Q4 2024 Graco Inc Earnings Call
Rico: Rico has additional information available in a Powerpoint slide presentation, which is available as part of the webcast player.
Speaker Change: At the request of the company, we will open the conference up for your questions and answers after the opening remarks from management.
Speaker Change: During this call various remarks may be made by management about their expectations plans and prospects for the future.
Speaker Change: These remarks constitute forward looking statements for the purposes of the Safe Harbor provisions of the private Securities Litigation Reform Act.
Speaker Change: Actual results may differ materially from those indicated as a result of various risk factors, including those identified in item one a of the company's 2023 annual report on 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 grieco dot com and the Sec's website at Www SEC Gov.
Speaker Change: Forward looking statements reflect management's current views and speak only as of the time they are made.
Speaker Change: 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 Nelson, Vice President Controller, and Chief Accounting Officer.
Speaker Change: 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 yes.
Speaker Change: Yesterday, Graco reported fourth quarter sales of $549 million, a decrease of 3% from the same quarter last year ACA.
Speaker Change: Acquisitions contributed 3% sales growth in the quarter, excluding acquisitions fourth quarter sales decreased 6%.
Speaker Change: Currency translation had no significant impact on sales reported.
Speaker Change: Reported net earnings decreased 1% to $109 million for the quarter or <unk> 63 per diluted share.
Speaker Change: The impact of business reorganization charges excess tax benefits from stock option exercises and other prior year items adjusted non-GAAP net earnings were $110 million or <unk> 64 per diluted share a decrease of 20%.
Speaker Change: The gross margin rate decreased 200 basis points in the quarter realized pricing was not enough to offset sales volume declines occurring in all segments unfavorable product and channel mix and acquisition related impacts.
Speaker Change: <unk> and assembling assembly hours declined on lower sales volume and inventory reduction efforts.
Speaker Change: Total operating expenses increased $19 million or 15% in the quarter, mainly due to business reorganization costs of $7 million expenses from acquired operations of $7 million and litigation costs in the contractor segment associated with the trial that concluded in December of 2024.
Speaker Change: A $7 million.
Speaker Change: Total spend related to this legal matter was $9 million for the quarter and $16 million for the year.
Speaker Change: Reductions in volume and earnings based expenses of $6 million, partially offset this increase.
Speaker Change: Lower gross margin along with increased expenses during the quarter resulted in an operating margin rate of 24% compared to 30% for the same quarter last year.
Speaker Change: Excluding business reorganization costs industrial segment operating margin rate for the quarter was 33% compared to 37% for the same quarter last year and the process segment operating margin rate for the quarter was 29% compared to 28% for the same quarter last year exclude.
Speaker Change: Excluding acquisitions and related costs is this reorganization charges and litigation spending previously mentioned contractor segment operating margin rate for the quarter was 27% compared to 29% for the same quarter last year.
Speaker Change: Total company operating margin rate, excluding these impacts for the quarter was 29% a decline of one percentage point compared to the same quarter last year.
Speaker Change: Excluding the impact of the pension settlement charge in 2023.
Speaker Change: And other increased $2 million during the quarter driven primarily by increased interest income on cash held.
Speaker Change: The adjusted effective tax rate was 21, 5% for the quarter due mainly to the unfavorable effects of foreign earnings taxed at higher rates.
Speaker Change: Cash provided by operations totaled $622 million for the year, a decrease of $29 million from last year, driven mostly by lower net earnings.
Speaker Change: Cash provided by operations as a percent of reported net earnings is 128% for the year.
Speaker Change: Significant year to date uses of cash include repurchases of 399000 shares for $31 million acquisitions of $242 million.
Speaker Change: Dividends of $172 million and capital expenditures of $107 million of which $67 million related to facility expansion projects.
Speaker Change: These cash uses were offset by share issuances of $66 million.
Speaker Change: A few comments as we move forward to 2005.
Speaker Change: Based on current exchange rates, assuming the same volumes mix of products and mix of business by currency as in 2020 for movement in foreign currencies would have an unfavorable impact of approximately one percentage point on net sales and two percentage points on net earnings for the full year of 2025.
Speaker Change: Unallocated corporate expenses are projected to be 39% to $42 million.
Speaker Change: The effective tax rate is expected to be 19, 5% to 25%, excluding any impact from excess tax benefits from stock related to stock option exercises and other onetime items.
Speaker Change: We expect capital expenditures to be approximately $50 million to $60 million as we have now completed expansion projects for nearly all of our operations.
Speaker Change: And finally effective January one 2025, the company move to a global customer centric operating structure, resulting in a nonrecurring business reorganization charge of $8 million in the fourth quarter annual savings is estimated to be approximately $16 million. The new operating structure consists of three segments.
Speaker Change: Industrial expansion markets and contractor. The industrial segment consists of the newly formed industrial Division and the powder Division the companys previous industrial and lubrication equipment divisions, along with the process transfer equipment business that was part of the company's process division combined to form the new global industrial.
Speaker Change: Division the powder Division remains unchanged.
Speaker Change: The company's environmental semiconductor high pressure valves and electric motors businesses together with select future adventures in acquisitions, and new or adjacent markets have been combined to create the new reform expansion market segment.
Speaker Change: The contractor segment remains unchanged as a reporting segment relative to prior periods.
Speaker Change: <unk> operating results will be reported under the new organizational structure, beginning with the first quarter of 2025 segment information recast to conform to this new structure is available as supplemental information.
Mark Sheahan: I'll now turn the call over to Mark for further segment and regional commentary.
Speaker Change: Thank you Chris Good morning, everyone. All my comments will be on an organic constant currency basis.
Speaker Change: I'd like to start today by welcoming <unk> to the Graco team we closed the acquisition in November and integration activities are underway.
Speaker Change: Initial results have been as expected generating 3% revenue growth in the fourth quarter.
Speaker Change: <unk> brings high tax dispensing and mixing solutions to graco in the growing paint and coating machinery and manufacturing category.
Speaker Change: This acquisition will enable us to leverage our existing products and channel, while expanding our global manufacturing footprint.
Speaker Change: Overall, the year has been challenging and the business landscape has been soft across many of our end markets declines in key industrial markets in China, along with weakness in our semiconductor business drove much of the decline during the year.
Speaker Change: <unk> continued into the fourth quarter, resulting in a 6% sales decline.
Speaker Change: These results were driven by lower sales volume in all segments and regions, except process, North America and contractor Asia Pacific.
Speaker Change: Sales in the process segment improved during the quarter as we had growth across major project categories, including vehicle service industrial lubrication and environmental.
Speaker Change: We continue to see revenue declines in the semiconductor markets globally, we had growth in North America in the quarter and have seen positive bookings momentum in all regions.
Speaker Change: Protective coatings activities remained strong with growth in all regions and particular, the container market has improved throughout the year and Asia Pacific.
Speaker Change: As Chris previously discussed the reported results were lower during the fourth quarter compared to the rest of the year. However, excluding initiatives and unusual items in the quarter revenue declined 6%, resulting in a 12% reduction in operating earnings which is consistent with the full year.
Speaker Change: The slower markets allowed us to speed up our M&A and reorganization activities that we believe will set us up for future growth as we enter 2025, we expect these initiatives to drive incremental volume along with our pricing actions, resulting in strong incremental margins.
Speaker Change: In addition to our M&A pipeline remains active and we're excited about the possibilities the new organizational structure can bring as we focus on new and adjacent markets.
Speaker Change: Now turning to some commentary on our segments and regions.
Speaker Change: Contractor declined 3% for the quarter and was down 1% for the year driven primarily by softness in the U S housing and remodeling markets.
Speaker Change: <unk> coatings or a bright spot with growth across all regions for both the fourth quarter and for the year.
Speaker Change: Steady performance in this market has been helped by infrastructure investments increases in container market, along with rail marine and fireproofing.
Speaker Change: While the current construction environment remains mixed and pressures on housing affordability are likely to continue our new products have been successful and are expected to contribute to growth.
Speaker Change: During the fourth quarter, we launched a new Powershot X T electronic powered airless paint gun, which allows contractors to spray all day on a single charge.
Speaker Change: This product along with additional 2025 releases and the full year impact of our 2024 launches gives us optimism as we enter the new year. Despite a mixed picture in the global construction markets.
Speaker Change: Industrial segment revenue declined 13% for the quarter and was down 6% for the full year.
Speaker Change: Kinda was weak, particularly in our sealants and adhesive products, which impacts many of our key end markets, such as automotive solar and battery.
Speaker Change: Despite the revenue declines incoming order activity in China throughout 2024 has been steady, albeit at a lower level than 2023.
Speaker Change: We have seen positive signs as quoting activity has been improving and our sales team has expressed optimism as we enter the new year.
Speaker Change: The timing.
Speaker Change: The timing of completion and acceptance of powder, finishing systems also resulted in a decline in the quarter booking.
Speaker Change: Booking activity in the powder Division has improved and we carry a slightly larger than normal backlog into the new year.
Speaker Change: Despite the tough year, the new industrial teams are energized by the full suite of <unk> products and are focused on executing under the new customer centric approach.
Speaker Change: Process was flat for the quarter, but down 8% for the year growth across Americas was offset by declines across EMEA and Asia Pacific.
Speaker Change: Sales in the fourth quarter were the largest of the year and grew sequentially by 13%.
Speaker Change: Total revenue for the quarter was consistent with the prior year quarterly run rates.
Speaker Change: Order activity increased low double digits for the quarter and our quarterly bookings were the largest we've seen in the past two years.
Speaker Change: However, backlog is back to normal which contributed heavily to the prior year sales, especially in the semiconductor market.
Speaker Change: Moving onto our outlook.
Speaker Change: Our team demonstrated resilience overcoming both commercial and operational obstacles and a challenging year with the dedication and resolve that define our company.
Speaker Change: We continue to generate strong cash flow and our balance sheet gives us flexibility over the past five years, we've invested heavily in our manufacturing footprint and automation capabilities, which puts us in a good position to meet future demand.
Speaker Change: Heading into 2025, we do anticipate that some of the challenging end market conditions, we experienced last year will persist, but we are optimistic that the worst is behind us. Therefore, we are initially our full year outlook for 2025 of low single digit sales growth on an organic constant currency basis.
Speaker Change: In closing I'd like to thank our employees suppliers customers and distributor partners around the world for their contributions throughout the year spend.
Speaker Change: It's been challenging and graco fashion, we've been able to overcome the hurdles and set ourselves up for future long term growth.
Speaker Change: Well there are many things that contribute to our culture, it's our loyal and hardworking employees that make this company great.
Speaker Change: That concludes our prepared remarks, operator, we're ready for the first question.
Speaker Change: Thank you the question and answer session will begin at this time.
Speaker Change: To ask a question. Please press star one on your telephone and wait for your name to be announced towards draw. Your question. Please press star one again.
Speaker Change: To your questions will be taken in the order that is received.
Speaker Change: Please standby for your first question.
Speaker Change: And our first question comes from the line of Deane Dray with RBC capital markets.
Speaker Change: Yes.
Speaker Change: Thank you good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Mark you provided good color regarding.
Speaker Change: Geographies and end markets, but can you just frame for us how 'bout versus your expectations I mean, China has been weak.
Speaker Change: But it sounded like it stayed weak and same on semiconductor being soft, but just kind of versus your expectations about the quarter. And then you also typically provide orders for the past six weeks you said things have been steady, but if you could give us that data point.
Speaker Change: That would be a great start thank you.
Speaker Change: Yes, I'll give it a shot here I think expectation wise I would say that our process division over performed our expert expectations and I think it was mostly in areas. Our environmental business was good our led businesses were good.
Speaker Change: And our high pressure valve business was also good.
Speaker Change: I would say that that came in a little bit stronger than what we had hoped and the booking activity there looks looks pretty good too as we head into.
Speaker Change: 2025, I would say industrial.
Speaker Change: Came in less than what we were expecting they did have a very tough comp in the fourth quarter. We knew that we were expecting that theyre revenues could be impacted by that but really the declines in Asia Pacific and then our sealant and adhesive business, where we're pretty sharp compared to what we experienced last year.
In Q4.
Speaker Change: And then contractor I think also underperformed a little bit in terms of our expectations.
Speaker Change: Didnt see the large kind of year end orders that we might have normally gotten in a in a normal year and I think that had something to do with the fact that the conditions are still fairly sluggish across a lot of the end markets.
Speaker Change: We experienced that really throughout the year. So if I look at the full year contractor business being down 1% I think is really good performance and a.
Speaker Change: A challenging economic environment.
Speaker Change: When it comes to the.
Speaker Change: Order rates and outlook and how we got to that.
The low single digit guide I mean, we really did look at what we've seen in the back half of last year.
Speaker Change: To help guide us in putting those numbers together and then comparing that to what we actually experienced on the billing side and that's how we got to those numbers and I would say that.
Speaker Change: With regard to the recent activity that we've seen.
Speaker Change: It kind of lines up with the guide at this point.
Speaker Change: Good that's really helpful and just the second question I know, we're still early in the process, but lots of questions in anticipations of how tariffs might play out and <unk> is in a unique position and look at this is not new we've been through this before but just a lot of this is reminding us but.
Speaker Change: The idea here.
Speaker Change: Unique in that you have a concentrated manufacturing footprint in the Minneapolis area less globally that in some of your peers, how does that present itself as a risk or.
Speaker Change: Different impact on tariffs.
Speaker Change: And how does that factor into your typical January price increase one price increase per year would you delay that.
Speaker Change: That impact as well.
Speaker Change: We didn't specifically factor tariffs and because a lot of times when you put your price lists out and you talk to distributors you got to give them enough notice ahead of time. So we did that kind of late third quarter early fourth quarter of 24 before all the tariff talk became more significant we have run some math here at the company we don't.
Speaker Change: We don't claim to be experts when it comes to what's actually going to get implemented versus what's talked about but at least in terms of what we've heard.
Speaker Change: Verbalize and what impact it might have to Greg it looks like it's something that we could manage.
Speaker Change: We didn't factor it into the January price increase, but as you know if we need to we can always make.
Speaker Change: Make a decision to do some other pricing actions if it becomes more and more significant for us what I will say is that the talk that we've heard.
Speaker Change: With respect to tax rates is interesting.
Speaker Change: The discussion about providing preferential corporate tax rates for companies that manufacture in the United States that can be really nice for us because we as you know have.
Speaker Change: A footprint that is really highly concentrated here in North America and so to.
Speaker Change: To the extent that that does take shape that could be beneficial.
Speaker Change: Its a great goal.
Speaker Change: That's real helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Mike Halloran with Baird.
Mike Halloran: Hey, good morning, everyone.
Speaker Change: Hey, Mike Hey, Mike.
Mike Halloran: So.
Mike Halloran: Just clarifying the outlook quick.
Speaker Change: If I Peel that back it sounds like Youre, saying, if you look at the current order rates and.
Speaker Change: And then layer on call it normal conversion based on last year's incidences and call. It relatively normal seasonality. That's how you get to the low single digits in other words, not really embedding any real improvement here, just kind of a steady state from current levels and that should be enough for my missing that.
Speaker Change: Yes, I think Thats I think thats accurate.
Speaker Change: Always tell people I think I've told you personally that.
Speaker Change: Our ability to forecast isn't real great just because of the fact that we're such as short cycle business, but.
Speaker Change: As I think we said in the comments the incoming levels of orders have been fairly consistent throughout the back half of the year.
Speaker Change: So we feel confident at least it feels like things have evened out we.
We do have our pricing actions, which should be helpful. We've got some new products that we're launching which should be helpful and all of that factored into our analysis and what we're coming up with on the on the outlook for the year.
David Law: Yes. This is David I would add that again going back to the comments the.
David Law: I'd say the big negatives the areas that we've talked about in China in particular in our industrial specifically, our adhesives and sealants space.
David Law: As well as the semiconductor space.
David Law: With the rates that we see now the big negatives that we were experiencing throughout the year have flatlined.
David Law: And with the sort of performance we saw in most of our businesses in 2024 and certainly in the back half along with what I would say flattish performance in those three or four markets that had been.
David Law: Festively negative.
David Law: Give us a pretty good degree of comfort that.
David Law: We should be.
David Law: Looking at growth.
David Law: With normal seasonality in markets like contractor.
Speaker Change: That helps and then two margin questions. If I may 1st Christmas a speedy manner, which I. Appreciate however, just want to make sure I understand the moving pieces on the contractor margins. So I think youre, implying 27% is the apples for apples margins versus last year, excluding all the one timers.
David Law: Excluding the acquisition.
David Law: If you think about what the margin would look like on a forward base or just in this quarter. If you exclude <unk>.
David Law: Call it the step up charges associated with bringing in <unk>.
What would that look like and how do we think about what the representative run rate looks like from here one solve that normalized.
David Law: So I think with the step up charges.
David Law: Add one time charges related to the acquisition of about $3 million in there. So if you take that into account with the contractor youre, probably going to look at somewhere for this quarter somewhere in that 25% to 26% range.
David Law: Subtract everything ourselves.
David Law: Right that's helpful and then.
David Law: The reorganization savings Thats, a big number a little bigger than I was expecting.
David Law: One is that expected to be realized starting in the first quarter and then secondarily, how does that shake out across the segments and where does that show up.
David Law: I would say, yes, it should start right away.
David Law: There was a concerted effort to get the hard I'd say the heavy lifting done in Q4 and it was completed in.
David Law: Thats reflect the cost side of it is reflected in the charges.
David Law: And across the organization, where we're working with the new.
David Law: We're working with the new.
David Law: The new arrangement and so you should see those benefits beginning.
David Law: Right in the beginning of the here in the first quarter.
David Law: I would say that.
David Law: In terms of thinking about the segments under the new structure.
David Law: The heaviest lifting was certainly done in the contractor space, where we were I'm sorry in the industrial space, where we were combining several organs.
David Law: Several different parts of the legacy Graco organization, but.
David Law: Contractor and the expansion markets also play a role and Youll see benefits.
David Law: Benefits in varying degrees across all three.
Mike Halloran: I will say, Mike if youre going to split it out between the different segments of that.
Mike Halloran: The charges as they are put in there for each of the segments. Today is a good proxy as to what the savings will run next year and as you put it into the new segment structure.
Mike Halloran: We're moving about two thirds of the revenue from the process segment to industrial and the cost and the savings should be allocated similarly.
Speaker Change: Awesome, that's really helpful. Thanks, guys really appreciate the time.
Mike Halloran: Yes.
Mike Halloran: Thank you.
Speaker Change: And our next question comes from the line of <unk> <unk> with Jefferies.
Speaker Change: Hi, good morning.
Speaker Change: Just building on the orders question since Youre in the last earnings call you saw some improvement in the incoming order rates over the prior six week in this release you guys have obviously talked about consistent rates in the fourth quarter. So did you see orders slow down with October and what have you seen more recently thank you.
Speaker Change: Yes, we did see a little bit of a slowdown in kind of surprised us I want to say that November December orders were softer than what we had seen in the early part of the quarter.
Speaker Change: In terms of how it how the quarter played out versus my expectations I think I answered that previously pretty good and the process group a little bit of a disappointment in contractor in a larger disappointment.
Speaker Change: Industrial.
Speaker Change: <unk>.
Speaker Change: The recent the most recent order trends that we've seen.
Speaker Change: Again, we believe that they are supportive of the low single digit guide that we've given for the year.
Speaker Change: Thank you for the color and then your claim have have outlet.
Speaker Change: Let me use your prior statements. So just curious just to break it out on how youre thinking about the updated industrial and expansion markets.
Speaker Change: Traditional pie chart framework.
Speaker Change: Okay.
Speaker Change: Yes, again I do believe that.
Speaker Change: We are looking for growth.
Speaker Change: And both those groups on a full year basis, but we do recognize that there still will be some challenges and I think that thats really what we tried to reflect in the in the chart.
Speaker Change: I appreciate it thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Matt Summerville with da Davidson.
Speaker Change: Thanks.
Speaker Change: Mark with respect to this reorganization in kind of <unk> historical M&A practice, how are you changing.
Speaker Change: The way the.
Speaker Change: Net is cast if you will and what kinds of things are you may be willing to look at that.
Speaker Change: Maybe you wouldn't have hit the radar screen of some of your predecessors, how should we be thinking about that yes.
Speaker Change: Yes, its good question and I might actually just expand a little bit to talk a little bit about why we're doing the re org and what we expect to get from it M&A is part of it but it's not it's not the full story so.
Speaker Change: Really there is there is a number of things that we believe are going to be.
Speaker Change: The result of what we've done number one we want to leverage our customers and our channel better by combining the industrial the led.
Speaker Change: The process group at the diaphragm pumps, we really do believe that we'll be able to offer a more complete picture of graco product to our channel partners as opposed to having several people interact with those those channel partners and their customers the <unk>.
Speaker Change: Customers are very common across those.
Speaker Change: Those product lines and the channel partners are also very common.
Speaker Change: That is one thing that we hope to get we also hope to have operational efficiencies by eliminating a lot of the overlap that existed in the company across those separate business units, primarily in the areas of sales marketing and engineering.
Speaker Change: And Thats really what <unk> seen in terms of the benefits that we're going to get out of the costs that we've taken out we.
Speaker Change: Also we'll be focusing more on a on a global organization.
Speaker Change: Taking down the matrix structure that we had previously so that our teams can focus on global customers and global accounts.
Speaker Change: And make the investment decisions and allocate the resources appropriately as they see fit and not have to go to a regional leader to ask for approval and to get the allocation of the funds and the resources that they need that way.
Speaker Change: With respect to M&A, we created this group called expansion markets and what we put in there or our legacy semiconductor business.
Speaker Change: Our environmental business and our high pressure valve business and we've asked that team to really evaluate those assets and look for ways to expand them.
Speaker Change: Really with a focus on can we do more in those areas. We like them, we think that there is opportunities.
Speaker Change: And if we put up our focus on it we think that there is.
Speaker Change: Better chance of us being able to expand there but in addition to that we've also.
Speaker Change: That group to work with our strategy team and our corporate development team to look for new sandbox is for Greg or to plan beyond the stuff that we would've looked at historically.
Speaker Change: We are sorting through some areas right now we've got a couple of.
Speaker Change: Things that we're looking at I don't want to share those with you, but we're talking about fairly sizeable fluid handling markets and applications that the company hasn't historically been involved with and where do we do the detailed work we want to make sure that it makes sense, we want to figure out the strategic fit for the company and to the extent that things line up then we start.
Speaker Change: To identify targets and we go after those things. So I think it opens up the lens a little bit for us we never really had anybody at the company that was looking beyond what we currently had in the portfolio and so I think that Thats really what that that group is charged with doing.
Speaker Change: That's helpful.
Speaker Change: As a follow up and maybe I just missed it I don't remember you guys talking about this sort of litigation that was seemingly ongoing for a period that has since wrapped up can you maybe talk a little bit about the genesis.
Speaker Change: Kind of the conclusion and I guess did I hear that you had $16 million of what we should consider to be nonrecurring charges. This year and I guess would that have hit the segment would that have hit at corporate.
Speaker Change: More detail on that would be helpful. Yes, the $16 million is a correct number it was in the contractor business. It was litigation that I really don't want to comment about it.
Speaker Change: It's done it's been taken care of and we're going to move off of it.
Speaker Change: So all of it just to be clear Mark all of the 16 hit contractor segment operating profit and you did in none of your financials you did not non-GAAP any of that out this year correct that is correct yes.
Speaker Change: That was the full year number and I think we had what eight or $9 million in the fourth quarter $9 million in the fourth quarter. We did the segment. The segment chart on I think page 13 of the slide deck for contractor does a pretty good job of breaking the special items out including the litigation.
Perfect. Thank you guys.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Bryan Blair with Oppenheimer.
Bryan Blair: Thanks, Good morning, guys.
Speaker Change: Good morning, Brian I was hoping.
Bryan Blair: We can offer a little more color on the early innings of <unk>.
Speaker Change: The integration.
Speaker Change: One <unk>.
Bryan Blair: Continues to excite your team there.
Bryan Blair: Any surprises to date.
Bryan Blair: Having now owned the asset for that.
Speaker Change: Im curious if youre willing to share on.
Speaker Change: 2025 outlook for revenue and margin contribution.
Speaker Change: Perhaps more importantly, looking forward.
Speaker Change: Where are you seeing things profitability.
Ken Kline: Ken Kline.
Speaker Change: The medium term.
Speaker Change: Yes, I'd say, it's early days, but we've been pleased with the revenue.
Speaker Change: So far I mean for that.
Speaker Change: Eight weeks that we've owned it or whatever it's been we.
Speaker Change: We like the team a lot.
Speaker Change: We feel pretty confident that <unk> got good momentum as we enter into 2025, we are expecting growth, it's not going to be anything heroic, but probably the low single digit growth for that that group is what we're aiming for for 2025.
Speaker Change: And all in all were excited on a number of fronts, but in particular.
Speaker Change: The business.
Speaker Change: It doesn't have a tremendously strong footprint here in North America.
Speaker Change: We believe that with the great brand that we have and the good.
Speaker Change: Reputation that critical has with some of the larger companies that purchased this equipment.
Speaker Change: Well at least have a good chance at being able to introduce <unk> to those customers, whether we're successful or not is really depends on us and how how good of a job that we do but we think that it could open up some doors that corroborative had a harder time opening on their own is up.
Speaker Change: Smaller independent company.
Speaker Change: Definitely makes sense.
Speaker Change: It's encouraging.
Speaker Change: Daily Youre expecting growth in China for the year admittedly against easy comps, but nonetheless that momentum.
Speaker Change: And the good guys.
Speaker Change: I'm wondering if you could talk a little more.
Speaker Change: Detail on what Youre seeing on a run rate basis.
Speaker Change: Perhaps comment on whether corralled relationships factor into or influence your your confidence in returning to growth this year.
Speaker Change: Yes, I think with respect to China, it's more of the Graco legacy business, we think we've kind of gotten through the worst of it I would say that it's.
Speaker Change: I'll call it plateaued or gotten to the point, where we've reached equilibrium and our hope is that now that we will get some upside as the market.
Speaker Change: Grows a little bit and we implement our pricing actions.
Speaker Change: Our team feels fairly confident obviously, we have easier comps that factors into the equation as well. So it's up it's more on the legacy side of the operation that we feel like China should get back to a growth trajectory here in 2025 crab does give us a little bit more exposure.
Speaker Change: <unk>.
Speaker Change: We're excited about their India manufacturing footprint, we think that there are some opportunities there for us to perhaps leverage that and it just gives us a little bit more of a presence in that country, where I think as I said before that's a country that we've had on our radar for a while to grow the <unk> presence.
Speaker Change: I should leave well enough alone I would just add we did have some nice feedback from the new industrial sales team and leadership in China last week and.
Speaker Change: Optimistic going into this year.
Speaker Change: Even about some areas.
Speaker Change: Were soft for us very soft for us in 2024 markets like battery solar and automotive and we see some we already are seeing a little bit of project activity that.
Speaker Change: Was absent during much of the year last year.
Speaker Change: Understood I appreciate the detail.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Joe Ritchie with Goldman Sachs.
Joe Ritchie: Hey, good morning, guys.
Speaker Change: Good morning.
Speaker Change: So.
Speaker Change: I'm just trying to make sure I fully understand the one offs that that could be potential good guys in 2025, and so if I'm looking at slide five you have got the business re our cost of that goes away. The incremental litigation costs of 13 that goes away and I think I heard you say that there is the savings from the re org.
Speaker Change: It should be $16 million is that all expected in 2025% did I get all of that right.
Joe Ritchie: I will say Joe on the litigation that is the change from 'twenty three to 'twenty for the total spend for the year on the litigation was $16 million that will go away.
Speaker Change: But you did give me.
Speaker Change: Okay got it so okay. So about $40 million in total is there is there is there anything thats.
Speaker Change: That should be offsetting this obviously.
Speaker Change: Get a better understanding of how volumes turn out for the year, but any any major offsets we need to consider from a margin standpoint.
Speaker Change: Yes.
Speaker Change: No I don't see anything that would be major.
Speaker Change: That would offset that.
Speaker Change: Okay, Great and then my one last question and just thinking about the expansion markets.
Speaker Change: Clearly it was very helpful to have all of the supplemental data going back to 'twenty two.
Speaker Change: Clearly 'twenty two 'twenty three great growth years 'twenty four.
Speaker Change: The expansion markets were down quite a bit I guess as you kind of think about.
Speaker Change: It's kind of odd to see expansion markets down, but I know that there is probably some tough comps there as well, but as you think about the trajectory of those businesses in 2025.
Speaker Change: Is the assumption that these businesses will outgrow your remaining portfolio and just any color on that would be helpful.
Speaker Change: Yes, I think if you were to look at the pieces I think the semiconductor is really the wildcard there and that was the main reason for the reduction in 'twenty four and we do expect that that market is going to be firmer that we'll get back to a little bit of growth there in that 25%. The other two businesses have been pretty steady performers with some decent growth here in 'twenty four for <unk>.
Environmental business, we kind of expect that to continue.
Speaker Change: And same thing on the high pressure valves.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Jeff Hammond with Keybanc capital markets.
Jeff Hammond: Hey, good morning, guys.
Speaker Change: Hey, Jeff.
Speaker Change: Just on contract or a couple of questions. One last year I think your new product timing was more <unk>.
Speaker Change: Versus <unk> based on time and I'm, just wondering how youre thinking about.
Speaker Change: Comp and new products coming in and then just with kind of rates stuck hi.
Speaker Change: Lower existing homes lower.
Speaker Change: New home sales.
Speaker Change: Comment on what you are hearing from the field paint stores contractors about.
Speaker Change: Just just.
Speaker Change: <unk> business in particular.
Speaker Change: Yes, Youre right I think you're I think you're correct that our new product launches last year came in a little bit late for CD I think they were in Q2 versus Q1 so.
Speaker Change: Perhaps that that creates a little bit easier comp for them in the first quarter than what you might see in the second quarter, but I'll, let you guys.
Speaker Change: Figure that out and do the do the modeling on that piece of it the market itself I think is.
Speaker Change: I call it stable to potentially improving housing starts are kind of projected to be flat here in 25, New home sales are projected to come up a little bit and that does help us because every time somebody moves they tend to fix it up or payment and then the new people move in and they repaying it again so.
Speaker Change: To the extent that the.
Speaker Change: Existing homes sales actually.
Speaker Change: Trend up I think that would be favorable for us remodeling is kind of hanging in there.
Speaker Change: Interest rates.
Speaker Change: No more about that than I do but they appear to be stable to maybe slightly favorable for us and I think commercial on the commercial side, we're expecting just a real small amount of growth there as well. So you put the whole thing together and I feel like it's at least it's favor at least as favorable market as what we've had the last couple.
Speaker Change: A couple of years, maybe a little bit of upside.
Speaker Change: Yes.
Speaker Change: Okay and then.
Speaker Change: Just on the comment about timing and powder coatings is that.
Speaker Change: Business that shifted from <unk> to <unk> and is there a magnitude you can give.
Speaker Change: I don't think so I think that really it really relates back to if you look at last year's Q4.
Speaker Change: And you look at the industrial number that was put up a lot of that was like powder project activity and so the fact that we just didn't get that in in Q4. This year really created kind of a.
Speaker Change: A tough comp for that for that group I think we said in the comments that they are back log right now is actually a little bit higher than what it would normally be so we feel pretty good about how things.
Speaker Change: Are trending here for that part of the business as we head into 'twenty, five, but I don't think theres any real meaningful shift that you should be thinking about from this should have gone in 'twenty four but it's going to wind up in 'twenty side, Yes. That's the one that's certainly one area, where we have a little longer visibility than in most.
Speaker Change: Of our most of our legacy businesses.
Speaker Change: Mark's right, we're carrying what looks to be a little bit a little bit of a backlog above normalized levels for the size of the business and we also saw some firmness in in I would say order rates as the fourth quarter wound up that left us with.
Speaker Change: With a I would say a positive ish feeling as we get into this year and bodes well, maybe not just for Q1 and Q2, but how the business could play out.
Speaker Change: On the second half of the year.
Speaker Change: Yeah.
Speaker Change: Okay, and then just last one on the one timers, so $3 million.
Speaker Change: Step up from the acquisition is that done.
Speaker Change: Or do you have some carryover into the first half.
Speaker Change: We'll have some carryover and through the first quarter.
Speaker Change: But after the first quarter will have gone through all of the step up.
Speaker Change: Okay, great. Thanks.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line of Ross <unk> with William Blair.
Speaker Change: Hey, Good morning. This is Sam Carlin on for Ross. Thanks for taking my question.
Speaker Change: Starting with strength.
Speaker Change: The legacy Americas process segment is there anything to read into it as it relates to quantum on pumps and are there any updates on where you think you are in the customer trial base.
Speaker Change: I don't think Theres anything in particular I think it was just across the board kind of general strength a lot of it actually was in our lubrication.
Speaker Change: <unk>, which have been good but they did have a nice strong finish to the year.
Speaker Change: Got it that's helpful. That's all for my answer there.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: As a reminder to ask a question. Please press star one one on your telephone.
Speaker Change: Our next question comes from the line of Andrew Buscaglia with PSP BNP Paribas.
Speaker Change: Hey, good morning, guys.
Speaker Change: Alright.
Speaker Change: I just want to clarify so.
Speaker Change: Extra commentary on <unk>.
Speaker Change: So it sounds like we should assume sort of mid single digit contribution to sales. This year can you.
Speaker Change: Clarify that and then what about quantifying anything on EPS accretion, whether it's year one year two can you make any statements there.
Speaker Change: Yes, I think the mid single digit MSR.
Speaker Change: MSR low single well I think if you just annualize the revenue I mean, it's probably 4% to 5% that will help our growth rate in 2025. So you can just add that on top.
Speaker Change: We're looking at it to be slightly accretive to EPS for the full year, but Chris would probably going to be accretive in 2026 for the full year.
Speaker Change: As we get through some of the onetime costs and things happening this year.
Speaker Change: That's kind of the estimate right now.
Speaker Change: Okay.
Speaker Change: Okay and then.
Speaker Change: Obviously, you guys are signaling a little bit more M&A had potentially.
Speaker Change: Can you talk about your.
Speaker Change: Your thoughts on accretion when you make these deals and then for investors that might be concerned around return on invested capital, which is very strong any thoughts.
Speaker Change: Talk about how youre thinking about returns and protecting that number.
Speaker Change: Well, we definitely think that buyers discipline is.
Speaker Change: The way that we.
Speaker Change: <unk> any major capital project and philosophically, that's the way we try to approach our acquisitions.
Speaker Change: Which is one of the reasons why over the last couple of years, we there have been some.
Speaker Change: Has there been some interesting transactions in some large transactions, but the multiples.
Speaker Change: Been pretty.
Speaker Change: Have remained I'd say, a little more elevated with.
Speaker Change: Some of the some of the deals in the niche industrial space, especially if they're in the pharma or the health care some of the higher growth spaces.
Speaker Change: All that said.
Speaker Change: That we.
Speaker Change: We are optimistic that the sell side activity, especially on the part of the P/e companies.
Could could represent an opportunity for some interesting business opportunities our team in development stays very close to the banks and they are.
Speaker Change: Reasons to believe there could be some interesting meaningfully sized properties in the flow control flow control space coming to market later in the in Q1 and Q2.
Speaker Change: So we're looking for I would say, we're looking for good merchandise that's number one.
Speaker Change: I've learned from experience as we want to buy good businesses and yes, you do have to maintain a buyers or buyers disciplined and.
Speaker Change: We will.
Speaker Change: We will see.
Speaker Change: With the chain.
Changes in interest rates and with decent properties coming to market how that plays out in the upcoming year, but we remain very optimistic and as Mark said our.
Our financial position gives us the flexibility.
Speaker Change: To move very quickly when we see the right kind of opportunity such as was the case with Colorado last year.
Speaker Change: And David maybe just.
Speaker Change: Just following on that comment or the deals youre looking at these opportunities where you see some sort of margin potential where you could improve them.
Speaker Change: Mostly after companies that already.
Speaker Change: Fairly fine tuned as it get you into the different adjacent market and help you grow from there.
Speaker Change: Oh I think it depends I mean this is this is one persons view in.
Speaker Change: Welcome other points of view I think we have an open mind when we go in.
Speaker Change: We certainly are interested in those niche market opportunities that have the characteristics of the markets that we're already in.
Speaker Change: Meeting the meeting essential needs for business people business to business, we like recurring revenue et cetera.
Speaker Change: Do understand from our own experience that sometime when we go in and we buy businesses that maybe have been.
Speaker Change: Held privately or maybe by our founding family.
Speaker Change: Always had the capital to inject in the business to bring there.
Speaker Change: Plant and equipment up too.
Speaker Change: What I would call the kind of expectations, we have for our operations and frequently when we have brought our capital to some of the opportunities that we pursued over the years powder coating.
Speaker Change: The semiconductor.
Speaker Change: Inductor space et cetera that has represented a real margin improvement opportunity and so I certainly like that attribute although the underlying businesses good ones to start with yes, I'll just add on that.
Speaker Change: We run DCF models, we're looking to get double digit rates of return for our shareholders. We arent looking at companies that we can't help them either grow their topline or expand their margins and so we feel like the businesses that we have acquired we've got a good track record of being able to do that and that's really what we're targeting.
Speaker Change: Okay. Thank you guys.
Speaker Change: Yep.
Speaker Change: Thank you.
Speaker Change: There are no further questions I will now turn the conference over to Mark Sheahan.
Mark Sheahan: Okay, well that concludes today's call I want to thank you for participating and have a good day.
Mark Sheahan: This concludes our conference for today, Thank you all for participating.
Mark Sheahan: Have a nice day all parties may now disconnect.
Mark Sheahan: [music].
Mark Sheahan: Yes.
Mark Sheahan: Yes.
Mark Sheahan: [music].
Mark Sheahan: Okay.
Mark Sheahan: [music].
Mark Sheahan: [music].
Mark Sheahan: Thank you.
Mark Sheahan: Okay.
Mark Sheahan: Dan.
Mark Sheahan: [music].
Mark Sheahan: Okay.
Mark Sheahan: [music].
Mark Sheahan: Yes.
Mark Sheahan: Okay.
Mark Sheahan: Okay.
Mark Sheahan: [music].
Mark Sheahan: Okay.
Mark Sheahan: Yes.
Mark Sheahan: [music].
Mark Sheahan: [music].
Speaker Change: Good morning, and welcome to the fourth quarter Conference call for Graco, Inc. If you wish to access the replay for this call you may do so by visiting the company website at Www Dot Graco Dot com.
Speaker Change: When you go has additional information available in a Powerpoint slide presentation, which is available as part of the webcast player.
Speaker Change: At the request of the company, we will open the conference up for your questions and answers after the opening remarks from management.
Speaker Change: During this call various remarks may be made by management about their expectations plans and prospects for the future.