Q2 2021 Graco Inc Earnings Call
[music].
Yeah.
Good morning, and welcome to the second quarter.
Our conference call for Graco, Inc. If you wish to access the replay for this call you may do so by dialing 8558592056 within the United States or Canada. The dollar number for international callers as force. They were 4.537 3406.
The conference I'd number is 978507 before.
The replay will be available through 2 P. M Eastern time Thursday July 29th.
Grieco 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 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.
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 on.
And item 1 a of the Companys 2020 annual report on form 10-K and in item 1 a of the company's most recent quarterly report on form 10-Q.
These reports are available on the company's website at Www Dot Graco Dot com and the S. E. C website at Www Dot S E C Dot Gov.
Forward looking statements reflect management's current views and speak only as of the time they are made.
The company on it takes no obligation to update these statements in light of new information or future events.
I will now turn the conference over to Kathy show on Rock Executive Vice President corporate controller.
Thank you Shannon good morning, everyone I'm here this morning, with Mark Sheahan, and David though I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion.
Our conference call slides and our second quarter form 10-Q are on our website and provide additional information on our quarter.
Yesterday, Graco reported second quarter sales of $507 million, an increase of 38% from the second quarter of last year.
The effects of currency translation added 4 percentage points of growth or approximately $12 million in the second quarter.
Reported net earnings were $110 million per the quarter or <unk> 63 per diluted share after adjusting for the impact of excess tax benefits from stock option exercises net earnings were $108 million or 62 per diluted share.
Gross margin rates were up 220 basis points from the second quarter of last year as the favorable effects from realized pricing increased factory volume product and channel mix and currency translation offset the unfavorable impact of higher product costs.
Mix was favorable on the quarter due to the strong sales in the higher margin industrial segment.
Supply chain constraints, such as logistics capacity and component availability had an unfavorable impact in the quarter and will likely persist for the rest of the year.
On a sequential basis gross margin rates were down 250 basis points as we saw cost pressures such as material labor freight and volume based costs increased throughout the quarter the.
The majority of these cost increase impacts the contractor segment as that is our highest volume business.
We also saw unfavorable mix on a sequential basis due to projects in Asia Pacific in the industrial segment.
At current cost and volume we are estimating that realized price strong factory performance and production activity will offset higher product costs on a full year basis.
Our operating teams are working diligently to minimize the disruptions and have been effective at keeping pace with our incoming order rate.
Operating expenses increased $27 million or 26% in the quarter.
Sales and volume based expenses increased $18 million against the very low comparable in the prior year.
New product development and currency translation rate each increased operating expenses by $3 million.
The adjusted tax rate for the quarter was 18%.
Cash flow from operations are at $220 million per the year compared to $143 million last year.
This increase is due to the improvement in earnings in the quarter, partially offset by increases in accounts receivable and inventories that reflects the growth in business activity.
Significant uses of cash or dividend payments of 63 million and capital expenditures of $55 million, including $21 million per facility expansion project.
A few comments as we look forward to the rest of the year.
Based on current exchange rates.
Full year favorable effect of currency translation is estimated to be 2% on sales and 5% on earnings with the most significant impact having occurred in the first half of the year.
We expect on unallocated corporate expense to be approximately $30 million and can vary by quarter.
Our full year adjusted tax rate is expected to be approximately 18% to 19%.
Capital expenditures are estimated to be $150 million, including $90 million per facility expansion projects.
Finally, 2021 will be a 53 week year with the extra week occurring in the fourth quarter I will turn the call over to Mark now for further segment and regional discussion.
Thank you Kathy and good morning, everyone on.
All of my comments this morning will be on an organic constant currency basis.
Sales in the second quarter grew by double digits in every segment and every region.
Good base growth for the quarter and for the year continued in all major product categories, resulting in record quarterly sales and operating earnings.
I would like to thank all of our employees suppliers and distributor partners, who continue to work long hours, keeping up with customer demand, while navigating logistical and supply chain challenges.
Growth in contractor continues this is.
Fourth consecutive quarter with near 30% sales growth.
The residential construction and home improvement markets have been strong in North America.
Demand in EMEA and Asia Pacific has accelerated resulting in sales exceeding pre pandemic levels.
We are optimistic that incoming order rates will remain good in all regions. During the second half of the year. However from a growth rate perspective, our comparisons become much more difficult due to the large increase was experienced in the second half of last year.
The industrial segment grew substantially during the quarter and for the year with sales volume either near or exceeding pre pandemic levels in all regions.
Quoting activity increased throughout the quarter as many of our key end markets continued to recover.
Incoming order rates remained elevated as the pace of business accelerates worldwide.
Process segment sales grew 29% for the quarter and 17% for the year.
Similar to industrial sales volumes were also either near or exceeding pre pandemic levels in all regions.
And market growth remains broad based with key product categories up for the quarter.
The strong recovery in both our lubrication and process pump businesses drove sales and earnings growth for the quarter in this segment.
Moving on to our outlook.
We have re initiated our revenue guidance for the full year 2021 and are projecting mid to high teens revenue growth on an organic constant currency basis.
Incoming orders continue to be robust in all regions with the industrial and process segments now on a solid footing.
And should finish the year strong.
Favorable operating conditions remain in contractor, however, second half comparisons are challenging.
Operator, we're ready for questions.
Thank you the question and answer session will begin at this time to ask a question you will need to press Star then 1 on your telephone.
To withdraw your question press the pound key.
Questions will be taken in the order that is received please standby for your first question.
Our first question comes from Matt Summerville with D. A Davidson please.
Please state your question.
Thanks, Good morning good.
Morning, Matt is on some of the income.
From a supply chain concerns out there mark.
Are you seeing customer behavior indicative.
Over ordering ordering Overstocking can you maybe speak to that and then also maybe comment on where.
Exactly.
The largest supply chain related bottlenecks right now what your greatest areas of concern might be thank you.
Yes, Matt it's hard to say that there is none of that happening in terms of people ordering in advance and trying to get ahead of the curve. So I would speculate that some of that is happening, but we haven't been able to quantify it I don't think that's a real big that's a real big concern for us.
I think we're experiencing really the same things that all other industrial companies are experiencing.
We haven't really seen anything with respect to graco, that's too dissimilar from what we're hearing from our competitors on what we're picking up from the channel partners that we deal with around the globe.
We're having supply chain issues across the business. So I don't want up under state what's happening in terms of like industrial and process, but for sure.
In the contractor business, where the demand even out the door sales demand has still been very robust.
That scenario, where I think we've seen the most pressure year to date.
The channel partners that we deal with I think at this point are still.
Hoping to get their inventories up a little bit from where they are at today and so as we're able to deliver more product to them, you'll hopefully that situation gets better.
Got it thank you.
Yes.
Our next question comes from Deane Dray with RBC capital markets. Please proceed with your question.
Thank you good morning, everyone.
Hey, we'd love to stay on this topic.
And we got the qualitative commentary that's helpful. But can you provide any specifics on.
Input costs.
And broadly the price cost you've always been good about getting price between 1 on the happened 2% how much of that has come through.
And then how does that how much of a headwind has higher input cost burn in the quarter in terms of the margin impact this quarter.
Yes.
Take a shot at it and then Kathy and David are here as well and they are welcome to join in we are realizing price gains and I would say more or less in line with what we had expected to realize when we put our price increases through.
And overall I think as Kathy said for the year, we expect that price cost, we're going to be in good shape.
We're seeing the same cost pressures that everyone else's or come on everywhere steel aluminum copper plastics those are key components in graco products and some of the components that we buy also like electronics.
Motors and engines and even like subcontract premiums that we pay to folks that help us out when our demand spikes up those are all those are all much higher freight costs are higher as well. So I think that as we head into the second half of the year the real.
The thing.
The thing that we need to have happen is the continued strong business demand.
And Thats right now it appears to be the case, if there is a tick up per ticked down in our factory volumes will then cost could be not as big of an issue if it ticks up or it could be more of an issue of if volumes ticked down, but we feel like we're in pretty good shape and I don't know if you guys have anything else you'd like to add but.
No I think that summarizes net really well.
Yes. This is David low I would agree that I think the challenges that we have are manageable.
And that the.
Areas of areas of pressure are not unique to us I guess, the only thing I would add is our business model is as all of you know is.
I'll cover the lower volume high mix model and was 65000 skus or more.
Our our sourcing people and our manufacturing people.
Are used to being in have a lot of experience being nimble to meet the kind of service levels that we want to have so.
This is this is more challenging than usual, but not unknown to the organization.
Got it but you just it doesn't sound like you've got a number.
That youll share on on what if you roll up that input cost pressure, how much of that impacted margins this quarter.
Not by the quarter I think what we've said is for the full year, we expect it to be a neutral at current day.
Alright, So second topic is just get some further color if possible on the falloff and contractor on a monthly basis. It really does jump off the page at you.
And I also appreciate on a 2 year stack you are still up 30%. So this is still good underlying growth versus pre COVID-19, but just.
Characterize the monthly progression and what does that say about July.
Yes, I think when we look at what we're actually seeing for incoming orders from our customers that are coming into the factory, it's been pretty consistent.
Through June and July so far from what we've experienced for the first part of the year, obviously, the comps just get tough and so thats why the percentages look funny.
And I think.
Looking back at the schedule from second quarter last year.
You see the point that Mark is making pretty dramatically.
Have the chart in front of me now, but April and May were very soft and then we saw a sharp.
Like 25% or 26 percentage point in contractor revenue in the month of June last year.
That's helpful and just lastly, a comment.
For us it's great having you in the CEO seat, we'll all Miss Pat, but nice transition and.
Great to have your CEO, thanks, well, thank you very much.
Thank you. Our next question comes from Andrew Buscaglia with Vandenberg. Please state your question.
Hey, guys.
I wanted to follow up on that contractor question.
Yes.
Yes June.
Like these that June.
It really kind of decelerated there but.
Is there anything going on with where you were June should've been maybe higher but you're just having some trouble meeting that demand.
I'm, just trying to get a sense of going into July if if.
Those sales will go negative.
Albeit at very high levels.
Yeah, I think that for the most part what I said about the absolute level of orders coming into the shop had been pretty consistent and our ability to get product out is constrained by some of the supply chain issues that we've talked about and they have accelerated a bit. So when you look at our ability to actually deliver.
That's something that the team is working very hard on and I think is going to remain challenging but the encouraging thing and the thing that we were probably the most concerned about going into the year was.
What we see.
A significant step down or a step down in orders coming from customers around the world as we sort of lap the pandemic.
Spike that we had last year and as we sit here today, we have not seen that so that's really encouraging.
Interesting yes.
Just sticking with contractor hit the Mark.
<unk> obviously.
Obviously facing tough comps versus versus last year, but you really called out more so.
Kind of adverse impacts and contracted versus the other segments. So is there is there something specific any contractor that.
That's different from the other segments, that's impacting those margins.
Yes. This is Kathy on.
Other segments or what we would really point to is our low volume businesses high mix low volume and then contractor. That's the 1 business, where we do have higher volumes, meaning higher quantities of units that are being sold.
That's really the driver of the more significant impact on that business.
Okay makes sense.
Thanks, guys.
Yep.
Yes.
Thank you. Our next question on content lineup with Morgan Stanley. Please state your question.
Yes. Thanks, just wanted to stay on the topic of supply chain. So it certainly seems like you've been building inventory obviously, you've also been.
We're seeing substantial growth on the business just curious how you would characterize it for you are you building excess buffer inventory that you expect to monetize later this year or next year is that just a function of the higher cost of inventory.
Or is there something else going on there.
I think the inventory increase has been somewhat reflective of the business levels and that obviously is our industrial and process businesses picked up.
Compared to where they were at the beginning of the year or let's say in Q3 or Q4, when we were actually not seeing a lot of throughput in the factories and not producing goods I mean, the inventory levels have come up from from that standpoint. So.
It feels to us like it's a natural increase or has anything really funny going on there.
Of course, we're trying to get ahead of the curve like everyone else. When it comes to some of the key components that go into our products and I think we did a good job of that early on this year.
Pre buys on some of the categories that were mentioned to stay.
Ahead of things and given our cash position and ability to execute on those I think that those decisions will pay it out well for us.
Obviously, our inventory is high we all know that but we have really good levels of customer service and support that's needed.
There isn't really anything strange going on there from my view.
Yes, it makes sense makes sense.
Just on that sort of low turn.
Portions of the business.
I guess, what I'm wondering is as we think about back half this year or maybe it's 2022 basically how long is the lag in most cases between your raw materials purchases and your sale in other words is there a margin pressure that we should think about.
In relation to that are you feeling good about where prices are versus where you purchase things.
I think we're yes, I think we're pretty good I mean, our throughput as quick for the most part we don't let things that are on.
Terribly long.
As Kathy mentioned I think in her opening comments, we have seen the impacts of the higher costs coming into the factory now that maybe we didn't see quite so much of in late last year on early this year.
But as we roll forward, our forecast and we kind of look at how we think the year is going to play out we feel pretty good about where things will wind up yes, and I would just add to mark and kathy's comments that given the I'll call. It the process in the industrial divisions are skewed to the lower volume higher mix.
And with the I'll call. It the order trends that we see the overall strength in those segments globally.
It's very reasonable that we would be adding getting ready to fulfill the demand that is seems to be very evident in the business and sustainable.
Very helpful. Thank you.
Thank you. Our next question comes to Reboard to ski with Jefferies.
With your question.
Yeah.
Sorry. Your line is open please check your mute button.
Hi, sorry about that the outlook, which is almost all green is 1 of the most bullish you've been certainly over the last several years given your positive outlook and I guess the expectation for incoming orders to continue to be robust.
From a supply chain issues, you talked about could you touch on Youre starting to think about 2022 I know, it's early but I think given everything you would hope.
Data center demand profile from here.
Got it.
Hard to know, but right now things look really good.
Unless something changes in the world that we don't know about I don't really see.
A major inflection up or down as we head into 'twenty, 2 I think I think it should be a decent year.
Yes, I would just add yes.
As you as you well know, we're pretty short cycle business.
And we serve a lot of different industries, so it's hard to generalize, but when you.
Read the macro the macro picture in construction certainly here in North America, and overall levels of economic activity and despite maybe hiccups from time to time related to pandemic back.
Factories are open salespeople are out in the market, calling on customers like they were doing before those problems began.
And at the overall feedback we get from the field is.
Okay.
Mark alluded to at least makes us feel very good as we look ahead as far as we can look ahead.
Thanks, that's helpful and just another question on contractor.
Obviously margin took a step down versus the first quarter, it's pretty inconsistent with normal seasonality now it looks like you had some elevated expenses in marine based incentives, but could you just provide some color on performance there how should we think about margin performance. This year given the more challenging top line comparable is on that segment.
Yes, I think that we tend to look at things maybe on a bit longer term basis then.
What our quarterly results might show. So there is always noise and volatility, but when I look at where they are at year to date I feel pretty good about the absolute level of operating profit performance and I think that they are set up for a good second half as long as the volumes continue to stay where they're at.
For sure it when we started the year none of us really new.
How strong.
Strong the business would be on whether it be sustained throughout the full year and so as we got through Q1 and on into Q2. It became more apparent to us that volumes are strong we need to make sure that.
We're reflecting that in our variable cost and expenses, which include incentives and rebates on programs that we do with our our key distributors around the world. So.
As long as that kind of stays at the current pace I think that we're in good shape and we should be setting up for a pretty good second half of the year.
Yeah.
Great. Thanks for taking my questions.
Thank you. Our next question comes from Mike Halloran with Robert W. Baird. Please state your question.
Thanks, everyone. So.
Just following up on that then Mark then when you're thinking about the back half of the year here.
Does the incentive comp then start normalizing a little bit as those comps start normalizing, which means that the run rate from the second quarter isn't.
Isn't quite accurate, but maybe the combined <unk> you flatten things out that maybe is a better thought process to think about how back part of this year on into next year starts playing out on the margin profile in contractor.
I mean, I think we're in good shape right now as we sit here today and none of us really knows what volumes are going to be to be honest with you.
As I think Pat once that are.
Our crystal ball is like a bowling ball.
We live and die by the weekly and monthly bookings and billings that are coming in but as we sit here right now and what we see coming in and how we feel about the business on where we're positioned.
Do think that.
We're in good shape of course, what's going to happen now in the back half of the year in terms of like a comparison to last year is that <unk> as we all know ran really hard in the second half of the year. So in terms of where their incentive accruals are and where the growth accruals are for our customers and those types of things, Australia depend on where their volume.
Comes in and the other businesses are running hot so.
We are anticipating that people are going to get back on the road, they're going to start spending money, we're going to do trade shows again, so there likely be some incremental spending on the back half in process on industrial that wasn't there, but those should all be justified by the level of business coming in and as long as we're seeing the kinds of orders.
On level of activity that we've got going on right now I think we're comfortable spending those dollars.
Thanks for that and then.
A lot of moving pieces here comps or walkie, obviously, which which.
Just make it seem like not real numbers so.
When you strip back the noise, a little bit and you think about how sequential patterns have worked through the quarter and how you are envisioning things are working through the back half of the year on a sequential basis. When you think about the 3 segments. How would you compare that to what a normal seasonal curve would look like from an outlook perspective pretty in line.
What kind of variances are you seeing anything along those lines.
Yes, I think pretty normal if you if you were to strip out all the noise thats in there obviously our outlook is probably from a growth rate perspective is probably stronger than the businesses that were weak last year versus.
What we might experience for CBD.
<unk> is really the only business that I would characterize as being seasonal and they typically do have their strongest quarters and Q2 and Q3, if you look back historically and at least as we sit here right now like we said a couple of times, Puerto Rico look pretty decent.
Absolute demand sort of fits that that overall pattern on the other businesses there isn't a ton of seasonality it might be like 1 or 2 percentage points. If you went back historically and looked at how much industrial contributed first half versus second half second half a little bit stronger but.
It's probably not worth even screwing around with the math.
And then last 1 for me if you don't mind.
Capex side capital deployment side in general.
How are you thinking about it obviously capex seems like you pulled a little bit forward into the facility side.
And then any comment on that and then also how youre thinking about the M&A outlook.
On capital in general.
Alright. This is David I'll try to comment on on both those topics on the Capex side, Yes. The company as you know has been aggressively investing in really in new facilities and plant and equipment.
Improved productivity et cetera for several years now.
We announced.
Our investment.
In a new manufacturing facility.
Next Rogers, Minnesota, and we're in the process of breaking ground on that and we're hopeful that.
Kind of all come together in the next 2.
12 months to 15 months, so that is going to be a very.
Big.
Big investment for Us and where most of the money that cathie is talking about is going but along with that along with that.
Its route.
The last year all of the operations have continued to come forward with investment.
<unk> that makes sense.
They have to have offer improvements to the business that generate rois that we feel are justifiable and it's been.
Quite frankly, it's been.
Busy time, reviewing all of the proposals from the facilities. So I think that what we're communicating is really consistent and bringing our expectations up to date.
I guess I would add if you're switching gears to the M&A environment that.
You folks know a lot about and I guess I've been involved in recently from the operating side.
It's an extremely active market as you are aware there.
There is lots of.
Theres lots of proposals.
Floating through.
Some smaller ones that we look at and act on on an ongoing basis, and some and some bigger ones.
I guess as a former operating person I would say that the challenge to the current process is of course, we're willing to move forward, but.
When we look at the processes on the.
Especially on the bigger transactions that tend to be auction environments, which is usually a seller friendly decision in the process.
People expect to move very very quickly, which is fine when we're familiar with the market.
Maybe not so fine when we have to go to school and learn some things.
And then I think lastly.
We continue to be on I'll say impressed by the multiples of some transactions that we see in the marketplace and we understand the dynamics of the marketplace cost of capital and so forth, but historically we've been.
I think reasonably disciplined and that's something that I would expect we continue to be the case.
Well great I appreciate the thorough answers everyone take care.
Alright, Thanks, Mike.
Our next question comes from Hammond with Keybanc. Please state your question.
Good morning.
Hey, Jeff.
Just on the new segment reporting change can you just help us understand better what's driving that strategically.
You talked on the release about.
Kind of lining up customers distributors et cetera, but maybe just.
Expand on that that change.
Yes, sure. So we're really doing this to improve our ability to drive profitable organic growth. That's what it comes down to and when you look at the pieces here that the move really is combining our contractor focused businesses all under the contractor group.
Historically some of that resided in the industrial segment and that has led to.
Some overlap with regard to customers salespeople et cetera.
On the engineering front as well so we think putting the teams together is going to create some synergies.
Some better collaboration and obviously both groups are are important to us, but having them housed under 1 management team I think is a good move and then the other pieces that are also being combined I guess that weren't necessarily called out but they are the ones that are left in the businesses. After we put <unk>.
<unk> are the advanced fluid dispense part of our industrial business, which is really our seal at adhesive composite electronics type business, along with our liquid finishing and again those 2 businesses they really sell through common distributors.
They have overlap on salespeople the technical aspects of the product lines are actually quite similar and the selling process is also similar so we think that putting those 2 groups together again will help us energize some organic growth in and then get some more leverage out of the growth that we do get.
Okay. That's helpful. And then just the second 1 so industrial margins I think stepped down sequentially and I think you talked about mix just as you.
Kind of look at the regions and look at the type of projects that are coming in how do you. How do you kind of see mix into the second half for industrial I think yes. The project business is good the pipeline is solid so I would expect that we'll have more project business, both being booked and hopefully build as we work our way through the year a lot of times they are low.
Sure margin, but a lot of times. They also carry some high margin graco products in them and then once they get installed obviously you get the customers coming back for health part Successories, new projects things like that so it's pretty healthy healthy environment.
Okay, great. Thanks, Mark.
Yep.
Thank you. Our next question comes from Bryan Blair Oppenheimer. Please.
State your question.
Thanks, Good morning, everyone Hi, Mark.
Good morning.
That's somewhat of a follow up on net lead off question on Windows.
Through the cycle your parts and accessories mix is pretty consistent around 40% given the uniqueness of today's environment pervasive supply chain uncertainties. Some of the order flow that stemming from that.
Was that percentage, notably different in the second quarter.
No.
The same.
Amazing how it hangs in there but.
It's very consistent.
Okay that is very interesting.
Follow up higher level question.
Of outlooks.
Specifically for the contractor segment. Your team has been bullish on the housing market for for quite a while and correct in that.
And Mark you detailed on a favorable macro factors last quarter. Some of them were reiterated on this call.
We even cited the Freddie Mac study 3.
$3.8 plus million under supply and.
Housing all very favorable.
So I'm wondering if anything that.
That's taking place now.
Specifically in terms of affordability and.
Yes.
Literally the ability of the incremental buyer.
Move forward, whether that affects your teams.
Yes look in that regard.
Okay.
Not at this point, it's definitely worth keeping an eye on obviously a cost a heck of a lot more to build a house today than it did a year ago, but again the macro dynamics are still fairly favorable and we haven't really seen anything translate into activity with our painting contractors or the other parts of our business as I said before the incoming order rates still.
Good most of the painters that we talk to they have got a good backlog of jobs.
I was recently actually trying to get somebody to do some work on my place and that it's their backlog and you just can't get you can't get good people and I think it's the same thing on the housing side. If you want to build a house now youre looking out quite a ways.
I believe there will be a break in some of the cost pressures that they are seeing for building materials and I think you've already seen started to see a little bit of that and as we work our way through the year hopefully that opens things up a little bit, but we're still very bullish long term cyclically on that part of our business.
Okay excellent.
1 final 1 if I can David alluded to limited due diligence time on on certain M&A prospects with the vaccine rollout the ability to travel et cetera is that leading to more activity in your funnel and perhaps pulling forward.
Some process.
I don't know that we have seen that I think what David was alluding to and he can he can give you more color. If you want so as we were seeing last year.
During the pandemic that you would have come.
Companies come to the front end no due diligence no boots on the ground. It was all done virtually.
Unless you are intimately familiar with their organization or the.
Industry that they're in or the competitive nature of their business on all those things it would be very difficult to probably get yourself comfortable with the kinds of premiums that were out there in the marketplace I think going forward as people get vaccinated and factories open up and companies are.
More welcoming that should help.
That should help the dynamic on the due diligence side going forward.
Welcome to <unk>.
That's exactly what I was talking about it.
It's definitely 1 thing to assess a business that we have.
High level of familiarity with we know the products on the channel and so forth.
And maybe in the cases of certain businesses certainly maybe the bolt on businesses to some degree if they're familiar to us the level of the compatibility of the acquired management, maybe has a different level of importance I was thinking on 1 specific case, where we looked at an industry that potentially was.
Great excitement.
But it was definitely outset outside of my competency at least coming from the industrial on the process side of Graco and it was really going to be important to assess the compatibility and the staying power of the management group and there simply was no time for me too.
Those circumstances to go meet people face to face and participate in any reasonable way on the timetable they were insisting that the.
The process be conducted.
All makes sense very helpful color. Thanks again.
Yes.
Thank you as a reminder to ask question. Please press Star then 1 on you touched on the telephone.
Our next question comes from Brett Kearney with Gabelli funds. Please state your question.
Hi, guys. Good morning, Thanks for taking my question Yeah learning.
Just had 1 this morning.
On a covered in your comments early on Mark.
The broad based.
Demand outlook, but just curious.
Our space in particular.
If you could just remind us what part of the business I guess from a sales perspective that accounts for today and whether that is included in kind of day.
The growth profile outlook you have across.
The majority of the.
Industrial businesses.
Yes of course, we're in like a lot of different end markets Aerospace is definitely 1 of them.
And that business has been soft as you as you might expect it's in our industrial segment is really where we serve that industry, primarily our liquid finishing growth I think also our adhesive group gets involved to a lesser degree there.
Okay and.
The outlook.
Going forward.
Just kind of in line with.
The overall industrial segment.
Well I think that the outlook for aerospace is probably better today than it was a year ago, if people get back on airplanes and starting to place orders again again I don't feel that its a meaningful driver for graco business. It's 1 of many key markets that we participate in and I guess the way I would say if a person's I don't know.
If I'm speculating about the intermediate term.
I think I think Mark's point is when we look at the strength of.
Let's say automotive manufacturing the tier ones.
Farm construction equipment, the wood market and so forth.
On a relative basis, those carry a lot more weight than 1 single.
Our market space like aerospace.
Yes, that's very helpful. Thanks, so much.
Okay.
Thank you. Our next question comes from Walter Liptak with Seaport Global Securities. Please state your question.
Alright, thanks, good morning.
Right.
Wanted to see if.
If there's a way of talking about the project work is sort of like longer cycle.
And if.
During the quarter, you saw more projects kind of entering into sort of quoting or.
Project development.
I'm trying to understand it.
These are longer cycle.
Stuff that youre working on the longer cycles that ship in the second half or are you starting to build out project work for 2022.
Yes, I think for sure our quote activity is way up from a year ago, and I'm talking mostly on the industrial and process again, and then also our powder powder coatings business the game of business and it really depends on the type of projects some of them they lap over from 1 year to the next.
The majority of them there are probably 3 to 6 months in terms of the timing and they haven't really gone through and done an analysis of how much is actually going to bill on the back half of the year, but I think.
The takeaway from our standpoint is that theres more people out there they're looking to deploy capital. There is a lot more good projects out there and we should see the benefit of that.
Okay, and how do you protect yourself with material inflation.
Well on those longer cycle.
We do a pretty good job of co.
Quoting and estimating as you probably can imagine and to the extent that we've got components or things that we're concerned about we will either buy those ahead or.
Rebuild in some of that pricing into our project business project business is a little bit different than like our normal price increase right. So our normal.
Price increase that we do annually that that covers a lot of our our standard components and those types of things, but when youre doing a project you'd have a little bit more leeway in terms of building some of the price question in.
Okay got it.
I've always thought of that.
<unk> work is being like high ROI.
<unk> powder system or adhesive system or whatever goes in that the customer gets a payback in a year or 2 but with the.
Price increases in inflation is there a point at which the ROI has gone down enough where projects push out is there any concern about that.
No we haven't seen that.
I would say I would say that maybe offsetting the risk of that is the things that are good our new system would help a manufacturer with maybe in the area of labor savings in material savings, that's where inflation actually may help the ROI.
Okay sounds good thank you.
And there are no further questions I will now turn the conference over to Mark Sheahan.
Alright, well. Thank you so much for participating in this conference call and we'll see on the road or we will talk to you next time.
This concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.
[music], Inc.