue and operating earnings. Our pro paint and high-performance coatings and foam businesses remained strong but were partially offset by ongoing softer conditions in the home center channel. This change in demand at the home centers was not unexpected given the large ramp in business we've experienced since 2020. Growth in EMEA during the quarter was a bright spot as product availability improved and they had strong price realization. Asia Pacific, on the other hand, declined 8% as the shipping container business and construction markets have weakened. As expected, new single-family housing starts in North America have slowed during the quarter, but improving commercial and multifamily residential were more than enough to offset the decline. Professional painting contractors remain busy with order books extending throughout much of 2023 and even into 2024 for commercial applications. Operating earnings were 30% during the quarter as CED benefited from selling larger pro paint sprayers and fewer home center units. Pricing actions also contributed favorably in the quarter versus what we experienced last year. Incremental margins in Contractor were more than 100% in the first quarter. The Industrial segment grew 7%, resulting in record first quarter revenue and operating earnings. Our liquid finishing and sealant and adhesive businesses led the way but were partially offset by lower systems sales in our powder finishing business, especially in Asia Pacific. Backlog in powder equipment systems remains elevated overall, which should offset the softer start to the year. Additionally, we expect to benefit from new product releases in the back half of this year. The Process segment grew 16%, resulting in first quarter records for both revenue and operating earnings. This is the ninth consecutive quarter that Process has set these records. Continued broad-based sales growth in vehicle service, industrial lubrication, process transfer pumps, environmental, and semiconductor drove the strong performance. Pricing actions taken, along with careful expense management, drove 75% incremental margins for the quarter and resulted in 30% operating margins which is a record for the segment. Momentum continues to build as project activity in lubrication, environmental and process pumps are robust, backlogs remain elevated, particularly in semiconductor, and there is excitement around our recent upcoming new product releases. Moving on to our outlook. We are encouraged by the start of the year. End market activity and demand for our new and existing products remain solid. However, given the volume comparisons in the second half will be more challenging as we lap some of the price increases we took last year, we'll continue to watch incoming order trends in business tempo as we remain optimistic for growth in both sales and operating earnings for the full year. Therefore, we are confirming our outlook of low single-digit organic revenue growth on a constant currency basis. That concludes our prepared remarks. Operator, we're ready for questions.

Our first question comes from Deane Dray with RBC Capital Markets.

Good morning, everyone. Just you gave a lot of good color in the prepared remarks regarding end markets, but maybe just take us through on end market performance versus expectations and we can start there? Thanks.

Yes. I think overall, we're really happy with how things played out in Q1. That probably came in a little better than what we were anticipating when we started out the year. I would say that the growth is pretty broad-based across multiple product categories and across most of our business units and regions. Of course, there are some hotter spots and colder spots. But in the aggregate, backlog has kind of stayed flat from the beginning of the year, and I guess we're off to a good start. So, there's not much more than I can say other than it's been good so far.

Got it. And then it sounds like in talking to the other industrials this quarter, the supply chain improvements have been coming through pretty smoothly. I mean not out of the woods yet, but it sounds like you're still seeing enough pressure in electronics and castings to have to call it out. So, some color there, how do you expect that to? And I might have missed it, but did you do the annual price increase in January and when will we start to see that take hold? Thanks.

Yes. Good question. Yes, we do still have a couple of hotspots on the supply chain. I would say it's much better than it was even in like third quarter and the end of the last year. So, things are improving, but we have those two areas that you called out are still creating some pressure for us. And I will also say that we're still seeing inflationary pressure. Our costs are up. We track what we call purchase price variance, which is what we actually pay versus what we thought when we set our budgets and that is still running unfavorable against what we had planned. So, our pricing actions have really helped to offset that. We did implement price increases at the beginning of the year selectively, not across the board, but in a number of the businesses and in the regions. So that should help as we work through backlogs and they'll start to hit.

So, this is David, maybe I can offer an antidote to illustrate the supply chain situation. Last week, I spoke with one of our factory managers and she drew a comparison from a year ago to currently what her, I'd say, her gaps were in key products that were keeping her factory from shipping products. And a year ago, she looked at her list, and there were 30 items that were interfering with major items, that we're interfering with the flow of product out the door. She's continued to do that. We probably always do it at Graco. I always have something short. But by comparison, at least in the last week, she was talking about fewer than 10. So, lots of progress. I think that would be something that we would see across our system. Lots of progress has been made there. But there still are key gaps, as Mark highlighted.

Thank you.

Our next question comes from Mike Halloran with Baird. You may proceed.

Mike, can you help me make sense of the Process and the Contractor margins, you referenced it, but I mean, awfully robust records in both segments. Probably speak to some of the price cost catch-up reduction in some of the efficiencies. But maybe a little bit more help on what drove that magnitude? And then also, how should I think about what's sustainable at those levels? Obviously haven't been here before. I mean, is this the right run rate to think about on a forward basis? Or are there some puts and takes, mix, whatever it is that changes how we should be thinking about this over the next, call it, the remainder of the year moving forward, however you want to think about it?

I'll begin, and Kathy or David can add their insights. We have conducted some analysis to ensure we have accurate information to share. This aligns with what we mentioned earlier. For our Contractor segment, the significant pricing actions they implemented were a major factor. They faced the most cost pressure compared to our other businesses. Additionally, there has been impressive growth in the professional paint and high-performance coating and foam sectors, which were part of the industrial portfolio a couple of years ago. These areas tend to have higher profit margins. When we factor in a decline in the home center business, this explains the margin rate situation for the Contractor segment. We believe this trend can be maintained, assuming volumes continue at the same levels as we've experienced this year. However, the fluctuating orders will play a critical role in projecting the gross margin rate in CED. There's nothing about our current situation that raises concerns about margin rates except for incoming orders. In our Process businesses, we observed strong growth across the board. We categorize this into four main product lines: process pumps, environmental solutions, lubrication products, and semiconductors. The positive results stem from our pricing strategies along with improved supply chain operations, allowing us to reduce backlogs and increase output. We are confident that, provided volumes remain stable, the margin rates we achieved in the first quarter should continue to be sustainable.

Great. That was very helpful. From an outlook perspective, I understand the lack of visibility moving forward and why this has been a strong quarter. You mentioned a low single-digit perspective. Are there any specific areas, aside from Asia, that you can identify in terms of order rates or anything else in the business that might indicate a reason for caution? Or is this largely based on leading indicators that may not directly reflect your business but are more influenced by broader macroeconomic factors?

Yes. I would start by saying that since a large portion of our business is short cycle, our forecasting is only slightly better than guessing. When providing our guidance and forecasts, we are considering the input from the economy and what our teams are observing in the market. The end markets look fairly good, but there is enough uncertainty that we believe it is wise to maintain our current outlook. If more business comes in, that's great, but for now, it seems sensible to be cautious.

Yes, I would agree with everything said I would add that something that we've talked about now for 18 months is this backlog build. And we have seen backlog conversion really beginning in the fourth quarter and good progress here in the first quarter, which, by the way, is what we want. We want to work through backlog because we are a short-cycle business, as you know. And it's part of our value proposition that we strive to be the best in customer service and deliveries. And so, if the backlog conversion continues to be a factor in our business. We do really get back in most of our legacy businesses to the short side a little later in the year. And then we get into the visibility issue that Mark talked about.

Our next question comes from Saree Boroditsky with Jefferies. You may proceed.

Congrats on the quarter. So obviously, margin performance really strong, but Industrial margins maybe saw some pressure versus prior year. Is that a reflection of the higher margin sales in China being weaker? Or is there anything else that we should think about there? And does that reverse as China gets potentially stronger following the first quarter?

Well, they are at really high margin rates, to begin with, and we're really happy with the profitability of that business. So, I kind of view the quarter as being flat 13 weeks. Short time period, there's always some puts and takes mix and other things that go into it. So, I have no concerns at all about them being able to sustain or maybe even slightly improve if volumes continue to be where they're at or no higher.

I believe our strategy for capital deployment has been steady, with a strong emphasis on our organic growth opportunities. This quarter, we saw an increase in R&D aligned with the new product projections Mark mentioned. Our capital expenditure program is aggressive this year, particularly with our new warehouse in Dayton, Minnesota, and ongoing project expansions we have discussed. We are also starting developments in Anoka for our lubrication operations. It’s shaping up to be a significant year for our capital investments. Regarding M&A, I can say that discussions and opportunities come to us regularly. If I had to describe the market environment, there seem to be fewer participants in individual initiatives and potential purchases. However, I want to emphasize that good opportunities continue to present themselves at solid prices. Therefore, we remain hopeful that the prospects we are evaluating reflect these qualities. There may be deals available, though the number of nonstrategic participants appears to be smaller than before. Lastly, regarding share repurchases, we have always taken an opportunistic approach. As we showed last year, when we identify good opportunities at favorable prices, we can act decisively, having deployed about $1.25 billion in 2022. I’m pleased that you noted our modest purchases this year, and ongoing events will guide our activities for the rest of the year.

Looks like it could have been good to do it yesterday, but congrats on the quarter.

You mentioned earlier that I'm a bit slow, right?

Our next question comes from Matt Summerville with D.A. Davidson Company. You may proceed.

Just a couple of questions. Is there any way you can maybe directionally help us a little bit in terms of Graco's overall core growth was an impressive 10% in Q1? Roughly, how much of that is price versus mix versus volume? Is there any way to help us parse that out a little bit? And I guess at the end of the day what we're trying to get at is looking forward, how much incremental price is yet to be realized based upon the timing of the second increase last year plus the portion of the business that was subject to the 2023 price increase?

Yes. I mentioned in my earlier comments that most of the growth this quarter was due to our pricing actions, and I stand by that. We implemented two price increases as you noted. The second price increase was introduced in the early part of the third quarter or late in the second quarter. So, we have a tailwind from those increases until we anniversary them. Additionally, we also implemented some pricing adjustments at the beginning of this year. Overall, we are pleased with our actions as they are aimed at offsetting some of our input costs, and that reflects our current position.

And then, Mark, as a follow-up, can you maybe talk about what you saw sell-in versus sell-through in both the professional paint and home center channels as it pertains to contractor and what your view is there on general inventory across those two customer bases, please? Thanks.

From a general perspective, I would say that in the professional units, the sell-in and sell-through were relatively flat and consistent. There wasn't an increase in inventory nor a significant reduction. Our demand matched what they were experiencing in most locations where we have that type of equipment. However, on the home center side, the decline in their inventory negatively affected our results. Their inventories were somewhat lower than we would have expected for the first quarter, indicating they are likely facing reduced demand at the store level, which leads them to manage their inventories based on foot traffic. We are quick to respond to their orders, so any changes in inventory levels affect us rapidly.

Our next question comes from Walter Liptak with Seaport Global Securities. You may proceed.

Hi, thank you, everyone. Congratulations on the strong quarter. I'm joining the call a bit late, so I apologize if this has already been discussed. Regarding the Contractor segment, could you provide any insights into the geographic regions or any other aspects related to volume?

Certainly, there are many segments in the market to consider. We observed strong performance in North America, particularly in the commercial and multifamily sectors, which are crucial for new construction. Additionally, we've seen positive results in the insulation market and protective coatings for infrastructure and heavy-duty applications. One area worth mentioning is the performance in Asia, which has started slowly, especially in China. The construction market in China appears to be experiencing a pause. However, there is a significant opportunity for contractors in the protective coatings sector for containers in China. After a strong period in 2021 and 2022, the container market is undergoing adjustments, particularly in logistics and rebalancing, which is contributing to current challenges in that area.

If there are no further questions, I will now turn the conference over to Mark Sheehan.

All right. Thank you very much. In closing, I would like to thank Kathy Schoenrock, for participating on these calls the last few years and also congratulate her for moving into a new role as Graco's Executive Vice President and Chief Technology Officer reporting into me. I'd also like to congratulate Chris Knutson, who many of you know through his excellent efforts leading Investor Relations over the last few years. Chris will become our new Executive Vice President and Corporate Controller reporting to David Lowe. I'm excited about the energy and focus that these two people will bring to their jobs. They're very important for Graco, and we're excited to get them into those roles. So, with that, we'll conclude the call. Thanks for participating. Have a great day.

Thank you.

Thank you.

Thank you. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.