Slide 1: Investor Presentation 3rd Quarter 2016
Investor Presentation 3rd Quarter 2016
Slide 2: Safe Harbor
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 anticipate
Slide 3: Overview
Overview Enduring Business Model Strategies for Long-Term Growth – Invest in New Products – Expand Geographically – Target New Markets – Make Acquisitions Company Performance
Slide 4: Business Overview
Business Overview • Graco manufactures premium equipment to pump, move, meter, mix and dispense a wide variety of fluids and coatings – Difficult to handle materials with high viscosities – Abrasive and corrosive properties – Multiple component materials that require precise ratio control – Serving
Slide 5: Year-To-Date Sept 2016 Sales – $980 Million
Year-To-Date Sept 2016 Sales – $980 Million EMEA 23% 59% Industrial 17% Process Asia Pacific 18% 24% Contractor 68% Industrial 18% Process 14% Contractor 35% Industrial 22% Process 46% Industrial 43% Contractor 20% Process 34% Contractor 5
Slide 6: 2015 Sales by End Market
2015 Sales by End Market* Residential & Non-Residential Construction – 45% Industrial & Machinery – 17% Automotive – 12% Other – 8% Oil and Natural Gas – 6% Public Works – 4% Vehicle Services – 4% Mining – 2% Wood – 1% White Goods – 1% * Proforma for acquisitions. Graco management estimate. 6
Slide 7: Industrial Equipment Segment
Industrial Equipment Segment • Growth Drivers and Trends – Factory movements and upgrades – Integration of equipment with factory data and control systems – Reducing energy consumption – Material changes driving demand • Other Representative Industry Participants – Exel, Wagner, Carlisle Companies,
Slide 8: Process Equipment Segment
Process Equipment Segment • Growth Drivers and Trends – Targeting new products and new markets – Fill product lines for a single source solution – Focus on spec’ing in product at large OEM’s • Other Representative Industry Participants – Idex, Dover, IR, Lincoln, Vogel, Bijur, Hannay, Coxreels, and
Slide 9: Contractor Equipment Segment
Contractor Equipment Segment • Growth Drivers and Trends – Entry level product and channel expansion – Conversion of end users from manual application methods to equipment is a major focus outside North America – Application of texture and cementitious materials – Expanding pavement maintenance prod
Slide 10: Enduring Business Model
Overview Enduring Business Model Strategies for Long-Term Growth – Invest in New Products – Expand Geographically – Target New Markets – Make Acquisitions Company Performance
Slide 11: High Customer Value, Strong Product Differentiation
High Customer Value, Strong Product Differentiation Material Supplier Relationships Best in End Class User Delivery Interaction Customer Leading Strong NPD ROI Channel Investment Lowest Total Partners Cost of Ownership Stringent Best in Product Class Requirements Quality Niche Markets 11
Slide 12: Manufacturing & Engineering Excellence
Manufacturing & Engineering Excellence • 80%+ of production is based in the United States – High-quality, efficient, engaged labor force – Centralization allows for leverage of overheads – A currency mismatch of sales to COGS exists, however • Continuous improvement culture – Unique Graco cost-to-pr
Slide 13: Low Volume, High Mix Delivers Customer ROI
Low Volume, High Mix Delivers Customer ROI Average Number of Units Sold 2015 Sales # of SKUs Per Day ($ in millions) 0-1 43,006 92% $531 48% 2-5 2,578 5% $212 19% 6 - 10 625 1% $91 8% 11 - 15 215 1% $41 4% Greater than 15 567 1% $234 21% Legacy Graco Total Sales $1,109 Plus: Acquisition and Non-bran
Slide 14: Strategies for Long-Term Growth
Overview Enduring Business Model Strategies for Long-Term Growth – Invest in New Products – Expand Geographically – Target New Markets – Make Acquisitions Company Performance
Slide 15: Growth Plans and Earnings Drivers
Growth Plans and Earnings Drivers 12%+ ► Acquisitions Graco ► New Product Development Targeted Earnings ► New Markets 3% - 5% CAGR ► End User Conversion Industrial Production Average Growth Rate 15
Slide 16: Invest in New Products
Overview Enduring Business Model Strategies for Long-Term Growth Invest in New Products – Expand Geographically – Target New Markets – Make Acquisitions Company Performance
Slide 17: R&D Spending
Targeting Growth Through New Products & Markets New Product Development Expense as a Percentage of Revenues – 2015 Graco 4.6% R&D Spending Peers 1.6% Innovation 17
Slide 18: Industrial – Airless Sprayers
Industrial – Airless Sprayers e-Xtreme™ Electric Airless Sprayer • World’s first electric sprayer for protective coatings approved for hazardous locations • Electric power is safe, reliable, and convenient – Sprayers will be sold/used in emerging countries where compressed air is not readily availab
Slide 19: Contractor – Paint Sprayers
Contractor – Paint Sprayers Home Center Products Pro Products • New “Pro” performance features • Common platform delivers economies ProXChange™ “No Tools” pump repair of scale for entry-level markets cartridge • ProXChange “No Tools” pump repair Longer life / higher output cartridge Heavy-duty drive
Slide 20: Contractor – Pro Markets
Contractor – Pro Markets Texture Applications Pavement Striping Applications • 3 new interior / exterior options • New LineLazer V – 5th generation • Graco exclusive “Pro” features • #1 selling airless line striping system worldwide – 50% more air and fluid output – “SmartStart” system extends pump
Slide 21: Process – Saniforce 1040-e
Process – Saniforce® 1040-e Electric driven diaphragm pump for food and beverage applications 21
Slide 22: Target New Markets
Overview Enduring Business Model Strategies for Long-Term Growth – Invest in New Products – Expand Geographically Target New Markets – Make Acquisitions Company Performance
Slide 23: Industrial – ToughTek
® Industrial – • Expands our presence in the construction industry • Handles cementitious materials – Stuccos, self-leveling flooring, fireproofing, repair mortars, grouts • Piston pump technology ‒ Fireproofing sprayers ‒ Stucco / EIFS sprayers • Rotor/stator pumps – Continuous mixers – Mortar pump
Slide 24: Industrial – EcoQuip
® Industrial – EcoQuip 2 • EcoQuip 2 sets new standards for Vapor Abrasive Blasting – Faster, easier, and more reliable than existing systems – Up to 92% less dust than traditional dry blasting – Much less water than traditional water based methods (around 1 qt./min) • Expand into new markets – Coat
Slide 25: Make Acquisitions
Overview Enduring Business Model Strategies for Long-Term Growth – Invest in New Products – Expand Geographically – Target New Markets Make Acquisitions Company Performance
Slide 26: Recent Acquisitions
Recent Acquisitions TM TM TM TM High Pressure Equipment Company ® & 26
Slide 27: Acquired January 2016
& Acquired January 2016 Geotechnical Instruments – UK manufacturer of portable and fixed landfill gas analyzers and biogas analyzers used for monitoring, Landfill compliance, and control of landfill and biogas processes Landtec – Manufactures landfill gas wellheads and accessories Biogas Wastewater
Slide 28: Company Performance
Overview Enduring Business Model Strategies for Long-Term Growth – Invest in New Products – Expand Geographically – Target New Markets – Make Acquisitions Company Performance
Slide 29: Financial Results
Financial Results Third Quarter Year-to-Date $ millions except EPS 2016 2015 Change 2016 2015 Change Sales $ 327.2 $ 319.0 3% $ 980.2 $ 960.9 2% Gross Profit 176.6 170.2 4% 523.5 512.9 2% % of Sales 54.0 % 53.4 % 0.6 pts 53.4 % 53.4 % 0.0 pts Operating Earnings 81.5 76.9 6% 220.8 226.0 (2)% % of Sal
Slide 30: Non-GAAP Reconciliation
Non-GAAP Reconciliation • The Held Separate Liquid Finishing business assets were sold in the second quarter of 2015. 2015 net earnings included after-tax investment income of $2 million ($0.02 per diluted share) for the quarter (from post-closing purchase price adjustments) and $141 million ($2.36
Slide 31: Components of Net Sales Change
Financial Results Components of Net Sales Change Third Quarter September 2016 Segment Region Industrial Process Contractor Americas EMEA Asia Pacific Consolidated Volume and Price (1)% − 7% 2% 2% 3% 2% Acquisitions − 5% − − 2% 1% 1% Currency − (1)% − − (2)% − − Total (1)% 4% 7% 2% 2% 4% 3% Year-to-D
Slide 32: Operating Earnings
Operating Earnings Change in Operating Earnings Third Quarter Year-to-Date 2015 Operating Earnings ($M and % of sales) $ 77 24 % $ 226 24 % Translation effect — — (3) — Mix, volume and pricing 4 — 7 — Effect of acquired businesses operations, inventory set-up and acquisition costs, net 1 — 3 — Incre
Slide 33: Third Quarter 2016 Results
Third Quarter 2016 Results • Sales increased 3 percent (the same at consistent currency translation rates); acquired businesses account for 1 percentage point of growth • Gross profit margin up 0.6 percentage point from third quarter 2015 – Realized pricing and favorable impact of product and channe
Slide 34: Year-to-Date Sept 2016 Results
Year-to-Date Sept 2016 Results • Sales increased 2 percent (3 percent at consistent currency translation rates); acquired businesses account for 2 percentage points of growth • Gross profit margin consistent with 2015 – Favorable impact of reduced acquisition related purchase accounting and realized
Slide 35: Notable Info from Q3 2016 Earnings Release & Call
Notable Info from Q3 2016 Earnings Release & Call • Capital expenditures are expected to be approximately $40 million in 2016 • Unallocated corporate expenses for the full year 2016 are expected to be $1 million higher than 2015; expenses vary by quarter • Opportunistic share repurchases may continu
Slide 36: Goodwill Impairment
Goodwill Impairment • In 2016, operating results of our Oil and Natural Gas reporting unit ("ONG") within the Process segment have fallen short of expectations due to weakness in oil and natural gas markets • After considering third quarter operating results and preliminary projections from our 2017
Slide 37: Current Environment and Outlook
Current Environment and Outlook Constant currency basis and excluding acquisitions completed in the prior 12 months Americas EMEA Asia Pacific Worldwide Sales Growth Sales Growth Sales Growth Sales Growth Current Q3 2016 2% Q3 2016 2% Q3 2016 3% Q3 2016 2% Environment YTD 2016 (0%) YTD 2016 5% YTD 2
Slide 38: Long-Term Cash Deployment Priorities
Long-Term Cash Deployment Priorities International Footprint Organic Growth Product Development Production Capacity and Capabilities Supplement to Organic Growth Acquisitions Leverage Our Strengths Dividend Payout Ratio ~30% Shareholder Return Approximately 4 Million Shares Remaining on Authorizatio
Slide 39: Key Investment Attributes
Key Investment Attributes • Strategies that will drive long-term, above-market growth • Premium products that provide a strong ROI for end users • Leading industry positions • Serves niche markets where customers are willing to purchase quality, technology-based products • Products perform critical
Slide 40: Financial Summary 2015 Appendix
Financial Summary 2015 Appendix
Slide 41: Sales and Operating Margin
Financial Performance Sales and Operating Margin Net Sales Operating Margins 1,400 30% 1,200 25% Operating Margins Sales ($ millions) 1,000 20% 800 15% 600 10% 400 200 5% - 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD Sept. 2016 Diluted $1.55 $1.80 $2.17 $2.32 $1.99 $0.81 $1.69
Slide 42: Historic Sales ($ Millions)
Historic Sales ($ Millions) $1,000 $100 $10 42
Slide 43: Stock Dividend Growth
Stock Dividend Growth $1.32 $1.00 2016 $0.66 2013 2007 $0.22 2003 43
Slide 44: Strong Cash Generation
Strong Cash Generation ($ Millions) 2015 2014 2013 2012 2011 2010 2009 2008 2007 Operating Cash Flows $ 190 $ 241 $ 243 $ 190 $ 162 $ 101 $ 147 $ 162 $ 177 % of Net Income 55% 107% 115% 127% 114% 98% 300% 134% 116% Capital Expenditures 42 31 23 18 24 17 11 29 37 Free Cash Flow $ 148 $ 210 $ 220 $ 17
Slide 45: Capital Efficiency – 5 Year Average
Capital Efficiency – 5 Year Average 50% 40% 30% 20% 10% 0% Return on Assets Return on Equity Return on Capital Operating Profit Margin Peer Group Graco Source: S&P Capital IQ 45
Slide 46: Worldwide Leaders in Fluid Handling
move measure mix control dispense spray Worldwide Leaders in Fluid Handling www.graco.com