Q4 2021 Graco Inc Earnings Call
Speaker 1: Good morning and welcome to the fourth quarter conference call for Greco Inc. If you wish to access the replay for this call, you may do so by dialing 1-855-859-2056.
Good morning, and welcome to <unk> fourth quarter Conference call for Graco, Inc. If you wish to access the replay for this call you may do so by dialing 18558592056 in the United States or Canada, the dial in number for Internet.
Speaker 1: than the United States or Canada. The dial number for international callers is 404-537-3406.
National colors is 4045373406.
Speaker 1: The conference ID number is 7385-629.
The conference I'd number is 730 856 to nine.
Speaker 1: The replay will be available through 2 p.m. Eastern Time, Tuesday, February 8, 2022.
The replay will be available through two P. M. Eastern time Tuesday February eight.
'twenty two.
Speaker 1: 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 the conference up for questions and answers after the opening remarks from manager.
<unk> 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 question and answers after the opening remarks from management.
Speaker 1: 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.
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.
Speaker 1: as your results may differ materially from those indicated as a result of various risk factors, including those identified in item 1A of the company's 2020 annual report on form 10 pay, and in item 1A of the company's most recent quarterly report on form 10Q.
Actual results may differ materially from those indicated as a result of various risk factors, including those identified in item one a of the company's 2020 annual report on Form 10-K , and I don't want any of the company's most recent quarterly report on Form 10-Q .
Speaker 1: These reports are available on the company's website at www.graco.com and the SEC website at www.sec.gov.
These reports are available on the company's website at www.
W. W Dot co dot com and the SEC's website at Www Dot S E C Dot Gov.
Speaker 1: Four low-income statements reflect management's current views that speak only as of the time they are made. The company undertakes no obligation to update these statements and light of view information or future events.
For 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.
Speaker 1: I will now turn the conference over to Kathy, show and rock, executive vice president, corporate controller and information system.
I will now turn the conference over to Kathy showing rock.
Vice President corporate controller and information systems.
Speaker 2: Good morning. I'm here today with Mark Sheehan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for further discussion.
Good morning, I'm here today, with Mark Shannon and David Lowe.
I'll provide a brief overview of our quarterly results before turning the call over to Mark for further discussion.
Speaker 2: Our conference call slides have been posted on our website and provide additional information that you may find helpful.
Our conference call slides have been posted on our website and provide additional information that you may find helpful.
Speaker 2: Yesterday, Greco reported fourth quarter sales of 540 million an increase of 15% from the fourth quarter of last year.
Yesterday, Graco reported fourth quarter sales of $540 million, an increase of 15% from the fourth quarter of last year.
Speaker 2: As a reminder, the fourth quarter of 2021 included 14 weeks as compared to 13 weeks in 2020.
As a reminder, the fourth quarter of 2021 included 14 weeks as compared to 13 weeks in 2020.
Speaker 2: The effects of currency translation rate and acquisitions do not have a meaningful impact on worldwide sales for the quarter.
The effects of currency translation rate and acquisitions did not have a meaningful impact on worldwide sales for the quarter.
Speaker 2: Reported net earnings were $120 million for the fourth quarter, or $0.69 per diluted share. After adjusting for the impact of the pension settlement loss, excess tax benefits from stock option exercises, and certain non-recurring tax benefits, net earnings were $116 million, or $0.66 per diluted share.
Reported net earnings were $120 million for the fourth quarter or <unk> 69 per diluted share.
After adjusting for the impact of the pension settlement loss.
Tax benefits from stock option exercises.
And certain nonrecurring tax benefits net earnings were 116 million or <unk> 66 per diluted share.
Speaker 2: Growth margin rate was down 120 basis points from the fourth quarter of last year as the favorable effects of product and channel mix, realize pricing and increase factory volume were not enough to offset the impact of higher product cost.
Gross margin rate was down 120 basis points from the fourth quarter of last year as the favorable effects of product and channel mix.
Realized pricing and increased factory volume were not enough to offset the impact of higher product costs.
Speaker 2: These higher product costs, such as material, labor, and freight decreased our gross profit by $16 million in the quarter and $40 million for the full year.
These higher product costs, such as material labor and freight decreased our gross profit by $16 million in the quarter and $40 million for the full year.
Speaker 2: For the contractor segment, higher product costs were 11 million for the quarter and 29 million for the full year.
For the contractor segment higher product costs were $11 million for the quarter and $29 million for the full year.
Speaker 2: The increase in cost ramps up as the year progressed, with the majority of the cost increases occurring in the second half.
The increase in costs ramped up as the year progressed with the majority of the cost increases occurring in the second half.
Speaker 2: We expect to face similar cross-headwinds in the first half of 2022.
We expect to face similar cost headwinds in the first half of 2022.
Speaker 2: Supply chain constraints, such as logistics capacity and component availability, continue to have an unfavorable impact on our factory's ability to deliver in the quarter and will persist into 2022.
Supply chain constraints, such as logistics capacity and component availability continues to have an unfavorable impact on our factories ability to deliver in the quarter and will persist into 2022.
Speaker 2: Operating expenses increase 17 million or 15 percent in the quarter, mainly due to the increased activity as pandemic-related restrictions eased compared to a year ago.
Operating expenses increased $17 million or 15% in the quarter, mainly due to the increased activity as pandemic related restrictions eased compared to a year ago.
Speaker 2: Higher sales and earnings-based expenses also contributed $4 million in additional expense in the quarter. The adjusted tax rate for the quarter was $3.5 million.
Higher sales and earnings based expenses also contributed $4 million in additional expense in the quarter.
The adjusted tax rate for the quarter was 18%.
Speaker 2: Cash flows from operations are $457 million for the year compared to $394 million last year.
Cash flow from operations are $457 million for the year compared to $394 million last year.
Speaker 2: The increase is due to the improvement in earnings partially offset by higher working capital that reflects growth in business activity.
The increase was due to the improvement in earnings partially offset by higher working capital that reflects growth in business activity.
Speaker 2: Significant uses of cash are capital expenditures of $134 million, including $71 million for facility expansion projects.
Significant uses of cash or capital expenditures of $134 million, including $71 million for facility expansion projects.
Speaker 2: dividend payments of $127 million, and a voluntary contribution to our U.S. pension plan of $20 million.
Dividend payments of $127 million and a voluntary contribution to our U S pension plan of $20 million.
Speaker 2: During the fourth quarter, Greco entered into an agreement in which approximately 60, 3 million of pension obligations were transferred to an insurance company through the purchase of an annuity contract.
During the fourth quarter <unk> entered into an agreement in which approximately $63 million of pension obligations.
Transferred to an insurance company through the purchase of an annuity contract.
Speaker 2: In connection with the transfer, we recognize the non-cash pre-tax pension settlement charge of approximately $12 million in other non-operating expense in the quarter. A few comments as we look forward to
In connection with a transfer we recognized a noncash pre tax pension settlement charge of approximately $12 million in other non operating expense in the quarter.
A few comments as we look forward to 2022.
Speaker 2: In January , we repaid $75 million of our private placement debt and a $3.5 million prepayment fee, which will be recognized as interest expense in the first quarter of 2022.
In January we repaid $75 million of our private placement debt and a $3 $5 million prepayment fee, which will be recognized as interest expense in the first quarter of 2022.
Speaker 2: Based on current exchange rates and the same volume and mix of products and sales by currency, the effect of exchange would have an unfavorable impact of 1% on sales and 3% on earnings for the year.
Based on current exchange rates and the same volume and mix of products and sales by currency. The effect of exchange would have an unfavorable impact of 1% on sales and 3% on earnings for the year.
Speaker 2: Unallocated corporate expenses are projected to be $28 to $30 million and can vary by quarter.
Unallocated corporate expenses are projected to be $28 million to $30 million and can vary by quarter.
Speaker 2: The effective tax rate for 2022 is expected to be 18 to 19 percent.
The effective tax rate for 2022 is expected to be 18% to 19%.
Speaker 2: Capital expenditures are estimated to be $190 million, including $140 million for facility expansion projects at our Minnesota, Sioux Falls, Switzerland, and Romania locations.
Capital expenditures are estimated to be $190 million, including $140 million for facility expansion projects at our Minnesota to fall.
<unk> and Romania locations.
Speaker 2: We may make share repurchases in 2022 by opportunistic open market transactions or short-dated accelerated share repurchase programs. I'll turn the call over to Mark now for further comments.
We may make share repurchases in 2022 by opportunistic open market transactions or short dated accelerated share repurchase program.
I'll turn the call over to Mark now for further comments.
Thank you Kathy and good morning, everyone.
Speaker 3: All of my comments this morning will be on an organic, cast and currency basis. We finished the year strong with record sales and all reportable regions and segments with the exception of the contractor segment, which is received, which achieved its quarterly record earlier this year.
All of my comments this morning will be on an organic constant currency basis.
We finished the year strong with record sales in all reportable regions and segments with the exception of the contractor segment, which is C, which received which achieved its quarterly record earlier this year.
Speaker 3: We also exceeded our peak annual revenue by $334 million and peak annual operating earnings by $95 million, both previously set in 2018.
We also exceeded our peak annual revenue by $334 million in peak annual operating earnings by $95 million. Both previously set in 2018.
Speaker 3: Consistent with much of 2021, incoming orders exceeded deliveries in the fourth quarter. Again, this was primarily driven by shortages in key materials and components.
Consistent with much of 2021 incoming orders exceeded deliveries in the fourth quarter.
Again, this was primarily driven by shortages in key materials and components.
Speaker 3: Some items worth mentioning include electronic components, castings, engines, motors, and raw materials.
Some items worth mentioning include electronic components castings.
<unk> motors and raw materials.
Speaker 3: We are also experiencing unprecedented backlogs at subcontractors who are flooded with demand from customers, including Graco.
We are also experiencing unprecedented backlogs at sub contractors, who are flooded with demand from customers, including graco.
Speaker 3: At the end of the fourth quarter, our consolidated backlog was approximately $375 million, which is $95 million higher than what it was at the end of the third quarter, and $220 million higher than at the end of last year.
At the end of the fourth quarter, our consolidated backlog was approximately $375 million, which is $95 million higher than what it was at the end of the third quarter and $220 million higher than at the end of last year.
Speaker 3: The full year growth in backlog alone represents more than 10% of our 2021 annual revenue.
The full year growth in backlog alone represents more than 10% of our 2021 annual revenue.
Speaker 3: Our price increase for 2022 will be implemented in the first quarter, however, due to the size of our backlog, we may not begin to fully realize the impact of the increase until the second quarter.
Our price increase for 2022 will be implemented in the first quarter. However, due to the size of our backlog we may not begin to fully realize the impact of the increase until the second quarter.
Speaker 3: We anticipate that our pricing actions will be enough to offset current cost pressures from inflation. Now turning to
We anticipate that our pricing actions will be enough to offset current cost pressures from inflation.
Now turning to some commentary on our segments.
Speaker 3: We have completed the move of our high-performance coatings and foam products from the industrial segment to contractor.
We have completed the move of our high performance coatings in film products from the industrial segment to contractor.
Speaker 3: This transfer better aligns our contractor focused businesses and addresses any overlap we had in markets, products, end users, and distributors.
This transfer better aligns our contractor focused businesses and addresses any overlap we had in markets products and users and distributors.
Speaker 3: The teams are energized and looking forward to the benefits of the new organization.
The teams are energized and looking forward to the benefits of the new organization.
Speaker 3: The contractor segment rebounded in the fourth quarter, growing at high single digits, and ended up the year up mid-teens off tough comparisons to the prior year.
The contractor segment rebounded in the fourth quarter growing at high single digits.
We ended up the year up mid teens tough comparisons to the prior year.
Speaker 3: The global construction and home improvement markets remain strong with new housing starts, commercial spending, and remodeling activity all expected to grow this year.
The global construction and home improvement markets remained strong with new housing starts commercial spending and remodeling activity all expected to grow this year.
Speaker 3: Incoming order rates have reflected this strength, resulting in a backlog of $64 million, which is up $18 million from the end of the third quarter, and up $38 million from the same period last year.
Incoming order rates have reflected the strength, resulting in a backlog of $64 million, which is up $18 million from the end of the third quarter.
And up $38 million from the same period last year.
Speaker 3: Out-the-door sales at our major distributors are robust and we are optimistic that this pace of business will continue.
Out the door sales at our major distributors are robust and we are optimistic that this pace of business will continue.
Speaker 3: Strong industrial segment performance continued with its fourth consecutive quarter of double-digit growth. The segment grew low teens for the quarter and achieved both quarterly and annual records for sales and operating earnings.
Strong industrial segment performance continued with its fourth consecutive quarter of double digit growth.
The segment grew low teens for the quarter and achieved both quarterly and annual records for sales and operating earnings.
Speaker 3: Consistent with our other businesses, the biggest challenge is overcoming supply chain constraints that have contributed to a spike in backlog of $92 million compared to the same time last year.
Consistent with our other businesses. The biggest challenge is overcoming supply chain constraints that have contributed to a spike in backlog of $92 million compared to the same time last year.
Speaker 3: Overall, our key end markets remain healthy with specific strength in automotive, electronics, alternative energy, battery, and agriculture.
Overall, our key end markets remain healthy with specific strength in automotive electronics alternative energy battery and agriculture.
Speaker 3: Process segment sales grew 35% for the quarter, resulting in both quarterly and annual records for revenue and operating earnings.
Process segment sales grew 35% for the quarter, resulting in both quarterly and annual records for revenue and operating earnings.
Speaker 3: This segment was slower to recover than our other segments, however, we are seeing strong demand worldwide in our lubrication, process pump, and semiconductor businesses.
This segment was slower to recover than our other segments. However, we are seeing strong demand worldwide and our lubrication process pump and semiconductor businesses.
Speaker 3: We're expecting this recovery to continue into 2022.
We're expecting this recovery to continue into 2022.
Moving onto our outlook.
Overall, the business is performing well new product pipelines are robust and worldwide demand levels remain solid.
Speaker 3: As a result, we are initiating revenue guidance for the full year 2022 of high single digits on an organic constant currency basis, with growth expected in every region and reportable segment.
As a result, we are initiating revenue guidance for the full year 2022 of high single digits.
On an organic constant currency basis.
With growth expected in every region and reportable segment.
Speaker 3: This guidance is based on the assumption that approximately two-thirds of the growth will come from our pricing actions and the remainder a result of our core strategic initiatives.
This guidance is based on the assumption that approximately two thirds of the growth will come from our pricing actions and the remainder a result of our core strategic initiatives.
Speaker 3: While we expect to face headwinds in 2022, we believe the strength of our markets, product lines, operations, and people position us well to deliver another year of record sales and earnings.
While we expect to face headwinds in 2022, we believe the strength of our markets product lines operations and people position us well to deliver another year of record sales and earnings.
Speaker 3: In closing, I want to say thank you again to all of our employees, our suppliers, distributor partners, and end users for another great year. Operator, we're ready for.
In closing I want to say, thank you again to all of our employees our suppliers distributor partners and end users for another great year.
Operator, we're ready for questions.
Sure.
Speaker 1: Thank you. The question and answer session will begin at this time. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Your question will be taken in the order that it is received. Please stand by for your first
Thank you the question and answer session will begin at this time.
As a reminder to ask a question I wanted to press our one on your telephone.
Draw your question press the pound key.
Your question will be taken in the order that is received please standby for your first question.
Speaker 1: Our first question comes from the line of Dean Dre from RBC Capital Markets. Your line is now open. Thank you.
Our first question comes from the line of Deane Dray from RBC capital markets. Your line is now open.
Thank you and good morning, everyone.
Hey.
Maybe we can start with the expected cadence of earnings.
For 'twenty two.
We are hearing from lots of companies talking about the.
All the product challenges labor inflation et cetera that are.
Pressuring first quarter.
The demand looks fine and according to your six week.
Update, but what are you expecting in terms of like seasonality first half second half any color there would be a big help thanks.
Yes, I think it will be fairly consistent with what we've done in the past Deane obviously, our contractor business is our most seasonal business that we have and they they tend to post big revenue in Q2 and Q3.
In terms of the earnings cadence I mean really it's the same story that we had in.
In the back half of 2021 in terms of the pressures that we're expecting to see on the cost side at least through the first quarter until our pricing actions kick in and then we should see an improvement I would speculate in Q2 and Q3 and then perhaps for the rest of the year of course all.
That has a big caveat tied to it.
Experiencing.
Some moderation in cost input costs that we're seeing right now and the expectation is that things remained relatively stable as we go through the year here and if that's the case I think we should be in good shape.
Good to hear and talk about the.
Price actions, you're taking now or have taken in January I mean, you all are unique.
That you resist all the calls for intra year price increases Thats just not your style. It's not your business model and we completely respect that so take us through whats different this time and price actions how much is it.
Inflation adjusted.
How much are like new product launches and so forth, but the dynamics. This time feels a lot different.
Yes, so for sure we like to play the long game when it comes to pricing and of course that approach has really paid off well for graco our customers our distributors.
And we have implemented pricing actions here in 'twenty two.
We will hopefully offset all the cost pressures that we had.
They are higher than what we would normally experience.
Under normal pricing year, which I think everyone expected.
The pricing increases that we did varied by division and by region. So it's hard to give a lot of color around specific numbers, but the feedback so far that we've gotten from our customers has been.
Not surprised.
Most of them are experiencing pressures in their business as well and we havent gotten any real major pushback on the pricing actions that we've taken.
In my opening comments I.
Talked a little bit about the fact that our top line revenue growth forecast for the year being high single digits.
When we step back from our pricing actions, we think that.
With luck, we'll be able to realize about two thirds of that growth just through our pricing actions.
Of course, there's always puts and takes and projects and things that happened throughout the year, we're going to try to keep a close eye on our pricing and hopefully at the end of the year, we will be able to realize decent pricing in 2022, which of course will be much higher than what we have done on a normal year basis.
That's great color just last one from me if I could.
Can you size, what sort of revenues.
Missed in the quarter.
Cause of product availability and that all presumably went into backlog. So when how much was missed and when would you recoup that.
Four.
First quarter second quarter.
That would be helpful. Thanks.
Other than the the.
The increase in the backlog, which was pretty substantial in Q4.
It's hard for us to actually know how much was revenue was missed.
The good news is we kept the orders right. So we will be able to serve those customers but.
Having the backlogs up $375 million on a full year basis.
<unk>.
Growing in the fourth quarter.
It gives us some confidence heading into the 'twenty two that we have.
Got a good chance to have another good year.
Great to hear thank you.
Thank you. Our next question comes from the line of Mike Halloran from Baird. Your line is now open.
Hey, good morning, everyone.
So.
Hey, so a couple of things here.
One maybe just an update on how youre thinking about the capital allocation capital deployment side of things externally obviously.
Prioritizing growth internally, but I know you hired some of the focus a little bit more on M&A just wanted to understand how thats integrating with the with the.
Division level.
How the opportunity set looks from here.
Good morning, This is David Lowe.
I would say that our capital allocation process is.
Is one that we're continuing from the long history of the company as you touched on.
As Kathy mentioned, we've got a very aggressive capital expenditure program over the next year year and a half.
There was major facility investments in several different locations, we continue to invest aggressively in.
Product development I think at $80 million it was a record for 2021.
And we're committed to that.
Think on the.
When we get beyond those things then we get into some of the topics that you are referring to Mike.
Our new colleague Ingo garage door joined US just a couple of weeks ago, So he's getting us.
Wet in the organization, but.
The strategy Mark outlined to bring ingot in the organization is the one that we're pursuing we think having the focus.
Of an experienced executive that has negotiated and completed a number of deals as well as the capabilities and the.
If you will the technical knowledge from an engineering background and work closely with the business units should put us in a very good position as we assess opportunities and we're quite excited and.
As somebody that has an opinion on capital allocation.
Im looking forward to being in a position where when the opportunities are right. We can.
<unk> transactions larger and smaller as we as we see appropriate.
And then I guess I have to touch on.
Capital allocation for share repurchases.
I would say that 2021 was a year, where we didn't acquire stock and that's a reflection in part of I think <unk> long history of being opportunistic successfully I believe in terms of buying shares.
And relative to at least some years, we had a fairly narrow trading range in 2021, but we remain committed.
To being in the market being active in the market and.
I am hoping we will see some opportunities to move forward in that space as well I don't like share creep any better than anyone else.
And help me translate a couple of things here, obviously backlog is up across the board bookings remain robust.
Expectations are more muted, which makes sense as comparisons track through the year.
But how would you think about kind of that normalization curve as these things start tracking towards each other so when do you think normalization can start materializing when you get backlogs back towards historical.
Historical levels might look like as a percentage of revenue or whatever metric you want to use.
Essentially have that could play out in your mind.
It's pretty tough.
Tough to predict I think at the beginning of the.
The second quarter, a lot of people thought we'd be in better shape by the end of the year than where we actually wound up being so most of the.
The information that we're seeing would indicate that maybe by Q3 things will get more normalized but a lot of the a lot of the pressure in our organization that I'm sure others in terms of getting product out the door is really tied to some of the electronic components that go into.
A lot of the graco product lines.
There is.
Our mad fight going on amongst a lot of different industrial companies to get their hands on those things and eventually.
It will shake out in.
In the meantime, our teams are doing.
Their level best to.
Lay on top of things and.
Get as much product out the door as we can.
Hopefully by Q3, or so things get more to a normal pace for us.
I appreciate it thanks alright.
Alright, Thanks, Mike.
Thank you. Our next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is now open.
Thank you and good morning, everyone.
<unk>.
Can we talk about the volume assumptions.
A little bit more detail it seems like you've got some pretty muted assumptions baked into your expectations for for this year, just given the backlog change youre seeing some of the supply chain constraints hopefully easing in 2022 to maybe help kind of parse out how youre thinking about volumes across each of the three segments.
Yes, I'll take a crack at it I mean, obviously it's.
February 1st right. So there's a lot of year left here as we work through 2022 and as we're sitting here today.
Enough uncertainty really around the supply chain and the constraints that we have in our production that give us some pause when it comes to setting our growth objective for the full year of course, we're going to get a price increase of course, we've got a big backlog, but the wildcard really is I think the <unk>.
Previous question on when things open up for Us and at this point I think you can expect that sort of baked into our.
Assumptions at this point, we're hopeful that things will open up by the by the third quarter of the year.
Got it that makes sense I guess it pays to be conservative to start the year, we'll see how things progress.
Sure.
In contractor. So it's interesting right like last year, you didn't see you and the rest of the market, we didn't really see much.
Nonresidential activity you had a lot of leading indicators.
Pointing to an uptick in that in that end market in 2022, I'm just curious as you kind of think about that.
Moving toward.
<unk>.
It sounded like that.
The higher end models within within your contracts your segment like.
How far along are we in terms of getting traction with the market.
The adoption of higher end sprayers.
I think we're pretty far along here in North America, most of the big contractors that do those jobs all have a fleet of equipment and they replace that on a fairly regular basis. So to the extent that they've got a backlog of jobs in and they're busy then they're more likely to upgrade their fleet and go to newer technology.
As opposed to just repairing what they got the market in that space does look.
Favorable compared to a year ago, I think that the latest data I saw a commercial construction was projected to be up about four 5% in 'twenty two after a decline in 'twenty one.
And then you combine that with the other good favorable macro characteristics housing starts are strong.
Six and 2021 with a little growth in 'twenty, two new home sales are going to be up remodeling activity is good so.
The mentality of the contractor is really important and as long as they've got jobs and they're busy and they have a backlog.
They are more willing to buy our equipment and I think thats, what <unk> seen played out here in 'twenty, one and hopefully continues in 'twenty two.
Yes that makes sense and then maybe one last one just on process like the trajectory of that business, particularly on the margin side has been pretty incredible.
Now that's sitting at 23% type margin at the end of 2021, I guess, how are you thinking about this business and what's kind of like the right entitlement for this business.
Over the next few years.
So if I'm asking like where can margins go in this business.
Well I think.
The team there has done a great job they've got a really good infrastructure in place and the name of the game now is leveraging and getting as much.
Revenue through the top as possible because there isn't a whole lot of expense.
Infrastructure to be to be added except for maybe on the production side and a couple of places but.
Our double diaphragm pump business looks really solid we're getting involved in some things like lithium battery production, where we're moving some of the highly caustic materials that are used in that our semiconductor businesses.
Would expect very strong so.
As we get more through the topline I expect margins to go up we don't really put targets out there, but I think it would be reasonable to expect that you would see some improvement.
Great. Thank you very much.
Thank you. Our next question comes from the line of Bryan Blair from Oppenheimer. Your line is now open.
Thanks, Good morning, everyone.
Brian .
I just wanted to clarify are you expecting that contract or price cost will be neutral or may be positive for the full year respecting the first versus second half dynamic.
That will be there does that shake out to neutral to positive.
Given current visibility.
I think what we're looking at right now.
You would expect that contract or price cost would be neutral.
Of course, where the supply chain goes and where commodity prices go can always impact that but I think for what we're estimating right now we would expect that their pricing actions would offset their costs in 'twenty two.
Okay.
Understood.
Following up on the capital deployment question is it fair to assume given the respective market structure and greater market share.
Along with I guess the background of your new Edp that any larger scale more needle moving M&A would be in your process segment.
And then related question.
Respecting that you have aggressive organic.
Investment plans and that's that's the norm for Greg that you do have a pristine balance sheet I was curious if you could frame.
Frame your realistic dry powder, if we look forward 12 months or whatever a reasonable timeframe would be.
Yeah. So.
Brian .
Ingalls literally about one month into the job here. So we're going through a process, where he is working with all of our teams to identify not only real close adjacencies, but other areas, where we might be able to bring some graco competencies to help them grow their businesses and of course, we have a lot to offer companies when we acquire them we have world class Manny.
Factoring we understand customer requirements better than most we have an enviable global footprint.
<unk> be interesting to see.
What comes out after he works with the team for a year or so but my objective really is to get the organization to think about using M&A, a little bit more as a revenue and earnings growth driver for critical by putting that corporate focus up at the top of the house.
Yes, I would just add as a former operating person that.
It really would be helpful to have it will be helpful to have somebody in that role working side by side with the business unit leaders.
The business unit leaders have a lot of insights about what they're good at and where they see opportunities, but they are running their businesses daily and having an expert in.
Cultivation negotiation identification and research really should help the business units.
Articulate and really maybe each one of the segments.
Credible and realistic development plans.
Understood I appreciate the color.
Thanks, Brett.
Thank you. Our next question comes from the line of Matt Summerville from D. A Davidson your line is now open.
Thanks couple of questions with how youre running the business now with phones now being under the contract are umbrella are there any changes to segment seasonality any changes to the segments incremental margin profiles, we should be thinking about as we model on a go forward basis.
I don't think anything meaningful im looking at Kathy here, but I ran that business for a while and it is there is maybe a little bit of seasonality in North America in Q2.
And early Q3, but.
A very global business on the protective coating side and that tends to be very stable. So.
Not really fine tune your your numbers for you on that one.
No and I think.
Yes.
See it on our website you can look and we have the history of the restated results out there that you would be able to see what that looks like the last couple of years.
And then to that end how has the organic profile look in that business versus the great go average.
From what I Recollect I think you acquired your way into the foam business, maybe 15 years ago, something like that and it's been inside the industrial business ever since so why make this change now and what type of synergies should we expect you guys to be able to extract from the change. Thank you.
Yes, I think that we aren't going to break out the historical revenue of that segment because it was part of industrial and we just don't feel like for competitive purposes. We should we should do that but it really is a way to combine graco as contractor focused businesses in dresses. Some overlap that we had with regard to customers.
<unk> product development engineering resource sales resource marketing resource et cetera, and so that the contractor team is really sorting through what those.
What they overlap look like and then they'll decide how they want to address that on a P&L basis, but.
In the end, we should be more efficient more targeted and more focused on those customers than maybe what we were when they were part of the industrial business.
Got it thanks Mark.
Yes.
Thank you. Our next question comes from the line of Jeff Hammond from Keybanc capital markets. Your line is now.
Hey, good morning, everyone.
Hey, Jeff.
Just on contractor I mean, I know there was a concern.
Second half comps it.
It seems like the business did have some some DSL, but now it seems to be kicking back up just how are you thinking about kind of the.
The demand momentum, there and kind of a tough comp kind of dynamic.
I think it looks pretty good to us I mean, we just went through some meetings with the team and they are pretty optimistic about 'twenty two.
When they talk to their customers.
The retail channel partners that we have there.
Still looking for more stock and inventory both here domestically and regionally.
The professional side of the business the higher end sprayers looks looks really favorable.
As I said before with all the construction activity that's going on.
Tractors are busy and that's a good thing.
Over and above that I think our product pipeline for the next couple of years, what they've got teed up.
It should also help their growth. So I think we're bullish on that on that business.
That team has done a great job and it's all about execution here.
Okay, Great and then.
The higher Capex spend I think.
The last couple of projects or years have been kind of focused on contract or where is kind of the incremental capacity being added.
As you look at this next mix look.
In terms of the businesses, we've got several in the works.
In the Minnesota area, we're building a new facility that will house the other day.
<unk> pump and some of the related prop.
Process Division.
Manufacturing.
<unk> is also going to be shared.
With our <unk>.
Our <unk> business, which is which will be conveniently located about a mile away from our CEB headquarters.
The game of businesses in Europe , we're investing in two facilities in Romania, and in Switzerland, and were doing an expansion in our Sioux Falls facility, which provides a number of products primarily.
Applicators and spray guns to a number of the <unk> businesses.
Okay very helpful. Thanks, guys.
Our next question comes from the line of Conor <unk> from Morgan Stanley . Your line is now open.
Yes. Thanks.
I wanted to return to process obviously.
Very very high growth business at the moment I'm just curious if you could characterize or do you see this as.
One time catch up in demand versus where it was historically do you see.
For further growth.
The year end.
Hi, how are you thinking about that.
Sure.
Yes, I think as I said in the earlier remarks that they were a little bit slower out of the gates than our industrial business. So in terms of the comps they probably had a little bit easier.
Comp in Q4 than what the industrial business had let's say, but again in that in that business order intake is really good our.
Our orders continue to outpace our deliveries so.
We're heading into the year here with a decent backlog there.
And it's coming from a lot of different areas.
Like the ones that I mentioned earlier and if we can get more of that revenue through the top line, we should see some nice margin expansion.
Alright fair enough.
Changing gears, a little bit here, just returning to the repurchase conversation.
How should we think about that gave it given that you do have this phone.
On M&A.
The organic.
<unk> initiatives.
I guess the question is how much how much excess capital do you really need to see on your balance sheet.
Or something you want to do or is it more about the share price if you could just.
How does that sort of calculus words in your guys' minds.
Well, yes it is.
As a bit of it it's a bit of an art as opposed to an absolute science I mean graco has a very strong.
Yes.
I'll call it liquidity position both in terms of the arrangements that we have in place as well as cash as well as cash on hand.
And as I said, we find opportunities throughout the throughout the year to do good ROI driven.
Decisions, most recently, adding to our.
Adding to our pension plan as well as <unk>.
Favorable prepayment of debt.
The issue on stock.
As I as I've said over the last decade. The company has been in the market very opportunistically and quite aggressive at time to time and I think we had on some occasions talked about having a long term return on investment of something like 15%.
There are no stock purchases and.
We wanted we want to remain in a position when the opportunity is right that we can jump in.
And jumped aggressively and quickly and I think that.
Sure.
We shall probably see the opportunity in stock markets from time to time, and and we'll be we'll be positioned to move appropriately when the situation arises.
Alright, I appreciate the context ill turn it back.
Thank you. Our next question comes from the line of Andrew Buscaglia from bearing Baird. Your line is now open.
Hey, guys good morning.
And touch on.
I wanted to touch on industrial a little bit bigger.
Your biggest segment.
And.
It is.
The six week bookings number somewhat surprised me that I think picked up pretty quickly.
Into the new year already and I'm wondering what are what are the.
The dynamic bandwidth and that how much of that business is still like really far below pre COVID-19 levels.
As the growth I know you are facing some tough comps but.
What are some of the things you are looking at our conversations youre, having with customers and distributors are saying that that growth rate will be sustainable despite kind of all the <unk>.
<unk>, we are seeing with supply change and supply chain challenges et cetera.
Yes, I think.
The short or the time period, you look the more dangerous it gets when it comes.
Absolute percentages in growth and things like that but.
Yes, just to reiterate what we've.
Said that we really do see across the board very solid demand.
With our customers it doesn't really matter, if we're talking about our liquid finishing equipment or our powder coatings equipment or our sealant and adhesives equipment. They've all experienced demand from end users that are really being pulled through the distributors and as we sit here today.
That level of demand still is robust.
Makes sense to me from the standpoint that with all of the increase in demand in the economy and consumers and people buying stuff, that's really put pressure on manufacturers to take another look at the equipment that they have and theyre looking for ways to eliminate any waste improve efficiencies and improve the quality.
The products that they have that really squares up very well with everything that we do in that business. So we feel pretty good about what's going on there.
Okay and similar to a contract right you gave some kind of drivers are.
Sort of economic data that you look at within industrial.
Does it concern you, maybe that PMI and IP production strong but.
I think peaking here are you guys not really feel that thats a good tracker for Ya for that industrial segment.
Yes, we look at a lot of different things, but it's hard for us to really look at any one or two metrics and come away with any revelations. So.
Industrial production GDP, PMI and other stuff, but that's such a broad based category for us that it's hard to tie it to any one or two for example, when I was in finishing one number and theres many as mark touched on automotive production.
I can look at that data going back to 17 and 18, we saw a surprising decline in 19, and obviously <unk> was very difficult.
Paint a picture.
What with the Underinvestment in the automotive plants as well as demand for new products. The next couple of years there to some degree you look a little bit like the picture, we see for contractor right.
Okay. Thank you.
Our next question comes from the line of Walter Liptak from Seaport Research. Your line is now open.
Hi, Thanks, good morning.
Alright.
Kind of sticking with the macro trends.
Asia Pacific you've got it all.
Green lights go in I Wonder if you could just maybe provide us with a little bit of color by countries and specifically there's been some question about.
China and the real estate markets Theres hardly in the soft landing I don't know if you have any thoughts about that.
Yes, I'll take a stab at it I mean for the year, we really saw a nice growth in all of the major geographies throughout the Asia Pacific region, and really across all of our divisions. So.
The automotive business in China was good Australia was good with CD, we had some nice solar projects that were in China that also helped the container and the shipping markets have been phase.
Favorable in 'twenty, one versus what we saw in 'twenty, we've got mining projects going on in Southeast Asia, and again in Australia New Zealand.
We've got good lubrication business happening in China for wind energy in some other applications and then like I said before you've got a lot going on with Evs and batteries and.
Lithium ion applications in places like Korea. So.
Really good activity across the board.
Okay fair enough.
One of the earlier questions.
I think somebody asked about what the M&A dry powder is.
If you can give us I don't know.
On a dollar amount or where you would take your dirty.
Debt to EBITDA levels up to.
Well, we've got a lot of cash in <unk>.
So I think I said that we'd be comfortable levering up for the right deal that two to three times EBITDA. So you guys can do the math on that but we have a lot of firepower available on M&A, if we find something that we like.
Okay.
Alright, and then last just considering that youll be at least price cost neutral for the year do we should we assume or can we think about the operating profit flow through going back to the kind of traditional 40% level.
Yes, I think Thats I think thats a reasonable course.
First half of the year is going to be different than the second half of the year just in terms of realizing price, but there should be no reason that I can think of right now.
That would prevent us from being able to do that.
Okay, great. Thank you.
If there are no further questions I will now turn the conference over to Mark Sheahan.
Alright, well. Thank you very much for your participation and thanks for being interested in graco.
Okay.
This concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.
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