Good morning and welcome to the First Quarter 2015 Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 within the United States or Canada. The dial-in number for international callers is 719-457-0820. The conference ID number is 1366681. The replay will be available through April 27, 2015. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. At the request of the Company, we will open up the conference 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, including those identified in Item 1A of the Company’s 2014 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. This call is being recorded. I’ll now turn the conference over to Caroline Chambers, Vice President, Corporate Controller and Information Systems. Please go ahead.

Good morning, everyone. I'm here this morning with Pat McHale, Jim Graner, and Christian Rothe. I'll provide a brief overview of results and our updated segment reporting before turning the call over to Pat for additional discussion. Our conference call slides and our first quarter Form 10-Q are on our website and provide additional information. Starting this quarter, we've created a new reporting segment that includes our process, oil and natural gas, and lubrication divisions. This change reflects our increased focus on growth driven by product and channel development initiatives in the process area as well as recent acquisitions. The segment includes vehicle servicing and industrial lubrication equipment, diaphragm pumps, and high and ultrahigh pressure valves. The process and oil and gas operations were historically included in the industrial segment. Although we will not talk specifically about lubrication equipment in future quarters, to help with understanding this first quarter and our new structure, our sales in our lubrication division were up 2% at constant exchange rates and operating earnings were down approximately 4% as compared to a year ago. The industrial segment reflects our liquid and powder finishing equipment, spray foam insulation equipment, plural-component proportioning systems, and other equipment for a variety of industrial customers and specialty contractor end user customers. The contractor segment remains unchanged. The contractor segment markets sprayers for architectural coatings and paintings, texture, and line striping equipment. Additional information regarding our updated segments is included on page 9 of our slide deck. We have also included historical results by quarter for these segments for 2013 and 2014 in the appendices found on pages 20 and 21 of our slide deck. Before Pat comments on our sales, earnings, and outlook, a few comments regarding cash flow and liquidity. Cash provided by operating activities was $47 million in the first quarter. The increase in inventory and accounts receivable reflects organic growth as well as the effective acquired operations. In the quarter, capital expenditures were $10 million, dividends paid totaled $18 million, and share repurchases net of shares issued, totaled $34 million. Debt including notes payable, totaled $819 million at the end of the quarter with approximately $500 million of debt repaid subsequent to quarter end. We expect capital expenditures to be in the range of $30 million to $40 million for the full year. Excluding any impact from post-tax dividends from the liquid finishing businesses or gain on sale of the investment, the annualized tax rate is expected to be approximately 32% to 33%. I'll turn the call over to Pat now for further segment and regional discussion.

Thanks, Carol, and good morning. Our reported figures of 6% sales growth and 41% growth in diluted earnings per share included $30 million in dividends from the hold separate business. Stripping away the dividends, diluted earnings per share were down 13% year-over-year. Foreign currency was a big driver of unfavorable performance in the quarter, reducing sales by 4% diluted earnings per share by 10%, in line with the expectations we put forth in late January. Acquisitions added 5% to our sales growth in Q1. The purchase accounting inventory step-up cost for the acquisitions that closed within the last few months reduced the earnings impact from acquisitions to zero for the quarter. If you exclude the inventory step-up, acquisitions would have added about $3 million to pre-tax earnings. I continue to be excited about the new opportunities we have with the acquired businesses and we'll talk more about the performance of the acquisitions later. There was a lot of noise in the quarter, but adjusting for the impact of acquisitions, the hold separate dividends, and foreign currency, organic sales grew 5% in the first quarter, but diluted earnings per share were off about $0.03 per share. This negative earnings leverage is unusual for Graco and I'll walk you through what happened as well as try to give you some insight as to what the next few quarters may look like. Other than our lack of growth in the regions, the underlying business is actually performing reasonably well. The drivers of negative leverage on organic sales came from a number of contributors, all at modest levels, but when taken together, they hurt us in the quarter. Many of the expenses are directly related to decisions we have made to pursue new growth opportunities. Growth is our focus and we will continue to…

[Operator Instructions] Please standby for your first question. Our first question comes from Charlie Brady with BMO Capital Markets. Please state your question.

Thanks. Good morning.

Good morning.

Good morning. Charlie.

I just want to focus on the -- just to make sure I'm clear - contractor. That incremental launch cost thing - that's done completely or is there a little bit left in Q2?

There could be a little bit spillover, but it shouldn't be significant. We got most of our launches in North America done here in the first quarter this year.

And is the loading part - does that continue into Q2 or are you fully loaded now?

I think we're fully loaded at this at this point.

Okay.

Of course, we hope to have some great sell through on these new product launches as well.

And just on process, the incremental costs, those are going to continue, but are they going to continue at the same pace as we go through the rest of the year or how is that going to be slotted in?

So for the growth investments, we were about $2.5 million in the first quarter. And I'm predicting in that range of $7 million for the full year.

Kind of spread out pretty evenly then?

No, I think we'll start lapping some of our investment decisions for 2014. So we'll get more relief, I'd say, in the latter half of the year.

One more and I'll hop in queue. Just on the M&A. Obviously, you guys have done a good bit of M&A in the past 12 months. You've got a plenty of capital to go forward. Are there any specific areas you really targeting, given what you've already purchased?

Well, obviously with the development of what we called the process segment, we think there's a lot of interesting opportunities, both in process and the oil and natural gas base. For us, process focus right now on areas like sanitary we think are very interesting. If you just step back a little farther than that, the more likely area for all of our future acquisitions is in the industrial and process segments. Due to our large market position in contractor, that becomes more problematic.

Okay. Thanks, guys. I'll hop in the queue.

And we will go next to Kevin Mackza with BB&T Capital Markets.

Thanks. Good morning.

Good morning.

Hi. Kevin.

Another question on process margin. So some of these costs go away. The translation effect doesn't. Can you just a little bit longer term, talk about the way this business is configured now with the new acquisitions in there, kind of what you think the potential is here for margins? Can they come back up to that 24% level over time?

I would say that, Kevin, we view this as an industrial segment like margins ultimately. A little bit lower with, I'll say, a third of the business coming from the legacy lubrication, but the process business and the oil and gas eventually should look a lot like our industrial segment

We’ll have the of course the accounting impact of the amortization that will go extended period of time. But if you take a look at what the margins would look like without that amortization, we expect they'd be pretty strong. Again, the recent acquisitions with those costs excluded are in that 30% range. So good strong niche markets.

Okay. Shifting gears, can you address the decision to repay all but the $300 million in private placement debt versus buybacks or some other use of that cash?

Where - what we paid off was on our revolving credit. So we still have our revolving credit line of $450million available to us. $500 million – Christian signals. And so that's available to us for the right transaction. And should opportunities come about on the share repurchases, we have that available with a telephone call.

Okay. And then finally from me, the translation effect here is a bit worse, as you called out. When I look at the organic growth in industrial and process, it doesn't look obvious that there's been any transactional effect, like losing out on sales versus just translating those sales back into fewer dollars. Are you expecting that? Is that something that we ought to be watching out for? Or is that a smaller issue here?

Yes, I view that as a smaller issue. Generally in the past, we haven't seen that be a dynamic in the marketplace when currency shifts. It can shift to maybe on a project-by-project basis, but I think generally from the larger view of things, the end market pricing will remain stable.

Okay, got it. Thank you.

And we will go next to John Franzreb with Sidoti & Company.

Hi, good morning guys. Just about the recent acquisitions. Given the continued weakness in the oil and gas sectors, are your expectations for the contributions from these businesses still the same as what they were three months ago?

Yes, probably three months ago. Probably not six months ago. So you know, when we were in the midst of doing the two deals that we did out of the group that have some oil and gas exposure, that was kind of at the point of and just the beginning of the point when oil prices started to collapse. So obviously, our timing wasn't great on those. They are not huge, so it shouldn't be the end of the world. I'll remind you that the high pressure equipment acquisition was only half oil and gas and Alco was about 70% oil and gas.. So those, compared to what we were thinking six months ago, those will probably have some challenges. But I think that our guidance in terms of what we thought the EPS accretion would be for 2015 still looks like it's going to be okay.

Okay. And as far as free cash flow, I guess typically, Q1 is the weakest and Q2 and Q3 kind of builds up substantially. Use of the cash - would you prioritize the buyback - just to piggyback on the last question - the buybacks versus further debt reduction. Would you prioritize?

For sure, there won't be any further debt reduction. We have the private placements in place. We intend to keep those in place. That's $300 million, which is all outstanding today. So we're going to be generating some cash and to the extent that we don't have any near - or long-term acquisition opportunities, buybacks certainly come to the top of the list.

Okay, perfect. Thank you very much, Jim.

And we will go next to Matt McConnell with RBC Capital Markets.

Thank you, good morning.

Good morning.

There was good clarification in the slides and some of this has come out in answers to your other questions, but you called out 5 percentage points of the operating margin headwind in 1Q. Can you quantify how much of that is expected to kind of repeat through the remainder of the year and what rolls off?

So I'd give you a reference to slide 7 in the deck and I'll call out a couple of the numbers on there. So it shows effect of the inventory step-up a 1 point margin, $3 million in operating earnings. That, of course goes, away. That gave you some guidance on the incremental investment in regional and product growth initiatives and the fact that they will continue, but should be a smaller trend. The unallocated corporate expense pain stays with us. And we're expecting the volume effect on the expense leverage to get smaller. In other words profit from the growth volume increasing and negative leverage expense of it. 2 points. But of course, we still, as we talked about, do have this translation effect with the exchange rates today that will continue. So it's - a few points come off, but a few points of headwind remain.

Okay, great, thanks. That's helpful. And on the reiterated target for a little bit of growth in EMEA for the whole Company, is that just because Russia, it is not going to be down 50% again? I know it's only a modest acceleration, but are you seeing anything there that makes you incrementally more confident in your ability to accelerate here from the flat growth that came in the first quarter?

Yes, part of that should be because the impact of Russia will be less as we move through the year. You know, Russia was getting worse last year as we progressed. Our view is it shouldn't get much worse than it was in the first quarter, so that the incremental impact quarter over quarter should be less to us. But we also have new product launches and we've got some other plans and programs that we think are positive. And we'll continue to work those for the next nine months. We've been performing okay in Western Europe and we don't necessarily see anything on the horizon right now that indicates that we should back off from that. So again, we are feeling like we can make a comeback from flat and get some growth for the year.

Sounds good. Thanks very much.

And we will go next to Walter Liptak with Global Hunter.

Hi, Thanks and good morning. I wanted to ask about operating leverage. And I guess for the rest of the year, all in with the three segments, where are you envisioning the businesses for operating leverage?

I'll take you on a little bit of a journey. Long term, we've always guided to about 40% operating leverage. That's, of course, predicated on a couple things. Stronger organic growth than when we've been reporting. You know, high single digits versus middle or low single digits. Organic growth and it also reflects a mix that's more geographically equal. So this quarter, we had a lot of growth in North America and negative in Asia and flattish in EMEA. That hurts our incremental profitability. So again, when the world gets back to equilibrium and our new product performance is getting us to, I'll call it the 8% to 10% organic growth, and it’s coming around the world, we believe the 40% is still appropriate. For sure this year, short term, we have the issue around exchange and we have the fact that we're not growing quite as rapidly - or lack of growth would probably be a better term - in Asia Pacific and EMEA. So near term, we're going to be significantly less than that 40%.

Okay. Thanks for that. Looking at the contractor segment, you mentioned in the comments double-digit growth. It sounds like that's going to come from your efforts on the contractor side rather than the pro painter. Is that right?

No. In the first quarter both paint stores and home centers grew strong double digit. It was just that the home center grew faster. But our outlook for in the Americas for both of those segments is strong and we think that we'll do better in the regions in the last nine months than we did in the first nine months.

Okay.

Or excuse me -- the first three months.

Okay. Thanks for that clarification. And in the process business, you know, the growth rate was -- volume price looked good, mid-single-digit, but it was a little bit of a slowdown from the big pickup you had in the fourth quarter. I wonder is - and what we're hearing from some other companies is capital projects pushing kind of generally in some markets because of currency or with the price of energy or whatever. I wonder if you just comment on what you're seeing from capital projects.

I've been doing a lot of traveling all over the place this year. And I would say that that's that's definitely a theme, especially outside of the U.S. here. You know, other than a few selected areas, it doesn't seem like it's real dramatic. But definitely there's an impact there and there's a tendency for people to be pulling back. Oil and gas is the obvious one. But you know, our exposure in oil and gas is still pretty small. We are exposed against a broad range of end markets and also a broad range of geographies. So it's a tough environment out there. Brazil is very challenged. China, for sure, I think is still trying to sop up a bunch of excess capacity in certain end markets they had put in place when things were going hot and heavy here for a few years. So it's a challenging environment, but I didn't get the sense in all my travels that this is going to be a repeat of 2009.

Okay, great. And then just a final one on the gain. I didn't think I heard you say what the gain was going to be in the second quarter for liquid finishing.

So we still have some moving pieces on the true up that will come about in some of the expense category, so I think we'll -- we had $422 million on the books from an asset point of view and we've got proceeds. Before these adjustment items of $590 million. I'll let you get close on your own.

Okay. All right. Thank you.

And we will go next to Joe Ritchie with Goldman Sachs

Thank you, good morning, everyone.

Good morning.

Apologies if I missed this. I missed the first couple minutes of the call. But can you just talk a little bit about the rationale for the resegmentation, whether there's any synergies associated with the new segments or really just more of a focus to grow that process segment?

Well, we've changed a lot. Caroline had some opening comments on that. But from a business standpoint, we've changed a lot with the creation of a process division in early 2013 that we didn't have before. We pulled that business out of our industrial group from a management perspective. It’s got its own engineering team, its own commercial organization. Really trying to focus on growth in that space. That division has done some deals, so that business is getting bigger and more complex. Then we also initiated our oil and gas business unit and we got two deals down there We are working this year to build up our commercial organization, because we are going to launch organically developed product as well. So really, it was just time for us to take a look at what made sense. From a management standpoint, the businesses will continue to run as they ran before. This is really an accounting exercise from a reporting standpoint, because we think that those businesses make more sense in a segment than they did the way we had them.

And Pat, maybe just following up there. How do you think about the risk of getting into a new organic growth vertical, be it oil and gas and natural gas at this point? And how do you think about the return hurdles and expected payback as you start to invest more into that vertical?

Yes, if I look at Graco and I say look, we got a great machine and if we can get revenue in the top, we are going to make a lot of money. And we need some new places to go and apply our skill set. So I'm excited about the fact that we're getting into new spaces. Our timing wasn't great in terms of the two deals that we did in oil and gas, if you just take a look at what we paid and then what happened in the marketplace. On the other hand, they weren't big. They didn't break the bank. And the slowdown here in the end market, although it's going to be negative from a revenue standpoint, it's going to take us some time to get our manufacturing investments in place and to get the incremental sales force in place, identify some new product opportunities and do some of the things we want to do with these businesses. So I don't anticipate that we're going to go out and be paying crazy prices for oil and gas assets right now. But I do think that the work that we're going to do over the next year or two to improve those businesses is going to be probably good timing for when the market comes back. So again, I tend not to look in reverse too much, just look forward. And I think it's going to be good in the long run.

Now, that's fair. I guess maybe following up on a comment you made earlier about Asia Pac and the double-digit decline that you saw in China and Japan; can you give us any color on the verticals where you really saw weakness?

Well, the large project spending in China was definitely soft, at least - our billings to large projects in the first quarter was definitely soft. The economy over there still has a lot of activity, so it's not like it looks like its dead, but there was a lot of capacity put in place. So I think that's just going to be a little bit challenging here, as it really has been, for them to use up that capacity with more production before they really need to start putting more CapEx in place. Automotive sales over there are still okay, but they did build capacity to build a lot of vehicles. So we got to watch that. And ship building and aluminum profiles. And aluminum profiles are a big business for us and our powder business in China. And that is making trim and things that are used in the construction market. So as we see some domestic construction slowdown due to the big build in. In China that business is impacted as well. So yes, I think we just have to have a little bit of patience there. But again, we are anticipating overall in Asia Pacific that we are going to have a much better finish to the year than we had start and that we are going to put up a positive organic growth number.

Just a couple of points to add to that. We did have an increase in our backlog situation in China during the first quarter compared to the quarter the year before for about -- on our legacy business is about $4 million or $5 million. And if we were able to ship that, we would have had a flat kind of number there. We are, as Pat mentioned earlier, putting in place a warehouse there and stocking of that warehouse, we believe, will help our growth prospects. A little bit of disruption on the supply chain to that warehouse in the first quarter with the West Coast strike. So again, our team in Asia is expecting to have growth in the second quarter. In reviewing their numbers, they have some pretty good logic behind projecting growth in the second quarter. So hopefully, we'll move on from this low point and finish the year on a positive basis.

That's helpful. Maybe one last comment on China. I mean, how is the pricing holding up today, given the environment has maybe been a little bit weaker to start the year? Are you seeing a little bit more competitive pressure and is FX impacting anything?

It's been good. We actually put our price increase in place a month earlier than we normally do. We normally target February 1 in China. We moved it to the end of December. As you might recall, we had a really nice finish to the year. Some of that, again, was driven by the fact that our distributors there are little bit more proactive in ordering ahead of the price change than they are in the rest of the world. So on retrospect, we probably pulled a few million dollars worth of business into December that normally we would get in January. But the pricing is holding and as it is around the world, we feel good about our pricing and our ability to price year over year.

All right, sounds good. Thanks, guys.

We will go next to Liam Burke with Wunderlich Securities.

Thank you. Pat, you talked about the various regions in the industrial segment. Could you shift over and talk about what product lines did well and didn't do well on the industrial business?

So when I looked at our performance in Asia Pacific, we had a couple of product lines that were better than others. But I'd say, generally in terms of our billings, they were soft across product categories. There wasn't, I wouldn't say a bright shining star, it – I'm feeling okay about global automotive, even though that China is a little bit soft. And so I'm feeling good about that end market. I think aerospace is still going to hold up well. Construction markets here in the U.S., of course, are hot, but even in places like Southern Europe, in Spain, we are starting to see them creeping off the bottom.

Now is the balance on new product introductions or is it just general end market improvement?

Are you talking about the U.S.?

Yes.

The U.S. is both - I mean our contractor business they’ve got a great track record of launching pretty exciting new products every year and they definitely get some incremental growth over that. But certainly, the construction market in the U.S. is continuing to strengthen and we are riding that wave.

Great, thank you.

[Operator Instructions] And we will go next to Jim Giannakouros with Oppenheimer.

Good morning, guys.

Good morning.

Sorry if I missed it. I know that there were questions asked about pricing. But if you can give any color from a price cost perspective on a per-segment basis, how things trended in 1Q. And I would assume that that's going to be a gross margin benefit. How should we be thinking about price cost benefit to the margin for the coming quarters?

Jim, our business model is still intact. So again, we are targeting 1.5 points of realized price increase. We are on our trajectory to meet that. Our mix is moving a little bit against this. I’ll call it the lower featured units. We are selling more of -- their rate of increase is little bit greater than our higher- priced units. So that hurts us as well as the geographic mix, because in certain parts of the world, our prices are higher than the US. So the geographic mixes and product mix is hurting us. On the cost side, we are getting favorable price exchanges. As you know, a big component of our input is stainless steel and copper and those costs are all moving favorable to us. So again, going back to our long-term model of a little bit of price every year and a flat cost manufacturing cost structure looks pretty solid for this year.

Got it, okay. And then on that mix, I mean, when historically we’ve talked about contractor margins and I know that it’s come from the investor base and us asking hey, can you get back to previous peak margins in contractor. But seeing that you are seeing a mix shift kind of headwind on the margin side there, one -- is the focus on the home center lower margin stuff, is that a strategic focus near term? If yes, why? And I guess second, how should we be thinking about the margin potential for the segment longer term?

So in terms of the folks at the organization up there, they are launching new products across a variety of categories. We are launching a lot of new products into the pro paint as well as into the home center market. The home center has been a growth driver for us over the course of last three years or four years as we have been able to capture the major home center customers here in the U.S. We are pretty well positioned now, so it will be more challenging to put up the big, huge home center growth numbers of the underlying business, isn’t there. Because we’ve got shelf space everywhere. From a strategic perspective, I like the home center business. It does a lot of good things, I think, for the organization, despite the fact that it’s got lower profitability. It certainly has taught us a lot about how to manufacture and design products to hit lower price points in the market. And we can use that knowledge as we move up through our product line. It also gives us volume and allows us to have component level quantities on some parts that can be shared across product lines that are much higher volume and more cost effective than they would be had we not had that business. And really, finally, if somebody wants to try to attack our pro-business and we see the home center business and they have the ability to sell thousands of sprayers at lower price points in that market, it’s likely only a matter of time before they expand their product range up. So there’s a variety of reasons to be there, but I don’t want anybody to think that we’ve lost our focus on the pro-business. The pro-business is our bread-and-butter. And that’s where we’re launching all sorts of new products every year and actually doing very well.

So just a couple of additional points of clarification. Our pricing on the products is pretty equivalent - or it is equivalent between the home center channel and the paint channel is just that we sell more entry-level units in the home center channel. We sell similar products in the paint channel and they are priced the same. So our gross margins generally increase as the features and functionality of those units increase. So the other point I wanted to make that within the paint channel in North America we have always guided to the fact that when the construction market got healthier, we would sell more of the big units. And they are the percentage of sales in that channel, I’ll call it the largest units are increasing percentage wise at a faster rate than the middle and the lower priced units. So the mix is changing in the paint channel back to more normal. The comparable issue here is that the fact that we’ve launched more and more entry-level products and that’s changing our mix.

Got it. That’s very helpful. Thank you.

Sure.

And we will go next to Jim Krapfel with Morningstar.

Hey, good morning. So revenue growth has been consistently robust in the Americas region. But what do make of the more tepid growth in overseas markets really over the last three years, which appears to have underperformed in the regional economies, especially in light of the conversion opportunity in spray equipment? And is the competitive environment becoming more challenging in those markets?

Okay. So I’m going to hit region by region. Our performance in South America, I think, has been reflective of the underlying economies down there. Brazil, certainly, the last couple of years, has been a major headwind for us. We are making progress in that geography in terms of market penetration with our contractor business building out channel and doing some end-user conversion. Again, it’s a very small number and we have a long ways to go, but I see us making forward progress. In Europe, I believe our business there has outperformed the economy. I mean the Western European economy for several years has had really almost no economic growth. And if you take a look at our performance in the West has been pretty decent. Certainly for the last year or so, the Russia has offset a lot of our performance and sort of masked some good work that we’re doing there. Asia Pacific has been, I’ll say, a sore spot, particularly on the contractor side for us. We certainly are not meeting our own expectations in terms of market conversion. Our contractor sales in Asia Pacific - not in every country, but in Asia Pacific as a region has been disappointing. We have made some changes there. We have made some leadership changes in the contractor business. Those I would say are in their infancy here in terms of trying to see if those can have an impact. We are doing some things on the product side. There definitely is more competition in China at the low end than there were a few years ago, but I think generally speaking we feel that it is more of a Graco execution issue on our contractor business in Asia Pacific and that we need to get our act together.

Thanks for the color.

There are no further questions. I will now turn the conference over to Pat McHale.

All right, thank you for everyone for joining us and we’ll talk to you next quarter.