Q4 2023 Graco Inc Earnings Call

January 30, 2024

Okay.

Yeah.

Speaker Change: Good morning, and welcome to the fourth quarter Conference call for Graco, Inc.

Speaker Change: We wish to access the replay for this call you may do so by visiting the company's website at Www Dot co dot com.

Speaker Change: Greg will have additional information available in a Powerpoint slide presentation, which is available as part of the webcast player.

At the request of the company will open the conference up for question 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 future.

Speaker Change: These remarks constitute forward looking statements for the purpose of the safe Harbor provision of the private Securities Litigation Reform Act actual results may differ materially from those indicated as a result of the various risk factors, including those identified in item one a of the Companys 2022 annual report on the Form 10-K and it.

Speaker Change: I don't want a at the company's most recent quarterly report on Form 10-Q.

Speaker Change: These reports are available on the company's website at Www Dot <unk> dot com and the Sec's website at Www Dot FCC Dot Gov.

Speaker Change: 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.

Speaker Change: I will now turn the conference over to Chris can Knutson Executive Vice President corporate controller.

Jeff Hammond: Good morning, everyone and thank you for joining our call I'm here today with Mark Sheahan, and David Law I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary.

Good morning, everyone and thank you for joining our call I'm here today with Mark Sheahan, and David Law I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary.

Jeff Hammond: Yesterday, <unk> reported fourth quarter sales of $567 million, an increase of 2% from the fourth quarter of last year.

Jeff Hammond: The effect of currency translation increased sales by one percentage point or approximately $6 million.

Jeff Hammond: Reported net earnings decreased 13% to $110 million for the quarter or <unk> 64 per diluted share in.

Jeff Hammond: In December the company transferred $147 million of.

Jeff Hammond: Of its pension obligations to an insurance company through the purchase of an annuity contract in connection with the transfer we recognized a noncash pre tax pension settlement charge of approximately $42 million recorded in other non operating expense.

Jeff Hammond: Excluding the impact of this pension settlement loss certain nonrecurring tax provision adjustments and excess tax benefits from stock option exercises adjusted non-GAAP net earnings were $137 million or <unk> 80 per diluted share an increase of 10%.

Jeff Hammond: The gross margin rate increased 370 basis points in the quarter strong price realization and lower product costs were more than enough to offset lower factory volumes.

Jeff Hammond: Total operating expenses increased $10 million or 8% in the quarter, mainly due to volume and rate related increases of $3 million as well as higher sales and earnings based expenses of $3 million.

Jeff Hammond: Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of two five percentage points.

Jeff Hammond: The adjusted effective tax rate was 19% for the quarter.

Jeff Hammond: Cash provided by operations as a percent of net earnings was 129% for the year <unk>.

Jeff Hammond: Significant year to date use of cash include dividends of $158 million share.

Purchases of $102 million, which were offset by share issuances of $60 million debt repayment of $75 million and capital expenditures of $185 million, including $108 million of facility expansion projects.

Speaker Change: A few comments as we move forward to 2024.

Speaker Change: Based on current exchange rates, assuming the same volumes mix of products and mix of business by currency as in 2023 movement in foreign currencies would have no impact on net sales or net earnings for the full year.

Operator: Good morning, and welcome to the fourth quarter conference call for Graco. If you wish to access the replay for this call, you may do so by visiting the company's website at www.grayco.com.

Operator: Graco has additional information available in the PowerPoint slide presentation, which is available as part of the webcast plan. At the request of the company, we will open the conference up for questions and answers after the opening remarks from Anne. During this call, various remarks may be made by management about their expectations, plans, and prospects. Such remarks constitute forward-looking statements for the purpose of the safe harbor provision of the Private Security Litigation Reform Act. Actual results may differ materially from those indicated as a result of the various risk factors, including those identified in item 1A of the company's 2022 annual report on Form 10-K and in item 1A of the company's most recent quarterly report on Form 10-K. These reports are available on the company's website at www.grayco.com and on the SEC's website at www.sec.gov.

Speaker Change: Unallocated corporate expenses are projected to increase to a range of $41 million to $44 million with the increase related to share based compensation.

Speaker Change: The effective tax rate is expected to be 19, 5% to 25%, excluding any impact from excess tax benefits related to stock option exercises and other onetime items.

Speaker Change: We expect capital expenditures to be approximately $120 million with $60 million for facility expansion projects since 2018 and through 2024, we will have invested nearly $500 million.

Speaker Change: To expand our global manufacturing capacity by the end of this year, we will have completed expansion process projects for nearly all of our operations, which should set us up for several years of growth.

Speaker Change: Now I'll turn the call over to Mark for further segment and regional commentary.

Operator: Forward-looking statements reflect management's current views, and we 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.

Mark W. Sheahan: Thank you Chris Good morning, everyone. All my comments this morning will be on an organic constant currency basis.

Mark W. Sheahan: Sales in the fourth quarter were up low single digits, resulting in quarterly and annual records for both revenue and operating earnings our.

Jeff Hammond: I will now turn the conference over to Chris Knutson, Executive Vice President, Corporate Controller. Good morning everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe.

Mark W. Sheahan: Our industrial and process segments record annual sales.

Mark W. Sheahan: And I'm encouraged by the fourth quarter sales growth in our contractor segment.

Jeff Hammond: I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Graco reported fourth-quarter sales of $567 million, an increase of 2% from the fourth quarter of last year. The effect of currency translation increased sales by one percentage point, or approximately six million dollars. However, reported net earnings decreased 13% to $110 million for the quarter, or $0.64 per diluted share.

Mark W. Sheahan: Segment finished the year with record annual operating earnings.

Mark W. Sheahan: Pricing actions implemented in late 2022 at the beginning of 2023 drove sales growth and gross margin expansion during the quarter and for the year or.

Mark W. Sheahan: Our strong price realization across all businesses and regions combined with improved product availability stable product costs and favorable product and channel mix in contractor resulted in meaningful improvement in our gross margin rate.

Jeff Hammond: In December, the company transferred $147 million of its pension obligations to an insurance company through the purchase of an annuity contract. In connection with the transfer, we recognized a non-cash pre-tax pension settlement charge of approximately $42 million recorded in other non-operating expenses. Excluding the impact of this pension settlement loss, certain non-recurring tax provision adjustments, and excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $137 million, or $0.80 per diluted share, an increase of 10%. The gross margin rate increased 370 basis points in the quarter; strong price realization and lower product costs were more than enough to offset lower factory volume. Total operating expenses increased $10 million, or 8% in the quarter, mainly due to volume and rate-related increases of $3 million, as well as higher sales and earnings-based expenses of $3 million. Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of 2.5% a year. The adjusted effective tax rate was 19% for the quarter.

These improvements resulted in companywide incremental margins of nearly a 150% for the year.

Mark W. Sheahan: Adjusted net earnings expressed as a percentage of sales was 24% for the year, which is the highest in company history.

Mark W. Sheahan: Pricing actions taken in early 2024 closely resembled traditional levels in terms of size and cadence with all segments and regions initiating price increases at the beginning of the year.

Mark W. Sheahan: At the end of 2023, our consolidated backlog was $280 million, which was $75 million below last year's ending backlog.

Mark W. Sheahan: Backlogs have returned to normal levels within most product categories, but continue to remain slightly elevated in our semiconductor and powder coatings businesses.

Speaker Change: Now turning to some commentary on our segments.

Speaker Change: Contractor segment sales improved in the fourth quarter growing at low single digits.

Soft demand in the home center channel and challenging global construction markets remain headwinds.

Speaker Change: However, new product introductions and continued strength in the protective coatings and spray foam product categories were more than enough to offset these headwinds in the quarter.

Speaker Change: Operating earnings were 29% for the quarter and for the year as contractor benefited from pricing actions and favorable product mix by selling larger professional units and fewer home center units.

Jeff Hammond: Cash provided by operations totaled $651 million for the year, an increase of $274 million from last year, mostly driven by higher net earnings and a reduction in inventory. Cash provided by operations as a percent of net earnings is 129% for the year. Significant year-to-date uses of cash include dividends of $158 million, share repurchases of $102 million, which were offset by share issuances of $60 million, debt repayment of $75 million, and capital expenditures of $185 million, including $108 million of facility expansion projects. A few comments as we move forward to 2024. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency as in 2023, movement in foreign currencies would have no impact on net sales or net earnings for the full year. Unallocated corporate expenses are projected to increase to a range of $41 to $44 million, with the increase related to share-based compensation. The effective tax rate is expected to be 19.5% to 20.5%, excluding any impact from excess tax benefits related to stock option exercises and other one-time items.

Speaker Change: Heading into 2024, we're cautiously optimistic about business conditions based on improving global construction indicators.

As affordability improve new and existing home sales are predicted to increase throughout the year, along with the expected growth in commercial and nonresidential spending.

Speaker Change: The industrial segment achieved record sales and earnings for the year. Despite a 1% revenue decline in the fourth quarter compared to last year.

Speaker Change: Growth in liquid, finishing and sealant and adhesive product lines were not enough to offset the impact of lower powder, finishing systems sales in EMEA and Asia Pacific in the quarter.

Speaker Change: Fourth quarter 2022 represented peak revenue for our powder, finishing group as projects delayed during the pandemic were completed and placed into service.

Speaker Change: Our process segment grew 4% in the quarter and 11% for the year for.

Speaker Change: For the year, we saw growth in all regions and reported record earnings.

Speaker Change: Increases were posted for the quarter and many business units and across all reportable regions led by double digit growth in vehicle services and process pumps.

Price realization and increased volume drove incremental margins of 89% in the fourth quarter and 83% for the full year, we had broad based revenue growth in all our businesses. This year, resulting in record operating profit margins for the segment.

Jeff Hammond: We expect capital expenditures to be approximately $120 million, with $60 million for facility expansion projects. Since 2018, and through 2024, we will have invested nearly $500 million to expand our global manufacturing capacity. By the end of this year, we will have completed expansion projects for nearly all of our operations, which should set us up for several years of growth. I'll now turn the call over to Mark for further segment and regional commentary. Thank you, Chris. Good morning, everyone.

Speaker Change: Moving on to our outlook.

As we enter 2024, we're keeping a close eye on incoming order rates and global economic indicators.

Speaker Change: Despite difficult macroeconomic environment, we remain committed to our core strategies of launching new products entering new markets, expanding our global channel and pursuing strategic acquisitions. As a result, we are initiating revenue guidance for full year 2020 for a low single digit growth on an organic.

Mark W. Sheahan: All my comments this morning will be on an organic constant currency basis. Sales in the fourth quarter were up low single digits, resulting in quarterly and annual records for both revenue and operating earnings. Our industrial and process segments saw record annual sales, and I'm encouraged by the fourth quarter sales growth in our contractor segment. All segments finished the year with record annual operating earnings.

Speaker Change: Constant currency basis.

Speaker Change: That concludes the prepared remarks, Valerie we're ready for questions.

Thank you.

Valerie: The question and answer session will begin at this time, ladies and gentlemen, I would like to ask a question. Please press star one on your telephone.

Valerie: Western will be taken in the order that is received please standby for your first question.

Valerie: Our.

Question comes from the line of Deane Dray of RBC capital markets.

Deane Dray: Thank you and good morning, everyone.

Deane Dray: Dan.

Deane Dray: Hey, maybe we couldnt start with pricing.

Mark W. Sheahan: Pricing actions implemented in late 2022 and at the beginning of 2023 drove sales growth and gross margin expansion during the quarter and for the year. Strong price realization across all businesses and regions combined with improved product availability, stable product costs, and favorable product and channel mix and contractor relationships resulted in a meaningful improvement in our gross margin rate. These improvements resulted in company-wide incremental margins of nearly 150% for the year. Adjusted net earnings expressed as a percentage of sales were 24% for the year, which is the highest in company history.

Deane Dray: And Mark you gave the kind of that broad.

Deane Dray: Broadbrush comments said, it's back into the single price increase.

Deane Dray: Its representative of what would be normal price across the board maybe.

Deane Dray: Maybe talk about the expectation for new product introductions, and then where does the on the cost equation. It sounds like labor inflation is still around this or anything else are we back to normal on the rest of the cost side.

Speaker Change: Yes, so the pricing actions again, they're I'd say, they're more in line with what we've done historically kind of inflationary plus or minus a little bit all the business units are implementing increases as are all of the regions. So we feel pretty good about that getting back to a normal cadence there of course, if things change we know we can.

Speaker Change: Make an adjustment if we need to but it doesn't look like that's going to be the case. This year, our cost pressures for the full year and the plant, we're still unfavorable compared to what we were expecting them to be but we did start to see a little bit of light at the end of the tunnel here as we work through the year in the fourth quarter things turn.

Speaker Change: Slightly favorable so if.

If those trends continue I am hopeful that we would see some impact some favorable impact on the.

Speaker Change: On the gross margin line as we kind of work through the year labor is tight.

Speaker Change: Did just raise our wages in line with what the market is but even though its tight we have not really experienced any major difficulty <unk> in terms of attracting people to join joined <unk>, It's a great company.

We're growing we have a great story to tell and even though we have people retiring all the time, we were able to fill those positions.

Speaker Change: Pretty readily so feel pretty good as we enter into the year and we'll see what happens great.

Speaker Change: Great and then just as.

Speaker Change: Second question going to our favorite traffic light slide.

Speaker Change: Can you just comment on the changes.

Mark W. Sheahan: However, new product introductions and continued strength in the protective coatings and spray foam product categories were more than enough to offset these headwinds in the quarter. Operating earnings were 29% for the quarter and for the year as contractors benefited from pricing actions and favorable product mix by selling larger professional units and fewer home center units. Heading into 2024, we're cautiously optimistic about business conditions based on improving global construction indicators. As affordability improves, new and existing home sales are predicted to increase throughout the year, along with expected growth in commercial and non-residential spending. The industrial segment achieved record sales and earnings for the year, despite a 1% revenue decline in the fourth quarter compared to last year. However, growth in liquid finishing and sealant and adhesive product lines was not enough to offset the impact of lower powder finishing system sales in EMEA and Asia Pacific in the quarter.

Speaker Change: Versus.

Speaker Change: Last quarter, so improved outlook in Industrials America, but industrials Asia Pacific.

Speaker Change: Dipping and process Americas also has worsened I know you touched on the powder, finishing impact, but kind of reconcile some of those changes with what's actually going on in the business and order expectations. Okay. This is David Lowe.

Speaker Change: Thank you David.

As far as North America Industrial goes what we have seen there is.

Speaker Change: Pretty good project activity throughout the second half of the two.

Speaker Change: <unk> 2023.

David Lowe: The team reports.

Strength in a number of our core markets.

David Lowe: Ramble off two or three E mobility is continuing to be strong here in the home market aerospace.

Solar panel.

David Lowe: Agricultural equipment.

David Lowe: And.

David Lowe: We're hopeful that suggests that we're going to have.

Positive momentum going into 24, so we thought that was worthy of.

David Lowe: Worthy of refinement I think on the on the industrial Asia Pacific side, We clearly have a mixed picture in Asia and <unk>.

David Lowe: One of the I'd say, the most impacted markets for us has been it falls into industrial but its the construction activity that drives powder coating applications.

Mark W. Sheahan: Fourth quarter 2022 represented peak revenue for our powder finishing group, as projects delayed during the pandemic were completed and placed into service. Our process segment grew 4% in the quarter and 11% for the year. For the year, we saw growth in all regions and reported record earnings. Increases were posted for the quarter in many business units and across all reportable regions, led by double-digit growth in vehicle services and process pumps. Price realization and increased volume drove incremental margins of 89% in the fourth quarter and 83% for the full year.

David Lowe: And that continues to be soft space for us.

David Lowe: And the picture the picture.

David Lowe: Especially in China remains.

David Lowe: Murky at best So I think that's at least a reflection of how we see the business today and finally on process in the Americas overall as Mark touched on the business has been has been has been strong.

David Lowe: But we continue to see some softening in orders in the semiconductor space sort of consistent with the messaging that's going on around in the industry here.

David Lowe: Should add the business continues to be strong in markets outside of North America.

Mark W. Sheahan: We had broad-based revenue growth in all our businesses this year, resulting in record operating profit margins for the sector. Moving on, to our outlook. As we enter 2024, we're keeping a close eye on incoming order rates and global economic indicators. Despite the difficult macroeconomic environment, we remain committed to our core strategies of launching new products, entering new markets, expanding our global channel, and pursuing strategic acquisitions. As a result, we're initiating revenue guidance for full year 2024 of low single-digit growth on an organic constant currency basis. That concludes the prepared remarks. Valerie, we're ready for questions. Thank you. The question and answer session will begin at this time. Ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone.

Speaker Change: That's really helpful. Just a quick clarification David please.

Speaker Change: You mentioned the weakness in China, We had a company report this morning.

Speaker Change: That reference weakness in China, no less than 14 times in their prepared remarks do you have.

Speaker Change: Has there been any discernible down shift in China, it's been weak.

Speaker Change: Pretty consistently but let's say in the last couple of months as it turned.

Speaker Change: More negative for you just any color there would be helpful. I would say the quick the quick answer I've got a cheat sheet here I'd say it has not.

Speaker Change: I'm going to check this fall and I think that the overall, China has been weak for us and I would say that a couple of the areas that have been the weakest of in our contractor business in our powder powder coating business, but overall, it's kind of been an ongoing theme.

Speaker Change: For a for us throughout the year.

Speaker Change: Let's say that.

Speaker Change: Throughout the year.

Speaker Change: Marc is exactly right throughout the whole year, it's been soggy on the order rates.

Speaker Change: I would say we saw modest for what it's worth we don't really think of our businesses. These waves is turning around in a couple of months or a quarter.

Operator: Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from the line of Deane Dray of RBC Capital Markets. Thank you. Good morning, everyone. Hi Deane.

But the rate of.

Speaker Change: I would say the rate of softness has decreased I mean, partly because we're working through the period of the toughest comps in 2022.

Speaker Change: Thank you.

Speaker Change: Thanks Dean.

Deane Dray: Hey, maybe we can start with pricing. And Mark, you gave the kind of broad brush comments that it's back into the single price increase. And it's, it's representative of what would be a normal price across the board.

Speaker Change: Thank you one moment please.

Speaker Change: Our next question comes from the line of Mike Halloran, Michael Halloran of Baird. Your line is open.

Mike P. Halloran: Hey, good morning, everyone.

Mike P. Halloran: Mike.

Mark W. Sheahan: Maybe talk about the expectation for new product introductions. And then, where does the cost equation sound like labor inflation is still around? Is there anything else?

Mike P. Halloran: So a couple of questions here.

Mike P. Halloran: <unk>.

Mike P. Halloran: 2023 was a massive year for margins across the board here.

Mark W. Sheahan: Are we back to normal on the rest of the cost side? Yeah, so the pricing actions again, I'd say they're more in line with what we've done historically, kind of inflationary plus or minus a little bit. All the business units are implementing increases, as are all the regions. So we feel pretty good about getting back to a normal cadence there. Of course, if things change, we know we can, you know, make an adjustment if we need to, but it doesn't look like that's going to be the case this year. Our cost pressures for the full year and the plan were still unfavorable.

Mike P. Halloran: We're talking about more normalized price.

Mike P. Halloran: How do we think about what the right run rate looks like as we work through this year process had a mini step down in the fourth quarter, but was 30% plus all year industrial is that these really large levels.

Mike P. Halloran: You compare that to 22 and earlier such a sea change. So is this sea change shift is higher level, the right run rate across the businesses or should we be thinking about something different.

Yes, I feel good about it I really think that the businesses are performing extremely well I think the factories are doing well on lower volumes, but it certainly would be a volume game for us here in 'twenty four if we get volume growth above what we're guiding.

Mark W. Sheahan: Compared to what we were expecting them to be, but we did start to see a little bit of light at the end of the tunnel here as we work through the year and the fourth quarter things turn, you know, slightly favorable. So if those trends continue, I am hopeful that we will see some impact, some favorable impact on the gross margin line as we kind of work through the year. Labor's tight.

Going to be pretty nice we've got capacity.

Mike P. Halloran: To utilize and I really feel like the factories are in good shape to be able to deliver higher revenue. We have the low single digit guide mostly because.

Mike P. Halloran: If you look out at the global trends they are they are trending below.

Mike P. Halloran: Normal levels I would say.

Mike P. Halloran: And we also have a little bit of inflation sticking around and around the world too and you never really know how that's going to play out and then you've got other factors.

Mark W. Sheahan: We did just raise our wages in line with what the market is. But, you know, even though it's tight, we have not really experienced any major difficulties in terms of attracting people to join Graco. It's a great company. We're growing. We have a great story to tell.

Mike P. Halloran: I'll kind of winter that low single digit number.

Mike P. Halloran: Even though we're getting some pricing and we got really nice new products coming out so.

Mike P. Halloran: If we get volume growth, Mike things will be great if volumes hang in there at the low single digit level I don't see any deterioration in terms of the overall performance.

Mark W. Sheahan: And even though we have people retiring all the time, we're able to fill those positions pretty readily. So I feel pretty good as we enter into the year, and we'll see what happens. Great.

Mike P. Halloran: And there could be some upside in terms of some of the initiatives we have on the <unk>.

Jeff Hammond: And then just as a second question, going to our favorite traffic light slide, can you just comment on the changes versus last quarter? So, an improved outlook for industrials America, but the outlook for industrials Asia-Pacific dipping and process Americas has worsened. I know you touched on the powdered finishing impact, but kind of reconcile some of those changes with what's actually going on in the business and order expectations. Okay, this is David

Mike P. Halloran: Side to make sure that we're taking advantage of all the opportunities that we have available to us there's plenty plenty of work for us to do here.

Speaker Change: Well, thanks for that Mark and then mentioned initiatives.

Speaker Change: How do you think the internal M&A efforts are going maybe some conversations on pipeline.

Add stability and any thoughts on the broader landscape on the M&A side.

Speaker Change: Well, we're hearing that 24 might be a little bit more favorable than 'twenty. Three just in terms of overall M&A activity levels I feel good about our pipeline I think I've said this before but I think that today I could pull any of the names on our pipeline and we don't know how big the company is with the strategic fit is.

Jeff Hammond: As far as North America Industrial goes, what we have seen there is pretty good project activity throughout the second half of 2023. The team reports. Jeff Walsh, Matt Summerville, Evelyn Chow, Charles Brady, Jeff Hammond, Jeff Walsh, Matt, Solar Panel, Agricultural Equipment, and We're hopeful that this suggests that we're going to have positive momentum going into 2024. So we thought that was worthy of refinement. I think on the industrial side of Asia Pacific, we clearly have a mixed picture in Asia. And one of the, I'd say, the most impacted markets for us has been, it falls into the industrial category, but it's the construction activity that drives powder coating applications. And that continues to be a soft space for us. And the picture, you know, the picture, especially in China, remains murky at best.

Speaker Change: <unk> ability what kind of contact we've had with those those companies and so it's really just a matter of.

Speaker Change: Are they ready to get.

Get into a transaction or not I think Greg was in a good spot to be able to look at those opportunities I think we have a lot to offer.

Speaker Change: We have world class manufacturing operations, we are a global distribution channel, we have professional marketing and sales. So if we get the right opportunity with the right management team.

Speaker Change: To go in.

Speaker Change: I think we feel pretty good about the overall shape of the pipeline these days.

Jeff Hammond: So I think that's at least a reflection of how we see the business today. And finally, on process in the Americas overall, as Mark touched on, business has been strong, but we continue to see some softening in orders in the semiconductor space, sort of consistent with the messaging that's going on around in the industry here. I should add that business continues to be strong in markets outside of North America. That's really helpful.

Speaker Change: I would just add that to that that I think our experience in 'twenty three.

Speaker Change: Really reflects what we saw industry wide with declines.

Speaker Change: In deal volume certainly the deal supply.

I think as maybe in some cases sellers withheld moving forward trying to figure out where private equity fits in all of this and at least.

Jeff Hammond: Just a quick clarification, David, please. You mentioned the weakness in China. We had a company report this morning that referenced weakness in China no less than 14 times in their prepared remarks. Do you have any, has there been any discernible downshift in China? It's been weak pretty consistently, but let's say in the last couple of months, has it turned more negative for you? Just any color there would be helpful.

Speaker Change: On some transactions, we followed pretty closely multiples remain elevated.

Speaker Change: Elevated with that said the work is ongoing with respect to pipeline management, reaching out and cultivating transactions. It's it's long term retail work, but I think that anytime we can find opportunities where we could work on them on an <unk>.

Jeff Hammond: I would say the quick answer, I've got a cheat sheet here, I'd say it has not. I'm going to check this while I'm... I think that China overall has been weak for us, and I would say that the couple of the areas that have been the weakest have been our contractor business and our powder coating business. But overall, it's kind of been an ongoing theme for us throughout the year. I would say that Mark's exactly right. Throughout the whole year, it's been soggy on the order rates. I would say we saw modest for what it's worth.

Speaker Change: <unk> basis as opposed to an auction basis that remains that remains a real.

Speaker Change: The real opportunity for us and as Mark said in addition to the I would say our operating philosophy.

Speaker Change: Our channel management skills and some other things that we're proud of is that.

Speaker Change: Quite frankly, given our financial situation when the opportunity comes along we can move very quickly.

Appreciate it gentlemen, thank you.

Speaker Change: Mike.

Thank you one moment please.

Our next question comes from a lot of <unk> of June.

Jeffrey Your line is open.

Jeffrey: Hi, good morning.

Michael Halloran: We don't really think of our businesses this way as turning around in a couple of months or a quarter. But the rate of, I would say, the rate of softness has decreased, partly because we're working through the period of the toughest comps in 2022. Thank you. Thanks, Deane! Thank you. One moment, please. Our next question comes from the line of Michael Halloran of Baird. Your line is open. Good morning, everyone.

You typically see low single digit growth in all regions and segments that you kind of admitted that today. So maybe just talk about where you expect to see higher or lower growth within the guidance.

Jeffrey: For 2024.

Speaker Change: And I think we've fine tuned it I think we just decided that we're going to go at the overall macro and I think we're smart enough to know what's going to be up what's going to be down, but I feel very confident at this point that overall, that's where the number should be at.

Speaker Change: What are your customers talked about commercial sales any weakening in the second half of this year due to lower completion, maybe just talk within contractor about how youre thinking about the resi and commercial completions within your guidance in 2024.

Michael Halloran: Bye, Mike. So I have a couple questions here. First, you know, 2023 was a massive year for margins across the board here. You know, we're talking about a more normalized price. How do we think about what the right run rate looks like as we work through this year? You know, process had a mini step down in the fourth quarter but was 30% plus all year. Industrial production is at these really large levels. You know, when you compare that to 22 and earlier, it's just a sea change. So is this sea change, at this higher level, the right run rate across businesses? Or should we be thinking about something different?

Yes, I do think the commercial as expected a slowdown, but it's still going to grow in 'twenty four at least that's what they're predicting right now.

Speaker Change: I'm, probably a little bit more bullish on the residential side than maybe what some of the headlines are I do believe that rate stabilization. The fact that the fed's going to cut rates gives people more confidence to purchase new homes and I think that the builders are going to pick up on that and hopefully we see more activity there.

Speaker Change: We also expect to see more turnover in the North America market.

Speaker Change: People can see that theyre not going to be locked into these low mortgage rates and maybe they can move into new houses I think that'll be that'll be favorable for our contractor business too I'm also really excited about the new products coming out and CET.

Mark W. Sheahan: Yeah, I feel good about it. I really think that the businesses are performing extremely well. I think the factories are doing well on lower volumes. It's really going to be a volume game for us here in 24.

Speaker Change: We had great success with the quick chat product that we launched last year that really helped and we've got some new products coming out here in 'twenty, four including a new line of electric sprayers.

Mark W. Sheahan: If we get volume growth, you know, above what we're guiding, it's going to be pretty nice. We've got capacity to utilize, and I really feel like the factories are in good shape to be able to deliver higher revenue. We have the low single-digit guide, mostly because, you know, if you look out at the global trends, they are trending below, you know, normal levels, I would say.

Speaker Change: Our new.

What we are calling approach shot which is basically taken that quick shot technology and applying it to all of our installed base of sprayers and the marketplace. We've got some new.

Speaker Change: Guns coming out on the industrial side, we have a new gun coming out in the spray foam category. We have some two component flooring products coming out in <unk>. So.

Pretty excited about the about the launches that are having in 'twenty four gives us confidence that hopefully we'll be able to.

Mark W. Sheahan: And we also have a little bit of inflation sticking around the world too, and you never really know how that's going to play out. And then you've got other factors that all kind of went into that low single-digit number, even though, you know, we're getting some pricing and we've got really nice new products coming out. So if we get volume growth, Mike, things will be great. If volumes hang in there at the low single-digit level, I don't see any deterioration in terms of overall performance. And, you know, there could be some upside in terms of some of the initiatives we have on the cost side to, you know, make sure that we're taking advantage of all the opportunities that we have available to us. There's plenty of work for us to do here. Thanks for that, Mark.

Speaker Change: Grow the revenue in line with what we had projected.

Speaker Change: And I would just add one more your industrial margins at 37% in the quarter I think its the highest its ever been so maybe just think about that as starting off point higher thinking about price cost for the volume impact just how you think about industrial margins actually go out to my 24 and beyond.

Yes, I think they can go higher if we get the volume like I said earlier I think that there is a lot of capacity in the factories volumes have not been as strong lately as they had been historically most of the growth in 'twenty three came from our pricing actions. So theres no lid on the industrial margins that I am aware of.

Speaker Change: Great to hear congratulations thanks, Thanks, taking my questions.

Speaker Change: Thank you one moment please.

Speaker Change: Our next question comes from the line of Joe Ritchie of Goldman Sachs. Your line is open.

Mark W. Sheahan: And then you mentioned initiatives. How do you think the internal M&A efforts are going? Maybe some conversations on pipeline, actionability, and any thoughts on the broader landscape for M&A. Well, we're hearing that 24 might be a little bit more favorable than 23, just in terms of overall M&A activity levels. I feel good about our pipeline. I think I've said this before, but I think that today I could pull any of the names out of our pipeline and I'd know how big the company is, what the strategic fit is, actionability, and what kind of contact we've had with those companies. And so it's really just a matter of, you know, are they ready to get into a transaction or not?

Thanks, Good morning, guys.

Speaker Change: So.

Joe Ritchie: Just my first question look I agree with what.

Mike said earlier, just that performance this year on the margin.

Joe Ritchie: Really no volumes was pretty impressive.

As I kind of think about your product cost initiatives.

Joe Ritchie: How far along would you say you are and maybe if you could just provide a little bit more color on how that's impacting margins as well that'd be great.

Speaker Change: Are you talking about the purchased items in the factory that when you say product cost.

Yes, its just that youre continuing to lower product costs I would imagine that you're simplifying your line and also from a sourcing perspective, probably also benefiting but any any color, that's really kind of driving lower product costs across our portfolio.

Speaker Change: Yes, we have each of the business units has engineers that are looking for ways to take cost out of products. We do that continuously and then of course, when we launch a new product a lot of times. We're looking at how do we take cost out of the old one so we get kind of a double whammy there.

Mark W. Sheahan: I think Graco is in a good spot to be able to look at those opportunities. I think we have a lot to offer. You know, we have world-class manufacturing operations, we have a global distribution channel, and we have professional marketing and sales. So, if we get the right opportunity with the right management team, we're ready to go. And like I said, I think we feel pretty good about the overall shape of the pipeline these days. I would just add to that that I think our experience in 23 really reflects what we saw industry-wide with declines in deal volume. Certainly, deal supply slipped, I think, as maybe in some cases, sellers, you know, withheld moving forward, trying to figure out where private equity fits in all of this. And at least on some transactions, we followed pretty closely. Multiples remain elevated.

Speaker Change: It works the way according to plan.

When it comes to the factory input costs, we did.

Speaker Change: You'll start to see a little bit of favorability creep in in the late in the third quarter and into the fourth quarter in terms of what we call PPV purchase price variance.

So if that trend continues here into 2024, I think that that should be more or less a tailwind at this point I don't want to predict it but we don't really see the big inflationary pressures hitting the way we have over the last couple of years. So our hope is that if we keep our price increase in line and we can.

Speaker Change: Do a good job on the cost that there could be.

Decent potential for gross margin expansion in 'twenty for that sort of what we've baked into our internal plans.

Speaker Change: Got it that's great to hear and I guess look.

You took a look across the different regions in your segments and what does stand out to me is what's happening in the industrial segment in the U S or in the Americas. The growth has been really good had been in 2023 I guess.

Jeff Hammond: With that said, the work is ongoing with respect to pipeline management, reaching out, and cultivating transactions. Thank you all for joining us for this long-term retail work, but I think that anytime we can find opportunities where we can work on them on an exclusive basis as opposed to an auction basis, that remains a real opportunity for us. And as Mark said, in addition to, I'd say, our operating philosophy and our channel management skills and some other things that we're proud of, is that, quite frankly, given our financial situation, when the opportunity comes along, we can move very quickly. Appreciate it, gentlemen.

We've been talking a lot and writing a lot about Mega project and ultimately what that means for industrial growth going forward, whether it's this year or next.

Speaker Change: Or are you thinking about the investment that's happening in the U S and ultimately like when do you start to see it flow through your own P&L.

Speaker Change: Yes, I think it should be good for us I can't say that we've actually started to experience that I can't point to specific.

Speaker Change: Projects that we've gotten as a result of that but for sure anytime they move a factory around.

Speaker Change: From one location to another they usually don't rip out the old Graco equipment, and then put it into a new facility.

Speaker Change: Re buy the stuff because in terms of the overall capital outlay or stuff really isn't all that expensive and it's just easier and better if they take advantage of that.

Michael Halloran: Thank you. Thanks, Mike. Thank you. One moment, please.

Our next question comes from the line of Saree Boroditsky of Jeffreys, Yolana Vilppu, Hi, good morning. So you typically say low single-digit growth in all regions and segments, but you kind of omitted that today. So maybe just talk about where you expect to see higher or lower growth within the guidance of low single digits for 2024. I think we've fine-tuned it.

Speaker Change: In North America, industrial they've really done a nice job of executing on some of the initiatives that we've got around <unk>.

Speaker Change: Electric vehicles and battery production.

And in addition to that I think that the.

Speaker Change: Our powder business in North America has actually performed a little bit better than where it had outside of the North America marketplace. So.

Speaker Change: Feel good about the team there and the growth and what they are what they are working on I think they've got their eye on the ball and they're focused on the right things.

Speaker Change: Some of the products that they've got coming out as well.

Mark W. Sheahan: I think we just decided that we're going to go with the overall macro, and I think we're smart enough to know what's going to be up, and what's going to be down. But I feel very confident at this point that, overall, that's where the numbers should be. While your customers talked about commercial sales maybe weakening in the second half of this year due to lower completions, maybe just talk within contractor about how you're thinking about the resi and commercial completions within your guidance in 2024. Yeah, I do think that commercial is expected to slow down, but it's still going to grow in 2024, at least that's what they're predicting right now. I'm probably a little bit more bullish on the residential side than some of the headlines are. I do believe that rate stabilization, the fact that the Fed is going to cut rates, gives people more confidence to purchase new homes, and I think that the builders are going to pick up on that, and hopefully, we see more activity there.

Speaker Change: And the electric pump category should drive some incremental growth because a lot of.

Are these customers that they are moving into a new facility. They are also looking at their energy consumption and if they can put in an electric drive pump instead of an air drive pump they save a lot of energy and so we think that theres going to be the potential to get some incremental business with those new builds but also we can go back into old customers as well.

Speaker Change: <unk> and try to.

Speaker Change: Persuade them that there is a payback in ROI if they if they move to an electric platform. So a lot of good things happening in industrial and I.

Speaker Change: I think they'll have a.

Speaker Change: A good spot.

Speaker Change: To have a decent in 2024 and I would say just adding to marks comment that.

Yeah.

There are opportunities for re shoring or near shoring, whatever you want to call it.

That I think does play out over time for example, I can use an example in my own finishing experience where about a decade ago.

A couple of large Japanese automotive Oems decided to start.

Speaker Change: A couple of Greenfield facilities in Central Mexico.

Speaker Change: Sort of away from where the traditional automotive manufacturers for operating and from the time they initiated the project when they started making cars took about five years.

Mark W. Sheahan: We also expect to see more turnover in the North American market once people can see that they're not going to be locked into these low mortgage rates, and maybe they can move into new houses. I think that'll be favorable for our contractor business too. I'm also really excited about the new products coming out in CED. We had great success with the QuickShot product that we launched last year, and that really helped, and we've got some new products coming out here in 24, including a new line of electric sprayers, a new ProShot, which is basically taking that QuickShot technology and applying it to all our installed base of sprayers in the marketplace.

Speaker Change: And the reason for that is it took the better part of five years to flush out a vendor base that was suitable for the standards of Japanese car companies. So on the higher end of projects I think it should be a positive as alluded to over the next several years, but things like <unk>.

Speaker Change: Hi chains, and so forth don't come together overnight, especially in the higher value added product categories.

Speaker Change: Got it that's great color, if I could just fit one more in just real quickly on the pension settlement.

Mark W. Sheahan: We got some new guns coming out on the industrial side. We have a new gun coming out in the spray foam category. We have some two-component flooring products coming out in CED, so pretty excited about the launches that are happening in 24. It gives us, you know, confidence that hopefully we'll be able to grow the revenue in line with what we had projected. And if I could just add one more, your industrial margins at 37% in the quarter, I think it's the highest they've ever been, so maybe just think about that as a starting point for how you're thinking about price costs in 2024, the volume impact, just how you're thinking about industrial margins Thanks.

What's left on the pension at this point I know that you did $147 million this quarter, but what's left on the on the liability side.

Speaker Change: I think we have about $127 million remaining from the <unk>. After we did this round of the Derisking.

Speaker Change: Okay, great. Thank you very much.

Speaker Change: Thank you one moment please.

Speaker Change: Our next question comes from the line of Jeff Hammond of Keybanc capital market. Your line is open.

Jeff Hammond: Hey, good morning.

Jeff Hammond: Hi, Jeff.

Jeff Hammond: Just on process I mean, it's just had a tremendous run of growth I think the gross took down <unk> and youre, saying.

And that low single digits.

Are you seeing any real moderation within that business or are we just finally kind of catching up the tough comps, yes, I think that like David said earlier, the semiconductor business is probably the one that we would expect to see a little bit of a pullback in 24, the expectation is that.

Mark W. Sheahan: Yeah, I think they can go higher if we get the volume. Like I said earlier, I think that there's a lot of capacity in the factories. Volumes have not been as strong lately as they have been historically. Most of the growth in 23 came from our pricing action. So there's no lid on the industrial margins that I'm aware of. Great to hear. Congratulations. Thanks for taking my questions. Thank you. One moment, please.

I will actually start to ramp up their spend again kind of mid year 2024, but of course last year. At this time, we had these huge backlogs of orders from customers in.

Jeff Hammond: We haven't worked down all of those we worked down quite a bit of it so outside of that I don't really see much in terms of things that have us concerned the vehicle service side still looks pretty solid our industrial lube side looks good we still have plenty of opportunity there to gain market position.

Joe Ritchie: Our next question comes from the line of Joe Ritchie of Goldman Sachs, the line of... Thanks. Good morning, guys. Good morning, Joe.

Jeff Hammond: The.

The process pumping business looks decent we have an electric drive diaphragm pump that we're pretty excited about.

Jeff Hammond: Getting put into customers to drive some incremental growth there so.

Joe Ritchie: So just my first question, like, look, I agree with what Mike said earlier, just the performance this year on the margins with really no volumes was pretty impressive. As I kind of think about your product cost initiative, how far along would you say you are? And maybe if you could just provide a little bit more color on how that's impacting margins as well, that would be great. Are you talking about the purchased items in the factory when you say product cost? Yeah, just that you're continuing to lower product costs. I would imagine that you're, you know, simplifying your line. And also, from a sourcing perspective, probably also benefiting, but any color that's really kind of driving lower product costs across your portfolio? Yeah, we have engineers that are looking for ways to take costs out of products. We do that continuously.

Jeff Hammond: I feel I feel overall pretty good about all of the business units in there.

Jeff Hammond: Slight exception of the.

Jeff Hammond: Semiconductor space.

Speaker Change: Okay and then.

Speaker Change: So this looks to be your last year of kind of growth capital.

Speaker Change: Should we expect into 'twenty five that you start settling back in that $60 million capex or is there.

A new funnel of projects.

No I think we're in great shape facility wise once we get through 2024, and I would I would highly expect that our normal maintenance capex plus improvements is going to be somewhere in that 50 to 60 range.

Speaker Change: Okay. Thanks, a lot.

Thank you one moment please.

Our next question comes from the line of Matt Summerville of D. A Davidson your line is open.

Matt J. Summerville: Thanks, just a couple of quick ones with respect to the performance you saw in contractor can you maybe just touch on the divergence.

Mark W. Sheahan: And then, of course, when we launch a new product, a lot of times we're looking at how to take costs out of the old one. So we get kind of a double whammy there. If it works according to plan when it comes to factory input costs. We did start to see a little bit of favorability creep in late in the third quarter and into the fourth quarter in terms of what we call PPV, purchase price variance. And so if that trend continues here into 2024, I think that that should be more or less a tailwind. At this point, I don't want to predict it, but we don't really see the big inflationary pressures hitting the way we have over the last couple of years.

Matt J. Summerville: In the home center channel versus propane and whether you see that trend continuing in 'twenty four given kind of the new product cadence you're looking for.

Matt J. Summerville: Yes.

Speaker Change: I'll be honest with you Matt.

Speaker Change: Year ago somebody would have told me that full year CD is going to be up.

Our down 1% I think we always said, we will take that just given all the doom and gloom that was out there in the marketplace.

Speaker Change: Anything from DIY was way over bought to the housing market is going to collapse and creator and all that all that negative stuff, but.

Speaker Change: I think I reminded people at one point that business is made up of a lot of different things and you've got line striping, you've got spray foam you've got protective coatings, which are all kind of more in the professional camp as well as all of the Pearl sprayers that we sell through.

Mark W. Sheahan: So our hope is that if we keep our price increase in line and we can do a good job on the cost, there could be decent potential for gross margin expansion in 24. That's sort of what we've baked into our internal plan.

Speaker Change: The professional paint stores and that side.

Mark W. Sheahan: That's great to hear. And I guess, look, you took a look across the different regions and your segments. And what does stand out to me is what's happening in the industrial segment in the US or in the Americas. The growth has been really good, and it will be in 2023. I guess, you know, we've been talking a lot and writing a lot about megaprojects and ultimately what that means for industrial growth going forward, whether it's this year or next. How are you thinking about the investment that's happening in the US and, ultimately, when you start to see it flow through your own P&L? You know, I think it should be good for us, but I can't say that we've actually started to experience it yet.

Propane held up probably better than what we would've expected and then the <unk>.

Speaker Change: Other pieces that I mentioned were actually fairly robust with a lot of the infrastructure spend that's been going on.

Speaker Change: Opportunities to go in and re insulate homes for example, with a spray foam. So all in all feel pretty good about that I feel like the home center in terms of their inventory levels has gotten to a point where they're comfortable in there at the level that they're seeing in terms of.

Speaker Change: Foot traffic in the stores.

Speaker Change: From a demand standpoint, so I feel like we've already been through most of the the pain there in terms of reductions.

Speaker Change: We do have some new products going in there this year, we'll see what happens with that.

Mark W. Sheahan: I can't point to specific, you know, projects that we've gotten as a result of that. But for sure, anytime they move a factory around from one location to another, they usually don't rip out the old Graco equipment and put it into a new facility. They usually just rebuy the stuff because, in terms of the overall capital outlay, our stuff really isn't all that expensive, and it's just easier and better if they take advantage of that. In North America, industrial, they've really done a nice job executing on some of the initiatives that we've got around electric vehicles and battery production. And in addition to that, I think that the powder business in North America has actually, you know, performed a little bit better than where it has performed outside of the North American marketplace.

Speaker Change: If the level of activity remains where it is and we do a good job on the new products, we would actually see some potential growth in the home center in 2024, we'll just have to see how things shake out.

Speaker Change: Got it.

Speaker Change: Just as a follow up how do you guys think about balance sheet optimization, especially to the comment made earlier.

Speaker Change: Big multiyear capex cycle for Graco.

Speaker Change: Starting to roll off in 'twenty, four essentially abating in 'twenty, five and yet you're sitting here with half a $1 billion in net cash how should we think about.

Speaker Change: Whether or not you guys are likely to step up and get more aggressive with repurchases if the M&A.

Speaker Change: Pipeline, maybe doesn't play out as you hope how should we be thinking about kind of optimizing the balance sheet for graco well for sure top priority would be to do some acquisitions that makes sense strategic ones that we can add value, where we can put points on the board that payback nice rates of return for our investors and I think David alluded to the fact that pricing.

Mark W. Sheahan: So I feel good about the team there and the growth and what they're working on. I think they've got their eye on the ball, and they're focused on the right things. And some of the products that they've got coming out as well in the electric pump category should drive some incremental growth because a lot of these customers, if they're moving into a new facility, they're also looking at their energy consumption. And if they can put in an electric drive pump instead of an air drive pump, they save a lot of energy.

Has been a little bit of a challenge here, we will see what happens I like the pipeline, we will be active that would be my top choice and I think the top choice of our management team.

Speaker Change: We've always had the I'll call it the happy problem of.

Speaker Change: Generating more casually can plow back into the business and historically, we've taken care of that through buying back our stock and doing some acquisitions, but for sure. It's front and center in terms of things that we're keeping an eye on we do have a half of $1 billion in cash on the balance sheet, but we are a 14 plus billion.

Mark W. Sheahan: And so we think that there's going to be the potential to get some incremental business with those new builds. But we can also go back into old customers as well and try to, you know, persuade them that there's a payback in ROI if they move to an electric platform. So a lot of good things are happening in industrial and, you know, I think they'll have a go there in a good spot to have a decent 2024. Yeah, and I would add to Mark's comment that there are opportunities for reshoring or nearshoring, whatever you want to call it, that I think will play out over time. For example, I can use an example from my own finishing experience, where about a decade ago, a couple of large Japanese automotive OEMs decided to start a couple of greenfield facilities in central Mexico, sort of away from where the traditional automotive manufacturers were operating. And from the time they initiated the project, when they started making cars, it took about five years.

Speaker Change: Our $1 billion market cap company. So in terms of the overall leverage.

Speaker Change: It looks big but again, given the size and scale of graco.

Speaker Change: We really view it as a significant problem at this point I don't think anyone has a gun to David Loews had or my head and saying that we have to deploy that capital. We ensure we'd like to we'll do our best to be able to take advantage of opportunities on the share buyback side and M&A going forward, but.

Speaker Change: It's a great problem to have the company performs extremely well we're fortunate to have this happy problem. So.

Speaker Change: I should leave well enough alone because thats a good summary, I will just add the two things number one I think we like the flexibility that the position gives us to move quickly when opportunities and such come along and some of you have heard me talk about before while I don't think of our stock as a classic cyclical.

Speaker Change: Wall Street does because of the markets, we serve and what that means is from time to time.

Speaker Change: Without a lot of change in our business.

Speaker Change: Cyclical stocks go on a discount and I think our record over the last couple of decades has been pretty good at buying in most recently in 2002 also in 'twenty back in 15 and 16, when we were I think experiencing a 30% haircut and.

Jeff Hammond: And the reason for that is it took the better part of five years to flesh out a vendor base that was suitable for the standards of Japanese car companies. So on the higher end of projects, I think it should be positive, as alluded to over the next several years. But things like supply chains and so forth don't come together overnight, especially in the higher value-added product category. God, that's a great color.

Speaker Change: It's nice to know that that that.

Speaker Change: <unk> remains a real option for us when the opportunity comes along.

Speaker Change: Got it thank you guys.

Speaker Change: Thanks, Matt.

Speaker Change: Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star one line.

One moment for our next question.

Joe Ritchie: If I could just fit one more in just real quickly on the pension settlement. What's left on the pension at this point? I know that you did 147 million this quarter, but what's left on the liability side? I think we have about $127 million remaining from the PBO after we did this round of the de-risk. Okay, great. Thank you very much. One moment, please.

Speaker Change: Our next question comes from the line of Andrew Buscaglia.

BNP Your line is open.

Speaker Change: Okay.

Jeff Hammond: Hey, guys.

Jeff Hammond: Just looking at your margin I think everyone's kind of trying to figure out if you can exceed the watermark.

Jeff Hammond: You guys have had such strong margins. This year on low growth I'm wondering you talked a lot about new products you are introducing is there.

I mean, youre always introducing new products or is this a greater kind of new product cycle. We're re upon it seems like quite a bit of commentary on that.

Jeff Hammond: Our next question comes from the line of Jeff Hammond of KeyBank Capital Market. Your line is open. Hey, good morning. Hey, Jeff.

Speaker Change: Yes, I would say that for sure new products is oxygen for Greg all right.

Jeff Hammond: Just on process, I mean, it's just had a tremendous run of growth, and I think the growth stepped down in 4Q, and you're saying... You know, it fits in that low single digits. Is this, are you seeing any real moderation within that business, or are we just finally kind of catching up to it? Yeah, I think that like David said earlier, the semiconductor business is probably the one that we would expect to see a little bit of a pullback in 24. But the expectation is that they will actually start to ramp up their spend again, kind of mid-year 2024. But of course, last year, at this time, we had these huge backlogs of orders from customers.

Speaker Change: It's our primary growth lever and I really do believe that this year in the contractor business in particular is a.

<unk> lineup of new products coming.

Speaker Change: And we also have.

Speaker Change: Decent products in the other business units as well. So if you were to take like an average of a new product here for Greg or this 24, it looks like it could be a little bit stronger.

Speaker Change: That average yes, okay.

Interesting and is there.

Speaker Change: Is there a bit more pricing leverage therefore in contractor versus the other.

Speaker Change: Segment.

Speaker Change: Both price cost, but also those new product initiatives are not initiative, but but.

Speaker Change: New product expectation.

Speaker Change: I wouldn't say there is more pricing leverage I would say that we are able to charge a nice price for new technology, when we bring it to the marketplace and typically we're also looking to maybe reduce some of the costs. If we're replacing a legacy item with something new but.

Mark W. Sheahan: And while we haven't worked out all of those, we've worked out quite a bit of them. So outside of that, I don't really see much in terms of things that have us concerned. The vehicle service side still looks pretty solid. Our industrial loop side looks good.

Speaker Change: Being the first to the customer with new technology is really the name of the game.

Mark W. Sheahan: We still have plenty of opportunity there to gain market position. The, you know, the process pumping business looks decent. We have an electric drive diaphragm pump that we're pretty excited about getting put into customers to drive some incremental growth there.

Speaker Change: And if you can do that consistently like we've been able to do you really can drive.

Speaker Change: More organic growth than say other companies that are <unk>.

Speaker Change: Playing catch up.

Yeah, Okay and Youre talking.

Mark W. Sheahan: So, you know, I feel pretty good about all of the business units in there with, you know, the slight exception of the semiconductor space. Okay, and then, so, this looks to be your last year of kind of growth capital. Should we expect into 25 that you start settling back into that 60 million? CAPEX?

Speaker Change: I know acquisitions are.

Speaker Change: Your preference.

Speaker Change: How do we think about margin with new deals are these deals you're looking at I'm, assuming would be margin dilutive, but.

Speaker Change: Can you just kind of miranda's, what what your hurdle rates are and what your expectations are for that.

Speaker Change: Yes, we don't really have a targeted let's say operating margin for a business that we're going to acquire but for sure in most cases their operating margins are going to be below grade goes or their EBIT margins or EBITDA margins. So what we're really looking for is a good business.

Jeff Hammond: Or is there... in a new funnel of projects. No, I think we're in great shape facility-wise once we get through 2024, and I would highly expect that our normal maintenance CapEx plus improvements is going to be somewhere in that $50,000. Okay, thanks a lot. Thank you. One moment, please.

Speaker Change: We understand the product line, we understand the customers. We think we can bring some value, particularly on the operational side of the business and take their existing margin rate and improve it over time I think we've got good experience with the deals that we have done.

Matt J. Summerville: Our next question comes from the line of Matt Summerville of DA Davidson. Your line is open. Thanks. Just a couple quick ones with respect to the performance you saw in contractor. Can you maybe just touch on the divergence in the home center channel versus propane and whether you see that trend continuing in 24 months given the kind of new product cadence you're looking for? Yeah, you know, I'll be honest with you, Matt. If, you know, a year ago, somebody would have told me that full year CED was going to be up or down 1%, I think we all would have said we'd take that just given all the doom and gloom that was out there in the marketplace.

Speaker Change: With that kind of a playbook and that's really what we'd be looking for with <unk>.

Speaker Change: M&A as we as we're scouring the market for opportunities.

Speaker Change: Okay very helpful. Thank you yep.

Thank you.

Speaker Change: And there are no further questions I'll now turn the call back over to Mark Qiang Zhang for closing remarks, okay. Thanks very much.

Speaker Change: We thank our customers employees all of our channel partners around the world for a great year in 2023, their dedication and loyalty and unwavering commitment to graco is really what provides us with the winning edge in the marketplace I. Thank you all for participating on today's call that.

Mark W. Sheahan: Everything from DIY was way overbought to the housing market's gonna collapse and crater and, you know, all that other negative stuff. But, you know, as I think I reminded people at one point, that business is made up of a lot of different things. And you've got line striping, you've got spray foam, you've got protective coatings, which are all kind of more in the professional camp, as well as all the pro sprayers that we sell through the professional paint stores.

Speaker Change: That concludes the call for today.

Speaker Change: This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Mark W. Sheahan: And on that side, you know, the professional paint held up probably better than we would have expected. And then the other pieces that I mentioned were actually fairly robust with a lot of the infrastructure spend that's been going on and opportunities to, you know, go in and re-insulate homes, for example, with spray foam. So all in all, I feel pretty good about that. I feel like the home center, in terms of their inventory levels, has gotten to a point where they're comfortable, and they're at the level that they're seeing in terms of foot traffic in the stores, from a demand standpoint. So I feel like we've already been through most of the pain there in terms of reductions. We do have some new products going in there this year; we'll see what happens with that. If the level of activity remains where it is, and we do a good job with the new products, we'd actually see some potential growth in the home center. In 2024, we'll just have to see how things shape up.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Yes.

Speaker Change: Sure.

Sure.

Speaker Change: Okay.

Speaker Change: <unk>.

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Mark W. Sheahan: And just as a follow-up, how do you guys think about balance sheet optimization, especially, you know, to the comment made earlier, this big multi-year kind of capex cycle for Graco, really starting to roll off in 24, essentially abating in 25, and yet you're sitting here with half a billion dollars in net cash? How should we think about, you know, whether or not you guys are likely to stub out and get more aggressive with repurchases if the M&A, you know, pipeline maybe doesn't play out as you hope? How should we be thinking about kind of optimizing the balance sheet for Graco?

Mark W. Sheahan: Well, for sure, our top priority would be to do some acquisitions that make sense, strategic ones that we can add value to, or we can put points on the board, you know, that pay back nice rates of return for our investors. And I think David alluded to the fact that pricing has been a little bit of a challenge here. We'll see what happens. I like the pipeline; we will be active. That would be my top choice.

Mark W. Sheahan: And I think the top choice of our management team. We've always had the, I'll call it, the happy problem of, you know, generating more cash so we can plow back into the business. And historically, we've taken care of that through buying back our stock and doing some acquisitions. But for sure, it's front and center in terms of, you know, things that we're keeping an eye on. You know, we do have a half a billion in cash on the balance sheet, but you know, we are a 14 plus billion dollar or billion market cap company.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Thanks.

Speaker Change: Sure.

Speaker Change: Yes.

Mark W. Sheahan: So in terms of, you know, the overall leverage, it looks big, but again, given the size and scale of Graco, I don't really view it as a significant problem at this point. I don't think anyone has a gun to David Lowe's head or my head saying we have to deploy that capital; we sure would like to, and we'll do our best to be able to take advantage of opportunities on the share buyback side and M&A going forward. But, you know, it's a great problem to have the company performs extremely well; we're fortunate to have this happy problem. So I should leave well enough alone because that's a good summary.

Speaker Change: Yes.

Okay.

Speaker Change: Yes.

Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change:

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Okay.

Jeff Hammond: I'll just add two things. Number one, I think we like the flexibility that the position gives us to move quickly when opportunities and such come along. And some of you have heard me talk about before; while I don't think of our stock as a classic cyclical, Wall Street does, because of the markets we serve. And what that means is, from time to time, without a lot of change in our business, cyclical stocks go on a discount. And I think our record over the last couple of decades has been pretty good at buying in, most recently in 22, also in 20, back in 15 and 16, when we were, I think, experiencing a 30% haircut. And it's nice to know that that remains a real option for us to move quickly. When the opportunity comes along,

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

<unk>.

[music].

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: [music].

Speaker Change: Sure.

Yes.

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Earnings.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yes.

Okay.

Speaker Change: [music].

Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Sure.

Speaker Change: [music].

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Okay.

Speaker Change: Okay.

Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Sure.

Yes.

Speaker Change: Sure.

Speaker Change: [music].

Okay.

Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Matt J. Summerville: Got it. Thank you, guys. Thank you, Matt. Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone. Again, to ask a question, please press star 1-1.

Speaker Change: Great.

Speaker Change: Okay.

Speaker Change: Sure.

Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Right.

Speaker Change: Okay.

Speaker Change: <unk>.

Speaker Change: Okay.

Speaker Change: Yes.

Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Please.

Yes.

Speaker Change: Yes.

Operator: One moment for our next question. Our next question comes from the line of Andrew Biscaglia, of BNP, a lot of... Hey, guys. You know, just looking at your margins, you know, I think everyone's kind of trying to figure out if they can exceed the sort of watermark.

Speaker Change: [music].

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Jeff Hammond: You guys have had such strong margins this year on low growth. I'm wondering, you talk a lot about new products you're introducing. Is there, and you're always introducing new products. Is this a greater kind of new product cycle we're upon? It seems like you have quite a bit of commentary on that.

Sure.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Sure.

Speaker Change: Okay.

Okay.

Yes.

Sure.

Okay.

Mark W. Sheahan: Yeah, I would say that, for sure, new products are oxygen for Grey Gulf, right? I mean, it's our primary growth lever. And I really do believe that this year, in the contractor business, in particular, there is a strong lineup of new products coming. And we also have, you know, decent products in the other business units as well. So, you know, if you were to take like an average of a no product year for Greco, this 24 looks like it could be a little bit. Yeah, okay.

Speaker Change: Okay.

Sure.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Sure.

Speaker Change: Yes.

Okay.

Speaker Change: Okay.

Mark W. Sheahan: Interesting. Is there a bit more pricing leverage, therefore, in the contractor versus the other segments? Um, both price and cost but also this new product initiative or not initiative but, New Product Expectations. I wouldn't say there's more pricing leverage; I would say that we are able to charge a nice price for new technology when we bring it to the marketplace.

Speaker Change: Okay.

Speaker Change: Yes.

[music].

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Sure.

Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Okay.

Speaker Change: [music].

Speaker Change: Yes.

Mark W. Sheahan: And, you know, typically, we're also looking to maybe reduce some of the costs if we're replacing a legacy item with something new. But, you know, being the first to the customer with new technology is really the name of the game. And if you can do that consistently, like we've been able to do, you really can drive more organic growth and outperform other companies that are playing catch. Yeah, okay.

Speaker Change: Sure.

Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Sure.

Speaker Change: Okay.

Yes.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Okay.

Speaker Change: Okay.

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yes.

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Thanks.

Speaker Change: Yes.

Speaker Change: Okay.

Yes.

Mark W. Sheahan: And you're talking, you know, acquisitions are your preference, um, how do we think about margins with new deals? Are these deals you're looking at, I'm assuming, would be margin dilutive? But yeah, can you just kind of remind us what your hurdle rates are and what your expectations are for that? Yeah, we don't really have a targeted, let's say, operating margin for a business that we're going to acquire. But for sure, in most cases, their operating margins are going to be below Graco's or their EBIT margins or EBITDA margins.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: Okay.

Thank you.

Yes.

Speaker Change: Sure.

Speaker Change: Okay.

Okay.

Mark W. Sheahan: So what we're really looking for is a good business where we understand the product line, we understand the customers, and we think we can bring some value, particularly on the operational side of the business and take their existing margin rate and improve it over time. I think we've got good experience with the deals that we have done with that kind of a playbook. And that's really what we'd be looking for with M&A as we scour the market for opportunities. Okay, very helpful.

Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Sure.

Speaker Change: Okay.

Yes.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Got it.

Speaker Change: Yes.

Speaker Change: Okay.

Yes.

Speaker Change: Yes.

Okay.

Speaker Change: Okay.

Speaker Change: Yes.

Jeff Hammond: Thank you. Yep. Thank you. If there are no further questions, I'd like to call back over to Mark Sheahan for closing remarks. Okay, thanks very much.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Okay.

Sure.

Speaker Change: Thank you.

Speaker Change: Yes.

Mark W. Sheahan: I'd like to thank our customers, employees, and all of our channel partners around the world for a great year in 2023. Their dedication and loyalty and unwavering commitment to Graco is really what provides us with a winning edge in the marketplace. I thank you all for participating on today's call. That concludes our conference call for today. Thank you all for participating and have a nice day.

Got it.

Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Sure.

Speaker Change: Okay.

Yes.

Speaker Change: Sure.

Speaker Change: Thanks.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Sure.

Operator: All parties may now disconnect. ??? ??? ??? ??? ??? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? © transcript Emily Beynon © transcript Emily Beynon © transcript Emily Beynon © transcript Emily Beynon © transcript Emily Beynon © transcript Emily Beynon, Good morning and welcome to the fourth quarter conference call for Graco. If you wish to access the replay for this call, you may do so by visiting the company's website at www.grayco.com.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Yes.

Yes.

Right.

Speaker Change: Yes.

Yes.

Speaker Change: Got it.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Okay.

Speaker Change: Okay.

Yes.

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: Good morning, and welcome to the fourth quarter Conference call for Graco, Inc.

To access the replay for this call you may do so by visiting the Companys website at Www Dot <unk> Dot com.

Speaker Change: Greg will have additional information available in the Powerpoint slide presentation, which is available as part of the webcast player.

Operator: Graco has additional information available in the PowerPoint slide presentation, which is available as part of the webcast plan. At the request of the company, we will open the conference up for questions and answers after the opening remarks from... During this call, various remarks may be made by management about their expectations. Plans and Prospects These remarks constitute forward-looking statements for the purpose of the safe harbor provision of the Private Security Litigation Reform Act. However, actual results may differ materially from those indicated as a result of the various risk factors, including those identified in Item 1A of the company's 2022 Annual Report on the 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.grayco.com and on the SEC's website at www.sec.gov.

The request of the company, we will open the conference up for question 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 future.

These remarks constitute forward looking statements for the purpose of the safe Harbor provision of the private Securities Litigation Reform Act.

Speaker Change: Actual results may differ materially from those indicated as a result of the various risk factors, including those identified in item one a of the Companys 2022 annual report on the Form 10-K and in item one a of the company's most recent quarterly report on Form 10-Q.

Speaker Change: These reports are available on the company's website at Www Dot <unk> dot com and the Sec's website at Www Dot SEC Gov.

Forward looking statements reflect management's current views and speak only as of the time. They are made the company undertakes no obligation to update these statements in light of new information or future events.

I will now turn the conference over to Chris <unk> Executive Vice President corporate controller.

Jeff Hammond: Good morning, everyone and thank you for joining our call I'm here today with Mark Sheahan, and David Loeb ill provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary.

Yesterday, <unk> reported fourth quarter sales of $567 million, an increase of 2% from the fourth quarter of last year.

Jeff Hammond: The effect of currency translation increased sales by one percentage point or approximately $6 million.

Reported net earnings decreased 13% to $110 million for the quarter or <unk> 64 per diluted share in.

Jeff Hammond: I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Graco reported fourth-quarter sales of $567 million, an increase of 2% from the fourth quarter of last year. The effect of currency translation increased sales by one percentage point, or approximately $6 million. However, reported net earnings decreased 13% to $110 million for the quarter, or $0.64 per diluted share.

Jeff Hammond: In December the company transferred $147 million of its pension obligations to an insurance company through the purchase of an annuity contract in connection with a transfer we recognized a noncash pre tax pension settlement charge of approximately $42 million recorded in other non operating expense.

The gross margin rate increased 370 basis points in the quarter strong price realization and lower product costs were more than enough to offset lower factory volumes.

Jeff Hammond: In December, the company transferred $147 million of its pension obligations to an insurance company through the purchase of an annuity contract. In connection with the transfer, we recognized a non-cash pre-tax pension settlement charge of approximately $42 million recorded in other non-operating expenses. Excluding the impact of this pension settlement loss, certain non-recurring tax provision adjustments, and excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $137 million, or $0.80 per diluted share, an increase of 10%. The gross margin rate increased 370 basis points in the quarter; strong price realization and lower product costs were more than enough to offset lower factory volume. Total operating expenses increased $10 million, or 8%, in the quarter, mainly due to volume and rate-related increases of $3 million, as well as higher sales and earnings-based expenses of $3 million. Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of 2.5%. The adjusted effective tax rate was 19% for the quarter.

Total operating expenses increased $10 million or 8% in the quarter, mainly due to volume and rate related increases of $3 million as well as higher sales and earnings based expenses of $3 million.

Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of two five percentage points.

Jeff Hammond: The adjusted effective tax rate was 19% for the quarter.

Cash provided by operations as a percent of net earnings was 129% for the year.

Jeff Hammond: Significant year to date use of cash include dividends of $158 million share.

Jeff Hammond: Purchases of $102 million, which were offset by share issuances of $60 million debt repayment of $75 million and capital expenditures of $185 million, including $108 million of facility expansion projects.

Speaker Change: A few comments as we move forward to 2024.

Based on current exchange rates, assuming the same volumes mix of products and mix of business by currency as in 2023 movement in foreign currencies would have no impact on net sales or net earnings for the full year.

Jeff Hammond: Cash provided by operations totaled $651 million for the year, an increase of $274 million from last year, mostly driven by higher net earnings and a reduction in inventory purchases. Cash provided by operations as a percent of net earnings is 129% for the year. Significant year-to-date uses of cash include dividends of $158 million, share repurchases of $102 million, which were offset by share issuances of $60 million, debt repayment of $75 million, and capital expenditures of $185 million, including $108 million of facility expansion projects. A few comments as we move forward to 2024. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency as in 2023, movement in foreign currencies would have no impact on net sales or net earnings for the full year. However, unallocated corporate expenses are projected to increase to a range of 41 to 44 million dollars, with the increase related to share-based compensation. The effective tax rate is expected to be 19.5% to 20.5%, excluding any impact from excess tax benefits related to stock option exercises and other one-time items.

Speaker Change: Unallocated corporate expenses are projected to increase to a range of $41 million to $44 million with the increase related to share based compensation.

Speaker Change: The effective tax rate is expected to be 19, 5% to 25%, excluding any impact from excess tax benefits related to stock option exercises and other onetime items.

Speaker Change: Now I'll turn the call over to Mark for further segment and regional commentary.

Mark W. Sheahan: Thank you Chris Good morning, everyone. All my comments this morning will be on an organic constant currency basis.

Mark W. Sheahan: Sales in the fourth quarter were up low single digits, resulting in quarterly and annual records for both revenue and operating earnings our.

Our industrial and process segments, our record annual sales.

Mark W. Sheahan: And I am encouraged by the fourth quarter sales growth in our contractor segment.

Mark W. Sheahan: Segment finished the year with record annual operating earnings.

Mark W. Sheahan: Pricing actions implemented in late 2022 at the beginning of 2023 drove sales growth and gross margin expansion during the quarter and for the year are.

Mark W. Sheahan: Our strong price realization across all businesses and regions combined with improved product availability stable product costs.

Mark W. Sheahan: And favorable product and channel mix in contractor resulted in meaningful improvement in our gross margin rate.

Mark W. Sheahan: These improvements resulted in companywide incremental margins of nearly 150% for the year.

Adjusted net earnings expressed as a percentage of sales was 24% for the year, which is the highest in company history.

Mark W. Sheahan: At the end of 2023, our consolidated backlog was $280 million, which was $75 million below last year's ending backlog.

Backlogs have returned to normal levels within most product categories, but continue to remain slightly elevated in our semiconductor and powder coatings businesses.

Speaker Change: Now turning to some commentary on our segments.

Contractor segment sales improved in the fourth quarter growing at low single digits.

Speaker Change: Soft demand in the home center channel and challenging global construction markets remain headwinds, however, new product introductions and continued strength in the protective coatings and spray foam product categories were more than enough to offset these headwinds in the quarter.

Speaker Change: Heading into 2024, we're cautiously optimistic about business conditions based on improving global construction indicators.

Speaker Change: As affordability improve new and existing home sales are predicted to increase throughout the year, along with expected growth in commercial and nonresidential spending.

Mark W. Sheahan: Pricing actions taken in early 2024 closely resembled traditional levels in terms of size and cadence, with all segments and regions initiating price increases at the beginning of the year. At the end of 2023, our consolidated backlog was $280 million, which was $75 million below last year's ending backlog. Backlogs have returned to normal levels within most product categories but continue to remain slightly elevated in our semiconductor and powder coatings business. Now, I will make some commentary on our segments. Contractor segment sales improved in the fourth quarter, growing at low single digits. However, soft demand in the home center channel and challenging global construction markets remained headwinds. However, new product introductions and continued strength in the protective coatings and spray foam product categories were more than enough to offset these headwinds in the quarter. Operating earnings were 29% for the quarter and for the year as contractors benefited from pricing actions and favorable product mix by selling larger professional units and fewer home center units.

Speaker Change: The industrial segment achieved record sales and earnings for the year. Despite a 1% revenue decline in the fourth quarter compared to last year.

Speaker Change: Fourth quarter 2022 represented peak revenue for our powder, finishing group as projects delayed during the pandemic were completed and placed into service.

Speaker Change: Our process segment grew 4% in the quarter and 11% for the year.

Speaker Change: For the year, we saw growth in all regions and reported record earnings.

The increases were posted for the quarter and many business units and across all reportable regions led by double digit growth in vehicle services and process pumps.

Speaker Change: Price realization and increased volume drove incremental margins of 89% in the fourth quarter and 83% for the full year.

Speaker Change: We had broad based revenue growth in all of our businesses. This year, resulting in record operating profit margins for the segment.

Speaker Change: Moving onto our outlook.

Speaker Change: As we enter 2024, we're keeping a close eye on incoming order rates and global economic indicators.

Mark W. Sheahan: Heading into 2024, we're cautiously optimistic about business conditions based on improving global construction indicators. As affordability improves, new and existing home sales are predicted to increase throughout the year, along with expected growth in commercial and non-residential spending. The industrial segment achieved record sales and earnings for the year, despite a 1% revenue decline in the fourth quarter compared to last year. However, growth in liquid finishing and sealant and adhesive product lines was not enough to offset the impact of lower powder finishing system sales in EMEA and Asia-Pacific in the quarter.

Speaker Change: Constant currency basis.

Speaker Change: That concludes the prepared remarks, Valerie we're ready for questions.

Valerie: Thank you.

The question and answer session will begin at this time, ladies and gentlemen, I would like to ask a question. Please press star one on your telephone.

Questions will be taken in order that is received please standby for your first question.

Valerie: Our first question comes from the line of Deane Dray of RBC capital markets.

Deane Dray: Thank you and good morning, everyone.

Deane Dray: Dan.

Deane Dray: Hey, maybe we could start with pricing.

Deane Dray: And Mark you gave the kind of that Brian.

Deane Dray: Broadbrush comments said, it's back into the single price increase.

Deane Dray: Its representative of what would be normal price across the board maybe.

Deane Dray: Maybe talk about the expectation for new product introductions, and then where does the on the cost equation. It sounds like labor inflation is still around is there anything else are we back to normal on the rest of the cost side.

Deane Dray: Yes, so the pricing actions again, there I would say they're more in line with what we've done historically kind of inflationary plus or minus a little bit all of the business units are implementing increases as are all of the regions. So we feel pretty good about that getting back to a normal cadence there of course, if things change we know we can.

Mark W. Sheahan: We had broad-based revenue growth in all our businesses this year, resulting in record operating profit margins for the sector. Moving on, to our outlook. As we enter 2024, we're keeping a close eye on incoming order rates and global economic indicators. Despite the difficult macroeconomic environment, we remain committed to our core strategies of launching new products and entering new markets. Expanding our global channel and pursuing strategic acquisitions. As a result, we're initiating revenue guidance for full year 2024 of low single-digit growth on an organic constant currency basis. That concludes the prepared remarks. Valerie, we're ready for questions. Thank you. The question and answer session will begin at this time. Ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone.

Deane Dray: Make an adjustment if we need to but it doesn't look like that's going to be the case. This year, our cost pressures for the full year and the plant, we're still unfavorable compared to what we were expecting them to be but we did start to see a little bit of light at the end of the tunnel here as we work through the year in the fourth quarter things turn.

Deane Dray: Slightly favorable so.

If those trends continue I am hopeful that we would see some impact some favorable impact on the.

Deane Dray: The gross margin line as we kind of work through the year labor is tight.

Deane Dray: Did just raise our wages in line with what the market is but even though its tight we have not really experienced any major difficulty <unk> in terms of attracting people to join joined <unk>, It's a great company.

Mark W. Sheahan: Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from the line of Deane Dray of RBC Capital Markets. Thank you. Good morning, everyone. Hi Deane.

Deane Dray: We're growing we have a great story to tell and even though we have people retiring all the time, we were able to fill those positions.

Deane Dray: Pretty readily so feel pretty good as we enter into the year and we'll see what happens great.

Speaker Change: Great and then just as.

Speaker Change: Second question going to our favorite traffic light slide.

Speaker Change: Can you just comment on the changes.

Speaker Change: Versus.

Last quarter, so improved outlook in Industrials America, but industrials Asia Pacific.

Mark W. Sheahan: Maybe talk about the expectation for new product introductions. And then where does the cost equation sound like labor inflation is still around? Is there anything else?

Speaker Change: Dipping and process Americas look also has worsened I know you touched on the powder, finishing impact, but kind of reconcile some of those changes with what's actually going on in the business and order expectations. Okay. This is David Lowe.

Mark W. Sheahan: Are we back to normal on the rest of the cost side? yeah so the the pricing actions again they're I'd say they're more um in line with what we've done historically kind of inflationary plus or minus a little bit all the business units are implementing increases as are all the regions so we feel you know pretty good about that getting back to a normal cadence there of course if things change we know we can you know make an adjustment if we need to but it doesn't look like that's going to be the case this year our cost pressures for the full year and the plant were still unfavorable compared to what we were expecting them to be but we did start to see a little bit of light at the end of the tunnel here as we work through the year and in the fourth quarter things turn you know slightly favorable so if those trends continue I am hopeful that we would see some impact some favorable impact on the on the gross margin line as we kind of work through the year labor's tight we did just raise our wages in line with what the market is but you know even though it's tight we have not really experienced any major difficulties in terms of attracting people to join to join Graco it's a great company we're growing we have a great story to tell and even though we have people retiring all the time we're able to fill those positions you know pretty right readily so feel pretty good as we enter into the year and we'll see what happens you, Great. And then just as a second question, going to our favorite traffic light slide, can you just comment on the changes versus last quarter?

Speaker Change: Thank you David.

Jeff Hammond: As far as North America Industrial goes what we have seen there is.

Pretty good project activity throughout the second half of the.

Jeff Hammond: 2023.

Speaker Change: The team reports.

Speaker Change: Strength in a number of our core markets and I'll, just ramble off two or three E. Mobility has continued to be strong here in the home market aerospace.

Speaker Change: Solar panel.

Speaker Change: AG cultural equipment.

Speaker Change: And.

We're hopeful that suggests that we're going to have.

Positive momentum going into 24, so we thought that was worthy of.

Speaker Change: Worthy of refinement I think on the on the industrial Asia Pacific side, We clearly have a mixed picture in Asia and <unk>.

Speaker Change: One of the I'd say, the most impacted markets for us has been.

Speaker Change: It falls into industrial but its the construction activity that drives powder coating applications.

And that continues to be soft space for us.

Speaker Change: And the picture the picture.

Specially in China remains.

Murky at best So I think that's at least a reflection of how we see the business today and finally on process in the Americas overall as Mark touched on the business has been has been has been strong but.

But we continue to see some softening in orders in the semiconductor space sort of consistent with the messaging that's going on around in the industry here.

Jeff Hammond: So improved outlook in industrials America, but industrials Asia Pacific, dipping, and process Americas look has also worsened. I know you touched on the powdered finishing impact, but kind of reconcile some of those changes with what's actually going on in the business and order expectations. Okay, this is David Lowe.

Speaker Change: Should add the business continues to be strong in markets outside of North America.

That's really helpful. Just a quick clarification David please.

Speaker Change: You mentioned the weakness in China, We had a company report this morning.

Jeff Hammond: As far as North America Industrial goes, what we have seen there is, pretty good project activity throughout the second half of the of 2023. The team reports. , , , , , , , , , , , , , , Solar Panel, Agricultural Equipment, and Mark Sheahan, Christian Rothe and, We're hopeful that suggests that we're going to have positive momentum going into 2024. So we thought that was worthy of refinement. I think on the industrial Asia-Pacific side, we clearly have a mixed picture in Asia.

That reference weakness in China, no less than 14 times in their prepared remarks do you have.

Speaker Change: Has there been any discernible down shift in China, it's been weak.

Speaker Change: Pretty consistently but let's say in the last couple of months as it turned.

Speaker Change: More negative for you just any color there would be helpful. I would say the quick the quick answer I've got a cheat sheet here I'd say it has not.

Jeff Hammond: And one of the, I'd say, the most affected markets for us has been, it falls into industrial, but it's the construction activity that drives powder coating applications. And that continues to be soft space for us. And the picture, you know, the picture, especially in China, remains murky at best.

Speaker Change: I'm going to check this fall and I think that the overall, China has been weak for us and I would say that the couple of the areas that have been the weakest of in our contractor business in our powder powder coating business, but overall, it's kind of been an ongoing theme.

Jeff Hammond: So I think that's at least a reflection of how we see the business today. And finally, on process in the Americas, overall, as Mark touched on, the business has been strong, but we continue to see some softening in orders in the semiconductor space, sort of consistent with the messaging that's going on around in the industry here. I should add that business continues to be strong in markets outside of North America. That's really helpful.

Speaker Change: For a for us throughout the year.

Speaker Change: I would just say that.

Speaker Change: Yes.

Exactly right throughout the whole year, it's been soggy on the order rates.

Speaker Change: I would say we saw modest for what it's worth we don't really think of our businesses. These waves is turning around in a couple of months or a quarter.

Speaker Change: But the rate of.

Speaker Change: I would say the rate of softness has decreased.

Speaker Change: Because we're working through the period of the toughest comps in 2022.

Speaker Change: Thank you.

Speaker Change: Thanks, Dan.

Thank you one moment please.

Speaker Change: Our next question comes from the line of Mike Halloran, Michael Halloran of Baird. Your line is open.

Mike P. Halloran: Hey, good morning, everyone.

<unk>.

So couple of questions here.

Jeff Hammond: I would say the quick answer, I've got a cheat sheet here, I'd say it has not. I'm going to check this while I'm... I think that the overall Chinese market has been weak for us, and I would say that a couple of the areas that have been the weakest have been our contractor business and our powder coating business, but overall, it's kind of been an ongoing theme for us throughout the year. I would say that Mark's exactly right. Throughout the whole year, it's been soggy on the order rates. I would say we saw modest results for what it's worth.

Mike P. Halloran: First.

Mike P. Halloran: 2023 was a massive year.

Our margins across the board here.

Mike P. Halloran: We're talking about more normalized price.

Mike P. Halloran: You compare that to <unk> 22, and earlier its just a sea change. So is this sea change shift is higher level, the right run rate across the businesses or should we be thinking about something different.

Jeff Hammond: We don't really think of our businesses this way as turning around in a couple of months or a quarter. But the rate of, I would say, the rate of softness has decreased, partly because we're working through the period of the toughest comps in 2022. Thank you. Thanks, Deane. And thank you. One moment, please. Our next question comes from the line of Michael Halloran of Baird. Your line is open. Good morning, everyone.

Mike P. Halloran: I feel good about it I really think that the businesses are performing extremely well I think the factories are doing well on lower volumes, it's really would be a volume game for us here in 'twenty four if we get volume growth above what we're guiding.

Mike P. Halloran: It's going to be pretty nice we've got capacity.

To utilize and I really feel like the factories are in good shape to be able to deliver higher revenue. We have the low single digit guide mostly because.

If you look out at the global trends they are they are trending below.

Michael Halloran: Bye, Mike. .......

Mike P. Halloran: Normal levels I would say.

Michael Halloran: So, a couple of questions here. First, you know 2023 was a massive year for margins across the board. You know, we're talking about a more normalized price. How do we think about what the right run rate looks like as we work through this year? You know, process had a mini step down in the fourth quarter but was 30% plus all year. And industrial's at these really large levels. You know, compared to 22 and earlier, it's just a sea change. So is this sea change, at this higher level, the right run rate across the businesses? Or should we be thinking about something different?

Mike P. Halloran: And we also have a little bit of inflation sticking around and around the world too and you never really know how that's going to play out and then you've got other factors that are all kind of winter that low single digit number.

Mike P. Halloran: Even though we're getting some pricing and we got really nice new products coming out so.

Mike P. Halloran: If we get volume growth Mike.

It'll be great if volumes hang in there at the low single digit level I don't see any deterioration in terms of the overall performance.

And there could be some upside in terms of some of the initiatives we have on the.

Mike P. Halloran: <unk> side to make sure that we're taking advantage of all the opportunities that we have available to us there's plenty plenty of work for us to do here.

Speaker Change: Well, thanks for that Mark and then mentioned initiatives.

Speaker Change: How do you think the internal M&A efforts are going maybe some calmed conversations on pipeline.

Mark W. Sheahan: If we get volume growth, you know, above what we're guiding, it's going to be pretty nice. We've got capacity to utilize, and I really feel like the factories are in good shape to be able to deliver higher revenue. We have the low single-digit guide mostly because, you know, if you look out at the global trends, they are trending below, you know, normal levels, I would say.

Speaker Change: Action ability and any thoughts on the broader landscape on the M&A side.

Mark W. Sheahan: Well, we're hearing that 24 might be a little bit more favorable than 'twenty. Three just in terms of overall M&A activity levels I feel good about our pipeline I think I've said this before but I think that today I could pull any of the names on our pipeline and we don't know how big the company is with the strategic fit is.

<unk> ability what kind of contact we've had with those those companies and so it's really just a matter of are they ready to.

Mark W. Sheahan: Get into a transaction or not I think Greg was in a good spot to be able to look at those opportunities I think we have a lot to offer.

Mark W. Sheahan: We have world class manufacturing operations, we have a global distribution channel, we have professional marketing and sales. So if we get the right opportunity with the right management team.

Ready to go and like I said, I think we feel pretty good about the overall shape of the pipeline. These days.

Speaker Change: I would just add that to that that I think our experience in 'twenty three.

Mark W. Sheahan: And, you know, there could be some upside in terms of some of the initiatives we have on the cost side to, you know, make sure that we're taking advantage of all the opportunities that we have available to us. There's plenty, plenty of work for us to do here. Thanks for that, Mark.

Speaker Change: It really reflects what we saw industry wide with declines.

Speaker Change: In deal volume certainly the deal supply slipped I think is maybe in some cases sellers withheld moving forward trying to figure out where private equity fits in all of this and at least.

Speaker Change: On some transactions, we followed pretty closely multiples remain elevated.

Speaker Change: Elevated with that said the work is ongoing with respect to pipeline management, reaching out and cultivating transactions. It's it's long term retail work, but.

Speaker Change: I think that anytime we can find opportunities where we can work on them on an exclusive basis as opposed to an auction basis.

Speaker Change: That remains that remains a real.

Speaker Change: A real opportunity for us and as Mark said in addition to the I would say our operating philosophy.

Speaker Change: Our channel management skills and some other things that we're proud of is that.

Speaker Change: Quite frankly, given our financial situation when the opportunity comes along we can move very quickly.

Jeff Hammond: And I think Graco's in a good spot to be able to look at those opportunities. I think we have a lot to offer. You know, we have world-class manufacturing operations, we have a global distribution channel, and we have professional marketing and sales. So if we get the right opportunity with the right management team, we're ready to go. And like I said, I think we feel pretty good about the overall shape of the pipeline these days. I would just add to that that I think our experience in 23 really reflects what we saw industry-wide with declines in deal volume. Certainly, deal supply slipped, I think, as maybe in some cases sellers, you know, withheld moving forward, trying to figure out where private equity fits in all of this. At least on some transactions we followed pretty closely, multiples remain elevated.

Speaker Change: I appreciate it gentlemen, thank you.

Speaker Change: Mike.

Thank you one moment please.

Our next question comes from the line of <unk>.

Mike P. Halloran: Of Jefferies. Your line is open.

Jefferies: Hi, good morning.

Jefferies: You typically see low single digit growth in all regions and segments that you kind of admitted that today. So maybe just talk about where you expect to see higher or lower growth within the guidance of low single digit.

Speaker Change: For 2024.

Jefferies: We fine tuned it I think we just decided that we're going to go at the overall macro and I think we're smart enough to know what's going to be output is going to be down, but I feel very confident at this point that overall, that's where the number should be at.

Jefferies: What are your customers talked about commercial sales maybe weaken in the second half of this year.

Jefferies: To lower completions, maybe just talk within contractor about how youre thinking about the resi and commercial completions within your guidance in 2024.

Jeff Hammond: With that said, the work is ongoing with respect to pipeline management, reaching out, and cultivating transactions. This is a great opportunity for us to do this long-term retail work, but I think that any time we can find opportunities where we can work on them on an exclusive basis, as opposed to an auction basis, that remains a real opportunity for us. As Mark said, in addition to, I'd say, our operating philosophy and our channel management skills and some other things that we're proud of, is that, quite frankly, given our financial situation, when the opportunity comes along, we can move very quickly. Appreciate it, gentlemen.

Speaker Change: Yes, I do think the commercial as expected a slowdown, but it's still going to grow in 'twenty four at least that's what they're predicting right now.

Speaker Change: Purchased new homes, and I think that the builders are going to pick up on that and hopefully we see more activity. There. We also expect to see more turnover in the North America market. Once people can see that theyre not going to be locked into these low mortgage rates and maybe they can move into new houses I think that'll be that'll be favorable for <unk>.

Our contractor business too I'm also really excited about the new products coming out in CET.

Michael Halloran: Thank you. Thanks, Mike. Thank you. One moment, please.

Our next question comes from the line of Saree Boroditsky of Jeffreys, Yolanda Philpott, Hi, good morning. So you typically say low single-digit growth in all regions and segments, but you kind of omitted that today. So maybe just talk about where you expect to see higher or lower growth within the guidance of low single digits for 2024. I think we've fine-tuned it.

New.

Speaker Change: What we're calling approach shot which is basically taken that quick shot technology and applying it to all of our installed base of sprayers and the marketplace <unk> got some new.

Speaker Change: Guns coming out on the industrial side, we have a new gun coming out in the spray foam category. We have some two component flooring products coming out in <unk>. So.

Mark W. Sheahan: I think we just decided that we're going to go with the overall macro. And I think we're smart enough to know, like, what's going to be up and what's going to be down. But I feel very confident at this point that overall, that's where the number should be at. While your customers talked about commercial sales maybe weakening in the second half of this year due to lower completions, maybe just talk within contractor about how you're thinking about the resi and commercial completions within your guidance in 2024. Yeah, I do think that commercial is expected to slow down, but it's still going to grow in 24, at least that's what they're predicting right now. I'm probably a little bit more bullish on the residential side than maybe some of the headlines are. I do believe that rate stabilization, the fact that the Fed is going to cut rates, gives people more confidence to purchase new homes, and I think that the builders are going to pick up on that, and hopefully, we will see more activity there.

Speaker Change: Pretty excited about.

Speaker Change: The launches that are happening in 'twenty four gives us confidence that hopefully we'll be able to.

Grow the revenue in line with what we had projected.

And I would just add one more your industrial margins at 37% in the quarter I think its the highest its ever been maybe just think.

Speaker Change: About that as starting off point, how you're thinking about price cost.

The volume impact just how you think about industrial margins actually go up by 24 and beyond.

Speaker Change: Yes, I think they can go higher if we get the volume.

Speaker Change: I said earlier I think that Theres a lot of capacity in the factories volumes have not been as strong lately as they had been historically most of the growth in 'twenty three came from our pricing actions. So there is no lid on the industrial margins that I am aware of.

Sure.

Speaker Change: Great to hear congratulations thanks, Thanks, taking my questions.

Speaker Change: Thank you Amit.

Our next question comes from the line of Joe Ritchie of Goldman Sachs. Your line is open.

Joe Ritchie: Hi, Thanks, Good morning, guys morning, Joe So.

Joe Ritchie: Just my first question look I agree with what.

Joe Ritchie: Mike said earlier, just that performance this year on the margin.

Joe Ritchie: With really no volumes was pretty impressive.

Joe Ritchie: Think about in your product cost initiatives how.

Mark W. Sheahan: We also expect to see more turnover in the North American market once people can see that they're not going to be locked into these low mortgage rates and maybe they can, you know, move into new houses. I think that'll be favorable for our contractor business too. I'm also really excited about the new products coming out in CED. We had great success with the QuickShot product that we launched last year, and that really helped, and we've got some new products coming out here in 24, including a new line of electric sprayers, a new ProShot, which is basically taking that QuickShot technology and applying it to all our installed base of sprayers in the marketplace.

Joe Ritchie: How far along would you say you are and maybe if you could just provide a little bit more color on how that's impacting margins as well that'd be great.

Speaker Change: Are you talking about the purchased items in the factory that when you say product cost.

Speaker Change: Yes, I think that you are continuing to lower product costs I would imagine that you're simplifying your line and also from a sourcing perspective, probably also benefiting but any any color, that's really kind of driving lower product costs across our portfolio.

Speaker Change: It works the way according to plan.

Speaker Change: When it comes to the factory input costs, we did.

Start to see a little bit of favorability creep in in the late in the third quarter and into the fourth quarter in terms of what we call PPV purchase price variance.

Mark W. Sheahan: We've got some new, Guns coming out on the industrial side. We have a new gun coming out in the spray foam category We have some two-component flooring products coming out in CED, so Pretty excited about the about the launches that are happening in 24 gives us You know confidence that that hopefully we'll be able to You know grow the revenue in line with what we had projected, And I could just add one more, your industrial margins at 37% in the quarter, I think it's the highest it's ever been, so maybe just think about that as starting off point, how you're thinking about price costs in 2024, the volume impact, just how you're thinking about industrial margins as you think about 2024 and beyond. Thanks.

Speaker Change: And so if that trend continues here into 2024, I think that that should be more or less a tailwind at this point I don't want to predict it but we don't really see the big inflationary pressures hitting the way we have over the last couple of years. So our hope is that if we keep our price increase in line.

Speaker Change: And we can do a good job on the cost that there could be.

Speaker Change: Decent potential for gross margin expansion in 'twenty for that sort of what we've baked into our internal plans.

Speaker Change: Got it that's great to hear and I guess look you took a look across the different regions in your segment and what does stand out to me is what's happening in the industrial segment in the U S or in the Americas. The growth has been really good had been in 2023 I guess.

Speaker Change: We've been talking a lot and writing a lot about Mega project and ultimately what that means for industrial growth going forward, whether it's this year or next how are you thinking about the investment that's happening in the U S and ultimately like when do you start to see it flow through your own P&L.

Mark W. Sheahan: Yeah, I think they can go higher if we get the volume. Like I said earlier, I think there's a lot of capacity in the factories. Volumes have not been as strong lately as they have been historically. Most of the growth in 23 came from our pricing action. So there's no lid on the industrial margins that I'm aware of. Great to hear. Congratulations. Thanks. Thanks for your questions. One moment, please.

Speaker Change: Yes, I think it should be good for us I can't say that we've actually started to experience that I can't point to specific.

Projects that we've gotten as a result of that but for sure anytime they move a factory around.

Speaker Change: From one location to another they usually don't rip out the old Graco equipment, and then put it into a new facility.

Speaker Change: Just re buy this stuff because in terms of the overall capital outlay or stuff really isn't all that expensive and it's just easier and better if they take advantage of that.

Joe Ritchie: Our next question comes from the line of Joe Ritchie of Goldman Sachs. Your line is open. Thanks. Good morning, guys. Good morning, Joe.

Speaker Change: North America industrial they've really done a nice job executing on some of the initiatives that we've got around <unk>.

Speaker Change: Electric vehicles and battery production.

Joe Ritchie: So just my first question, like, look, I agree with what Mike said earlier, just the performance this year on the margins with really no volumes was pretty impressive. As I kind of think about your product cost initiative, how far along would you say you are? And maybe if you could just provide a little bit more color on how that's impacting margins as well, that would be great. Are you talking about the purchased items in the factories when you say product cost? Yeah, just that you're continuing to lower product costs. I would imagine that you're, you know, simplifying your line. And also, from a sourcing perspective, probably also benefiting, but any color that's really kind of driving lower product costs across your portfolio? Yeah, we have engineers that are looking for ways to take costs out of products. We do that continuously.

Speaker Change: And in addition to that I think that the.

The powder business in North America has actually performed a little bit better than where it had outside of the North America marketplace. So.

Speaker Change: Feel good about the team there and the growth and what they are what they are working on I think they've got their eye on the ball and they're focused on the right things.

Speaker Change: And some of the products that they've got coming out as well and the <unk>.

Speaker Change: <unk> pump category should drive some incremental growth because a lot of.

Speaker Change: Are these customers that they are moving into a new facility. They are also looking at their energy consumption and if they can put in an electric drive pump instead of an air drive pump they save a lot of energy and so we think that theres going to be the potential to get some incremental business with those new builds but also we can go back into old customers as well.

<unk> and try to.

Speaker Change: Persuade them that there is a payback in ROI if they if they move to an electric platform. So a lot of good things happening in industrial and I.

Speaker Change: I think they'll have a.

Speaker Change: They are a good spot.

Speaker Change: To have a decent in 2024 and I would say just adding to marks comment that.

Speaker Change: There are opportunities for re shoring or near shoring, whatever you want to call it.

Speaker Change: That I think does play out over time for example, I can use an example in my own finishing experience where about a decade ago.

Speaker Change: A couple of large Japanese automotive Oems decided to start.

A couple of Greenfield facilities in Central Mexico.

Speaker Change: Sort of away from where the traditional automotive manufacturers for operating and from the time they initiated the project when they started making cars took about five years.

Speaker Change: And.

Speaker Change: The reason for that is it took the better part of five years to flush out a vendor base that was suitable for the standards of Japanese car companies. So on the higher end of projects I think it should be a positive as alluded to over the next several years, but things like supply chains and so forth.

Come together overnight, especially in the higher value added product categories.

Speaker Change: Got it that's great color, if I could just fit one more in just real quickly on the pension settlement.

Speaker Change: What's left on the pension at this point I know that you did the $147 million this quarter, but what's left on the on the liability side.

Speaker Change: I think we have about $127 million remaining from the <unk>. After we did this round of the Derisking.

Speaker Change: Okay, great. Thank you very much.

Thank you one moment please.

Speaker Change: Our next question comes from the line of Jeff Hammond of Keybanc capital market. Your line is open.

Hey, good morning.

Jeff Hammond: Hi, Jeff.

Jeff Hammond: Just on process I mean, it's just had a tremendous run of growth I think the gross took down <unk> and you are saying.

It's in that low single digit. So is this are you seeing any real moderation within that business or are we just finally kind of catching up to tough comps, yes, I think that I think David said earlier the semiconductor business is probably the one that we would expect to see a little bit of a pullback in 'twenty for the <unk>.

Expectation is that.

Jeff Hammond: They will actually start to ramp up their spend again kind of mid year 2024, but of course last year. At this time, we have these huge backlogs of orders from customers.

Mark W. Sheahan: In North America Industrial, they've really done a nice job executing on some of the initiatives that we've got around electric vehicles and battery production. And in addition to that, I think that the powder business in North America has actually, you know, performed a little bit better than where it had performed outside of the North American marketplace. So I feel good about the team there and the growth and what they're working on. I think they've got their eye on the ball, and they're focused on the right things. And some of the products that they've got coming out as well in the electric pump category should drive some incremental growth because a lot of these customers, if they're moving into a new facility, they're also looking at their energy consumption. And if they can put in an electric drive pump instead of an air drive pump, they save a lot of energy.

Jeff Hammond: The.

Jeff Hammond: The process pumping business looks decent we have an electric drive diaphragm pump that we're pretty excited about getting put into customers to drive some incremental growth there. So.

Jeff Hammond: I feel I feel overall pretty good about all of the business units in there with.

Jeff Hammond: Slight exception of the.

Jeff Hammond: Semiconductor space.

Speaker Change: Okay and then.

Speaker Change: So this looks to be your last year of kind of growth capital.

Should we expect into 'twenty five that you start settling back in that $60 million capex or is there.

Speaker Change: In a new funnel of projects.

Speaker Change: No I think we're in great shape facility wise once we get through 2024, and I would I would highly expect that our normal maintenance capex plus improvements is going to be somewhere in that 50 to 60 range.

Mark W. Sheahan: And so we think that there's going to be the potential to get some incremental business with those new builds, but we can also go back into old customers as well and try to persuade them that there's a payback in ROI if they move to an electric platform. So a lot of good things are happening in industrial, and, you know, I think they'll have a good spot to have a decent 2024. Yeah, and I would add to Mark's comment that there are opportunities for reshoring or nearshoring, whatever you want to call it, that I think do play out over time. For example, I can use an example from my own finishing experience where, about a decade ago, a couple of large Japanese automotive OEMs decided to start a couple of greenfield facilities in central Mexico. Sort of away from where traditional automotive manufacturers were operating.

Speaker Change: Okay. Thanks, a lot.

Speaker Change: Sure.

Speaker Change: Thank you one moment please.

Speaker Change: Our next question comes from the line of Matt Summerville of D. A Davidson your line is open.

Thanks.

Matt J. Summerville: Quick ones with respect to.

Matt J. Summerville: <unk> you saw in contractor can you maybe just touch on the divergence in the home center channel versus propane and whether you see that trend continuing in 2004, given kind of the new product cadence you're looking for.

Yes.

Speaker Change: Honest with you Matt.

Speaker Change: A year ago somebody told me that full year CD is going to be up.

Speaker Change: Or down 1% I think we always said, we will take that just given all the doom and gloom that was out there in the marketplace everything from DIY was way over bought to the housing market is going to collapse and creator and all that all that negative stuff, but.

Jeff Hammond: And from the time they initiated the project, when they started making cars, it took about five years. And the reason for that was that it took the better part of five years to flesh out a vendor base that was suitable for the standards of Japanese car companies. So on the higher end of projects, I think it should be positive, as alluded to, over the next several years. But things like supply chains and so forth don't come together overnight, especially in the higher value-added product category. God, that's a great color.

Speaker Change: I think I reminded people at one point that business is made up of a lot of different things and you've got line striping, you've got spray fall and <unk> got protective coatings, which are all kind of more in the professional camp as well as all of the Pearl Sprayers that we sell through the professional paint stores and that side.

Speaker Change: The propane held up probably better than what we would've expected and then the other pieces that I mentioned were actually fairly robust with a lot of the infrastructure spend that's been going on.

And opportunities to go in and re insulate homes for example, with a spray foam. So all in all feel pretty good about that I feel like the home center in terms of their inventory levels has gotten to a point where they're comfortable in there at the level that they're seeing in terms of.

Speaker Change: Traffic in the stores from a demand standpoint, so I feel like we've already been through most of the the pain there in terms of reductions.

Jeff Hammond: Thank you. One moment, please. Our next question comes from the line of Jeff Hammond of Key Bank Capital Market. Your line is open. Hey, good morning.

Speaker Change: We do have some new products going in there this year, we'll see what happens with that.

Speaker Change: The level of activity remains where it is and we do a good job on the new products that we would actually see some potential growth in the home center in 2024, we'll just have to see how things shake out.

Jeff Hammond: Hey, Jeff. Just on process, I mean, it's just had a tremendous run of growth, and I think the growth stepped down in 4Q, and you're saying, you know, fits in that low single digits. Is this, are you seeing any real moderation within that business, or are we just finally kind of catching up to it? Yeah, I think that like David said earlier, the semiconductor business is probably the one that we would expect to see a little bit of a pullback in 24. The expectation is that they will actually start to ramp up their spend again, kind of by mid-year 2024. But of course, last year, at this time, we had these huge backlogs of orders from customers.

Speaker Change: Got it.

Speaker Change: Just as a follow up how do you guys think about balance sheet optimization, especially to the comment made earlier.

Speaker Change: Big multiyear kind of Capex cycle for graco.

Speaker Change: Starting to roll off in 'twenty, four essentially abating in 'twenty, five and yet you're sitting here with half a $1 billion in net cash should we think about.

Speaker Change: Whether or not you guys are likely to step up and get more aggressive with repurchases if M&A.

Speaker Change: Pipeline, maybe doesn't play out as.

Speaker Change: As you hope how should we be thinking about kind of optimizing the balance sheet for graco.

Mark W. Sheahan: And while we haven't worked out all of those, we have worked out quite a bit of them. So outside of that, I don't really see much in terms of things that have us concerned. The vehicle service side still looks pretty solid. Our industrial loop side also looks good. We still have plenty of opportunity there to gain market position. The process pumping business looks decent. We have an electric drive diaphragm pump that we're pretty excited about getting put into customers to drive some incremental growth there.

Speaker Change: Well for sure top priority would be to do some acquisitions that makes sense strategic ones that we can add value, where we can put points on the board that payback nice rates of return for our investors and I think David alluded to the fact that the pricing has been a little bit of a challenge here, we will see what happens I like the pipeline, we will be active that would be my top choice.

Speaker Change: And I think the top choice of our management team.

Speaker Change: We've always had the I'll call it the happy problem of.

Mark W. Sheahan: So, you know, I feel pretty good about all of the business units in there with the, you know, slight exception of the semiconductor space. Okay, and then, so, this looks to be your last year of kind of growth capital. Should we expect into 25 that you start settling back into that 60 million? CAPEX?

Speaker Change: Our $1 billion market cap company, so in terms of the.

Speaker Change: Overall leverage.

Speaker Change: It looks big but again, given the size and scale of graco.

Jeff Hammond: Or is there... in a new funnel of projects. No, I think we're in great shape facility wise once we get through 2024, and I would highly expect that our normal maintenance capex plus improvements is going to be somewhere in that 50 to 100. Okay, thanks a lot. Thank you. One moment, please.

I don't really view it as a significant problem at this point I don't think anyone has a gun to David Lowe has had or my head and saying that we have to deploy that capital we'd sure wed like to we will do our best to be able to take advantage of opportunities on the share buyback side and M&A going forward, but.

Speaker Change: It's a great problem to have the company performs extremely well we're fortunate to have this happy problem. So I should leave well enough alone because thats a good summary, I will just add the two things number one I think we like the flexibility that the position gives us to move quickly when opportunities and such come along and some.

Matt J. Summerville: And our next question comes from the line of Matt Summerville of D.A. Davidson. Your line is open. Thanks, um, just a couple quick ones with respect to the performance you saw in contractor. Can you maybe just touch on the divergence in the home center channel versus propane and whether you see that trend continuing in 24, given kind of the new product cadence you're looking for? Yeah, I'll be honest with you, Matt. If, you know, a year ago, somebody would have told me that full year CED was going to be up or I think we would all have said we'd take that, just given all the doom and gloom that was out there in the marketplace.

You have heard me talk about before while I don't think of our stock as a classic cyclical.

Speaker Change: Wall Street does because of the markets we serve and.

What that means is from time to time.

Speaker Change: Without a lot of change in our business.

Speaker Change: Stocks go on a discount and I think our record over the last couple of decades has been pretty good at buying in most recently in 2002 also in 'twenty back in 15 and 16, when we were I think experiencing a 30% haircut and it's nice.

To know that.

Speaker Change: Remains a real option for us when the opportunity comes along.

Speaker Change: Got it thank you guys. Thanks.

Thanks, Matt.

Speaker Change: Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star one line.

Mark W. Sheahan: And on that side, you know, the professional paint held up probably better than we would have expected. And then the other pieces that I mentioned were actually fairly robust with a lot of the infrastructure spend that's been going on and opportunities to, you know, go in and reinsulate homes, for example, with spray foam. So all in all, I feel like the home center, in terms of their inventory levels, has gotten to a point where they're comfortable, and they're at the level that they're seeing in terms of foot traffic in the stores, from a demand standpoint. So I feel like we've already been through most of the pain there in terms of reductions. We do have some new products going in there this year. We'll see what happens with that. If the level of activity remains where it is, and we do a good job with the new products, we could actually see some potential growth in the home center. In 2024, we'll just have to see how things shape up. Got it.

One moment for our next question.

Our next question comes from the line of Andrew Buscaglia.

BNP Your line is open.

Jeff Hammond: Hey, guys.

Jeff Hammond: Just looking at your margin I think everyone's kind of trying to figure out if you can exceed the sort of watermark.

Jeff Hammond: You guys have had such strong margins. This year on low growth I'm wondering you talked a lot about new products you are introducing is there.

Jeff Hammond: I mean, youre always introducing new products or is this a greater kind of new product cycle. We're re upon it seems like quite.

Quite a bit of commentary on that.

Speaker Change: Yes, I would say that for sure new products is oxygen for Greg all right I mean, it's our primary growth lever and I really do believe that this year in the contractor business in particular has a strong lineup of new products coming.

Speaker Change: And we also have.

Speaker Change: Decent products in the other business units as well. So if you were to take like an average of a new product year for Greg or this 24, it looks like it could be a little bit stronger.

Speaker Change: That average yes, okay.

Speaker Change: Interesting and is there.

Is there a bit more pricing leverage therefore in contractor versus the other.

Segment.

Both price cost, but also those new product initiatives are not initiative, but.

Speaker Change: New product expectation.

Speaker Change #100: I wouldn't say there is more pricing leverage I would say that we are able to charge a nice price for new technology, when we bring it to the marketplace and typically we're also looking to maybe reduce some of the costs. If we're replacing a legacy item was something new.

But that being the first to the customer with new technology is really the name of the game.

Speaker Change #100: And if you can do that consistently like we've been able to do you really can drive.

Mark W. Sheahan: And I think the top choice of our management team. We've always had the, I'll call it, the happy problem of, you know, generating more cash so we can plow back into the business. And historically, we've taken care of that through buying back our stock and doing some acquisitions. But for sure, it's front and center in terms of, you know, things that we're keeping an eye on. You know, we do have half a billion dollars in cash on the balance sheet.

Speaker Change #100: More organic growth than say other companies that are playing catch up.

Speaker Change #101: Yeah, Okay and Youre talking.

Speaker Change #100: I know acquisitions are.

Your preference.

How do we think about margin with new deals are these deals you're looking at I'm, assuming will be margin dilutive, but.

Speaker Change #102: Yes can you just kind of Miranda's what were your hurdle rates are and what your expectations are for that.

Mark W. Sheahan: But you know, we are a 14 plus billion dollar or billion market capital company. So, in terms of, you know, the overall leverage, it looks big. But, again, given the size and scale of Graco, I don't really view it as a significant problem at this point. I don't think anyone has a gun to David Lowe's head or my head saying that we have to deploy that capital.

Speaker Change #103: Yes, we don't really have a targeted let's say operating margin for a business that we're going to acquire but for sure in most cases their operating margins are going to be below grade goes or their EBIT margins or EBITDA margins. So what we're really looking for is a good business, where we understand the product line, we understand the customers. We think we can.

Mark W. Sheahan: We sure would like to. We'll do our best to be able to take advantage of opportunities on the share buyback side and M&A going forward. But you know, it's a great problem to have. The company performs extremely well. We're fortunate to have this happy problem. So I should leave well enough alone, because that's a good summary.

Bring some value, particularly on the operational side of the business and take their existing margin rate and improve it over time I think we've got good experience with the deals that we have done.

Speaker Change #103: And that with that kind of a playbook and that's really what we'd be looking for with <unk>.

Speaker Change #103: M&A as we as we're scouring the market for opportunities.

Okay very helpful. Thank you yep.

Speaker Change #104: Thank you.

And there are no further questions I'll now turn the call back over to Mark Qiang for closing remarks, okay. Thanks very much.

Mark W. Sheahan: Thank our customers employees all of our channel partners around the world for a great year in 2023, their dedication and loyalty and unwavering commitment to graco is really what provides us with the winning edge in the marketplace I. Thank you all for participating on today's call.

That concludes the call for today.

Speaker Change #105: This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.

Matt J. Summerville: Got it. Thank you, guys. Thanks, Matt.

Jeff Hammond: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone. Again, to ask a question, please press star 1-1. One moment for our next question. Our next question comes from the line of Andrew Biscaglia, of BNP, a lot of questions... Hey guys.

Jeff Hammond: You know, just looking at your margins, I think everyone's kind of trying to figure out if they can exceed the sort of watermark. You guys have had such strong margins this year on low growth. I'm wondering, you talk a lot about new products you're introducing. Is there, and you're always introducing new products. Is this a greater kind of new product cycle we're upon? It seems like you have quite a bit of commentary on that. Yeah, I would say that for sure the new product is oxygen for Great Gulf, right? I mean, it's our primary growth lever.

Mark W. Sheahan: And I really do believe that this year, in the contractor business, in particular, there is a strong lineup of new products coming. And we also have, you know, decent products in the other business units as well. So, you know, if you were to take like an average of a no new product year for Greco, this 24 looks like it could be a little bit.

Mark W. Sheahan: Yeah, okay. Interesting. Is there a bit more pricing leverage, therefore, in the contractor versus the other segments? Um, both the price cost but also this new product initiative, or not initiative, but New Product Expectations. I wouldn't say there's more pricing leverage, but I would say that we are able to charge a nice price for new technology when we bring it to the marketplace.

Mark W. Sheahan: And, you know, typically, we're also looking to maybe reduce some of the costs for replacing a legacy item with something new. But, you know, being the first to the customer with new technology is really the name of the game. And if you can do that consistently, like we've been able to do, you really can drive more organic growth and, say, other companies that are playing catch. Yeah, okay.

Mark W. Sheahan: So what we're really looking for is a good business, where we understand the product line, we understand the customers, and we think we can bring some value, particularly on the operational side of the business and take their existing margin rate and improve it over time. I think we've got good experience with the deals that we have done with that kind of a playbook. And that's really what we'd be looking for with M&A as we scour the market for opportunities.

Mark W. Sheahan: Okay, very helpful. Thank you. Yep.

Mark W. Sheahan: Thank you. If there are no further questions, I'd like to call back over to Mark Sheahan for closing remarks. Okay, thanks very much.

I'd like to thank our customers, employees, and all of our channel partners around the world for a great year in 2023. Their dedication and loyalty and unwavering commitment to Graco is really what provides us with a winning edge in the marketplace. I thank you all for participating in today's call. That concludes the call for today. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.

Q4 2023 Graco Inc Earnings Call

Request a DemoDemo

GGG

Graco

Earnings