Q1 2025 Graco Inc Earnings Call
Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. At the request of the company, we will open a conference up for questions and answers after the opening remarks from management.
During this call, various remarks may be made by management about their expectations, plans and prospects for the future.
These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the private security's litigation reform back.
Actual results made different materially from those indicated as a result of various risk factors, including those identified in item 1a of the company's 2024 annual report on Form 10-K ey K and in item 1a of the company's most recent quarterly report on form 10Q
Ford looking stainless reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements and light of new information on future events. [inaudible]
I will now turn the conference over to Chris Knutson by President, Controller, and Chief Accounting Officer.
Chris Knutson: Good morning everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary.
Chris Knutson: Yesterday, Graco reported first quarter sales of $528 million, an increase of 7% from the first quarter of last year Excluding acquisitions, which contributed 6% growth, sales grew 3% for the quarter The effect of currency translation reduced sales by 2% The effect of currency translation reduced sales by 2% from the first quarter of last year
Chris Knutson: Reported NetEarnings increased 2% to $124 million or 72 cents per diluted chair.
Chris Knutson: Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings for $120 million or $0.70 per diluted share, an increase of 8%.
Chris Knutson: The gross margin rate decreased 150 basis points in the quarter. The recurring impact of acquisitions accounted for nearly 100 basis points of the decline. Strong price realization was not enough to offset higher product costs, resulting from lower factory volume, which accounted for the remaining decrease.
Chris Knutson: Operating expenses were flat in the quarter as incremental expenses from acquisitions of $10 million for a 7% increase in total expenses, were offset by savings from the one Graco initiative and timing of stock-based compensation expenses.
Chris Knutson: Operating earnings increased $11 million dollars or 8% during the quarter on increased sales volume.
Chris Knutson: Operating earnings as a percent of sales was 27% for the quarter which is consistent with last year. Contractor segment operating margin rate for the quarter was 24% compared to 29% for the same quarter last year at a client of 5% points.
Chris Knutson: The acquisition of Kharab decreased the contractor operating margin rate by three percentage points with the remaining decline due primarily to lower sales and factory volume.
Chris Knutson: Interest in other were flat in the quarter. During the quarter, we recognized the gain on the sale of the former manufacturing and distribution facility in Switzerland of $5 million. This gain was offset by currency exchange losses and lower interest income.
Chris Knutson: The adjusted effective tax rate was 20.5%, which is consistent with our expected full-year tax rate of approximately 19.5 to 20.5% on an as adjusted basis.
Chris Knutson: Cash provided by operations totaled $125 million, an increase of $6 million from last year. Cash provided by operations as a percent of adjusted net earnings with 104%.
Chris Knutson: We repurchased 2.8 million shares totaling $238 million during the first quarter of the year.
Chris Knutson: We continue to re-purchase shares in the first weeks of April and as of market closed yesterday we have re-purchased 4.4 million shares for nearly $360 million here to date. [inaudible]
Chris Knutson: Based on this activity, we anticipate the average diluted share is outstanding for the full year 2025 to be approximately 170 million shares
Chris Knutson: A few comments as we look forward to the rest of the year. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency, as in 2024, movement in foreign currencies would have no impact on net sales or net earnings for the whole year.
Chris Knutson: Unallocated corporate expense remains unchanged, unchanged, and are projected to be $39 to $42 million for the full year, or about $11 million per quarter.
Chris Knutson: Finally, we expect Kaplan expenditures to be approximately $50 to $60 million in 2025.
Mark Sheahan: I'll now turn the call over to Mark for further segment and regional commentary.
Speaker Change: Overall, the start of the year was strong. We had 7% sales growth, including a 6% contribution from Korob and 3% organic sales growth. Korob is met our expectations as we continue our integration efforts. [inaudible]
Speaker Change: For the quarter, all segments and regions grew, except for Contractor Emea, which experienced slower activity in the Professional Paint Channel.
Speaker Change: Reduced foot traffic in the home center channel also contributed to a slight decline in the contractor segment despite robust growth in the North America Pearl Paint Channel.
Speaker Change: Last year, declines in our global semiconductor and China industrial businesses accounted for nearly 60% of the overall annual revenue shortfall.
Speaker Change: As expected, these businesses grew in the first quarter, driving positive results in both the industrial and the new expansion markets segments.
Speaker Change: Incoming Order Activity with Steady during the quarter and consistent with Billing Activity
Backlogs remain at normal levels across all segments
Speaker Change: For the past six weeks, incoming order rates have been up double digits compared to the first quarter run rate [inaudible]
Speaker Change: This is only one data point and it may include orders placed in advance of tariffs.
Speaker Change: After the cold of the quarter, the announced tariffs between the United States and China will have an impact on our business.
Speaker Change: China accounted for nearly 6% of our global revenue for the full year 2024 and for this quarter.
Speaker Change: In addition, nearly 6% of our cost of goods sold has China as the country of origin.
Speaker Change: Our teams are developing plans to mitigate these impacts, but these will take time to implement.
Speaker Change: Activities were undertaking include qualifying additional suppliers, moving component manufacturing to our U.S. factories, and redesigning products where components are either too costly or unavailable to purchase from Chinese vendors.
Speaker Change: We have about three months of Finnish goods inventory in China and about three months of components of our U.S. manufacturing locations that will help limit our exposure in the second quarter.
Speaker Change: We have implemented a pricing surcharge on all goods subject to tariffs shipped into China.
Speaker Change: This pricing surcharge is specifically targeted at retaliatory tariffs in China and will not affect the rest of our business in the Asia-Pacific region.
Speaker Change: Well, we've not ruled out the possibility of additional pricing actions this year, our US-based manufacturing footprint, current inventory levels, and strong financial position gives us the opportunity to be thoughtful regarding further pricing actions.
Now turning to some commentary on our segments and regions.
Speaker Change: The contractor segment sales declined 1% in the quarter due to continued softness in the home center business and challenging a Mayah construction markets.
Speaker Change: Pro Paint had a strong performance in North America compared to a soft quarter last year, but it was not enough to offset these declines.
Speaker Change: We also have not seen the full benefit of products launched this year as they will be introduced over the next few quarters.
Speaker Change: These upcoming releases, coupled with the successful introduction of new products last year, should position us well for the remainder of the year.
Speaker Change: Our strategic U.S. sourcing and manufacturing footprint will also give us an advantage in the United States versus key competitors who manufacture offshore, particularly in China.
The U.S. Market represents nearly 70% of total contractor sales.
Excluding Acquisitions
Speaker Change: Industrial segment sales increased 5% with growth in all regions. Powder finishing system sales saw strong activity in Asia Pacific compared to a soft first quarter last year.
While liquid finishing systems had steady performance across other regions.
Speaker Change: Vehicle Services performed well as companies continue to make investments in their service and repair shops
Speaker Change: Increased volume in the industrial segment drove incremental margins of nearly 100% for the quarter.
Speaker Change: Sales in the expansion markets segments increased by 12% with positive momentum in the semiconductor market, which we started seeing at the end of last year.
Speaker Change: The Environmental Businesses also grew in the fourth consecutive quarter with robust activity in the Groundwater Testing and Gas Analyzer Categories.
Speaker Change: Moving to our outlook, we are maintaining our full year revenue guidance of low single due to growth on an organic constant currency basis.
Speaker Change: Evolving trade policies and tariffs of China have created economic uncertainty that could negatively impact our full-year revenue guidance by approximately one to two percent. We're closely monitoring developments and we'll adjust our strategy if necessary.
Speaker Change: Despite these near-term challenges, Graco remains strongly positioned for long-term success as we continue to execute our proven growth strategies and invest in our businesses. [inaudible]
That concludes our prepared remarks. Operator, we're ready for questions.
Speaker Change: Thank you. The question you answered session will begin at this time. To ask a question, please first star one one of your telephone away for your name to be announced. To withdraw your question, please first star one one again. Your question will be taken in the order that it is received. Please stand by for your first question.
Speaker Change: Our first question comes from Deane Dray, with RBC Capital Markets. Please state your question.
Thank you. Good morning, everyone. Good morning.
Speaker Change: I appreciate all the detail you provided on the tariff situation and maybe just to start there with some clarifications.
Speaker Change: Six weeks of orders. So just clarify there how much that you might have benefited. And did you all preposition yourself inventory that comment about the three months?
Speaker Change: of Finnish goods that has already been positioned in China was that above what you would have typically done, so maybe to start there please.
But I would say that, uh...
Speaker Change: ordering a hat going on there that influence those numbers. It's hard for us to...
Speaker Change: In China itself, we always have inventory over there, and we did…
Speaker Change: We have proactively moved some of the inventory into the non-minded status, which basically means that if you do that before I think May 13th
Speaker Change: Then those items will not be subject to these new retaliatory tariffs in China, so we did say...
Speaker Change: Take some more proactive action there, just to get that stuff in there, and of course we have stuff on the water as well that's going over there that we will move into non-bond status once we get it into China. We do think that we have enough inventory over there to last us for a few months.
Speaker Change: We're obviously working closely with our Chinese distributors to make sure they understand what we have available [inaudible]
Speaker Change: and to the extent that they want to order products from the United States. At least now they're going to be subject to the retaliatory tariffs. And again, we'll be working on a case by case with our channel partners to do what we think is best there. And hopefully over the next few months.
Speaker Change: You know, things cool down a little bit and the 145% tariffs come down to a more reasonable level. That's that's what we're hopeful happens
Speaker Change: That's really helpful. Now let's talk about how you've sized the impact and there's a couple takes here. One is the 6% cogs from China. That's kind of the same neighborhood of number of the manufacturers that we cover. So that's that's
Speaker Change: Close to expectations there. What sort of mitigation efforts are going on now?
Speaker Change: and what's interesting in this, maybe this reflects your predominantly U.S. manufacturing footprint.
Speaker Change: Most of the company is talking about an impact on cogs for the tariffs.
Speaker Change: You've taken an attack to say one to two percent of this point of revenue impact.
Speaker Change: So, how did you land on the revenue impact? Any kind of just rough math, how you backed into that? And what do you think the tariff is doing on the cog side for China specifically?
Speaker Change: Yeah, good questions. I mean, the one to two percent really was our common on China.
Speaker Change: The China Impact, that's kind of what we think it is for this year, for 2024.
Speaker Change: Are there going to be terror impacts outside of the US-China connection? And will we actually benefit in some cases because we do have our US footprint here in some of our TN markets like Contractor as we laid out in the opening remarks?
Speaker Change: 70% of their businesses here, and we are a US-based manufacturer, and we know that some of the competition does.
source a lot of materials from Asia-Pacific and China. [inaudible]
Speaker Change: You know, we didn't factor any of that in, there could be some upside, really the one to two percent is really what we think is going to happen with China on the Class of goods sold side again we do have inventory here that you know we will use up. [inaudible]
Speaker Change: Before we start buying and paying 145% tariffs, we have our teams looking at alternative sources. We actually have our engineering teams looking at, can we redesign some of the products?
Speaker Change: such that we may not need to import things from China, we might be able to import here locally or we might actually be able to vertically integrate some of the things that we're currently buying from there. So we have a lot of activity going on. I've been really impressed with
Speaker Change: You know, the professionalism and the diligence that our purchasing team and our manufacturing teams are taking, we didn't feel like it was appropriate, just uh...
Speaker Change: You know, flaps are charges on everywhere. We want our teams to do work and they're doing that work and I think that that is paid off for us and as of right now we feel like it's a it's a manageable situation.
Speaker Change: Appreciate all that color. Thank you best of luck. Alright, thanks Deane.
Speaker Change: Our next question comes from Michael Halloran. Was Baird, please state your question.
Hey, everyone. Thanks. All right.
Speaker Change: So, just some clarifying comments in there then. So, when I think about this at the end of the day
Speaker Change: Maybe a weird way to put it, but what are you functionally trying to manage to hear with how you're taking care of the actions?
Speaker Change: Lloyd Demand, Degradation Through Incremental Pricing. But I guess what I'm asking is when you look at margin profile, margin dollars, what are you trying to solve, like what's the equation priority wise from your perspective.
Speaker Change: and how are you thinking about puts and takes as far as that goes if that makes sense?
Speaker Change: Well, it's never an easy environment at any given time, but this has been particular with all the volatility makes it even more challenging. I think that
Speaker Change: An overriding approach that our team has had here, and the short term is...
Speaker Change: Essentially that we believe that this stuff will become a lot more clearer over the next three months than it is here today.
and so taking a real ...
Speaker Change: Quick reaction, potentially being an overreaction and given the strong posture that we have and the good presence that we have with our customers and our brand we really feel like being patient and taking our time and making sure that we fully understand how things are going to play out before we do things makes a lot of sense. We've run the math on worst case scenarios and of course the math doesn't look real good. But we have our-
Speaker Change: Our team is working hard to try to minimize the impact of that, and as I've said a few times now, it isn't going to happen overnight, we do have...
Neil Plenty of Inventory .
Speaker Change: Developed really strong, good relations, and it's a balance to make sure that we try to maintain those during what is clearly a very challenging situation for not only Graco but all industrial companies.
Speaker Change: So it's a thought process just to make sure you understand that you've given yourself a short-term buffer between some of the surcharges.
Speaker Change: and the inventory you've built internally, as well as all the mitigation actions you're taking, and that kind of buffers the 2Q, and then as you get through the quarter,
Speaker Change: and if we don't get clarity, then maybe you respond anyways to mitigate the back half through pricing or whatever else. I mean, is that the thought process you're trying yourself to find? I think you said, well, I think that again, we have pricing power. We can pull the lever if we need to, but we don't feel like at this point that we really, you know, that that's the right thing to do. Given all the volatility and uncertainty is there and we have the ability to weather, you know, the storm here for the first. I think that's the right thing to do. I think that's the right thing to do.
Speaker Change: A few months I don't think it's really going to impact our results that much in Q2, but for sure by the end of Q2 we should have a much clearer picture on things like do we need to raise prices?
Speaker Change: Okay, great. Thank you. And then follow a question just to make sure, when you talk about that one to two percent, that is just in China. I mean, that's just the impact on what revenue could look like in the China region, correct? Not, you know, okay. That's all right. Thank you. Yeah, thank you. Yep.
Speaker Change: Our next question comes from Saree Boroditsky with Jeffries. Please state your question.
Suri Boroditsky: Hi, thanks for taking the question. Maybe just kind of moving to the margins. Industrial margins, obviously very solid in the quarter. If you talk about what drove some of that increase as it was higher than your normal incrementals on volume.
Suri Boroditsky: Well, I think some of it had to do with obviously they had revenue growth after a handful of quarters where we didn't have that and as the revenue came back, it came back on a lower expense base because of some of the actions that we took
Suri Boroditsky: with respect to the one great initiative that launched in the...
Suri Boroditsky: You know, late third quarter, early fourth quarter last year. So you put those two things together along with, you know, decent margin performance on the girls margin line. It really led to that really nice 100% incremental margin in the quarter. David, I would just say that although we have a pretty good
Profit margins across the large basket of the, David Littler, [inaudible]
Suri Boroditsky: Industrial Business, some of the, some of the particular areas that were strong in the quarter for us included automotive and within that specifically liquid finishing which tends to be a very
Good, incremental margin, product line for us in the...
Suri Boroditsky: Also, we saw uptick and demand in products like sanitary pumps.
Suri Boroditsky: and the areas of the markets that were particularly strong were drawing on particularly good product lines from us.
Speaker Change: That's helpful. And then maybe it's a larger picture. You mentioned the strength, I think, on the powder coating side, powder coating side, but would just be curious to see how customers are thinking about some of the larger project activity and investments. Thank you very much.
Speaker Change: Yeah, we had good growth in our game of powder business and Q1, I think they had growth pretty much across the board and a lot of the different product categories, but for sure I think that their manual and spare parts business really drove a lot of that increase. It wasn't so much project-based.
Speaker Change: As I sit here today, I haven't heard of any project cancellations from that team. I guess we'll see how things play out, but they're after a great start, and they have a lot of backlog from business that they booked in the last year. They feel pretty confident that they're going to have a nice year for us.
Thank you appreciate the color. Yep.
Brian Blair: Our next question comes from Bryan Blair with Oppenheimer. Please state your question.
Thank you. Want to guess? Yeah, for it.
Brian Blair: Now, something you could offer, you know, a little more detail, color at least on, you know, preverse post tariff implementation, order trends, you know, trust.
Brian Blair: Segments in Geography, I know that's a relatively short time period and to get a sense of underlying demand there's some, you know, smoothing effect and no doubt the playing field will change going forward to, you know, a lot of moving parts.
Brian Blair: Just curious if you would call anything out in terms of significant changes in trend relative to typical seasonality or, you know, your team's expected demands. I'll have this next.
Brian Blair: Yeah, I think what I would say is that the order intake in Q1 was, again, pretty consistent with what the revenue was for the business.
Brian Blair: So after that, you know, that six week number that I mentioned during the opening remarks of double digit most likely did include some of the
Brian Blair: Impact from customers that were, you know, trying to get in front of any tariffs that might apply to Graco products I don't know that it was that meaningful but for sure, you know, over the last
Brian Blair: Let's call the month of April . We haven't seen any real degradation in our order trends and we'll see how it plays out for the remainder of the year. But as a city right now, it doesn't feel like things are. But as a city right now, it doesn't feel like things are going to play out for the remainder of the year.
Brian Blair: are going to be dramatically different than maybe what we saw in Q1 in terms of order activity.
Speaker Change: Okay, appreciate the color. And maybe offer a good more of an update on crop integrations.
Speaker Change: Deal Performance, and nearly going, and then I respect, you know, early days here, but very interesting to know whether the distraction in introducing your crop to major North American customers and helping the brand establish more of a presence in the U.S. down.
Speaker Change: Yeah, it's early days, but our contractor team is really closely engaged with the Karab team to make sure that we capitalize on the relationship that Graco has with some of the larger customers that purchased that equipment. And I think here in the first few months, it's been more of the introductory meetings, getting people to know each other. [inaudible]
Speaker Change: Introducing the technology, making sure that customers understand some of the differences between Kharab and its competitors, and then also making sure that the customers understand that it is part of going out and that they can come to expect really good.
Speaker Change: Customers support, technical service, warranty, all those things that come along with purchasing a Graco product. So we're pretty happy with the progress as the team is making, as you said, it's early days.
Speaker Change: I'm not going to point to any, you know, specific victories at this point, but, uh,
Speaker Change: No surprises has probably been the way I would characterize our experience with the company so far.
Speaker Change: Everything that they said that they would do, they've done. Our teams are working really well together. The revenue is, you know, coming in the way that we expected it to and really retaining that revenue in year one in any deal is job one because there can be some disruption sometimes.
Speaker Change: What a company is acquired and we made it very clear to our team that
Speaker Change: you know, in terms of activities and where the top priority is, it's keep the revenue and let's see if we can grow it by establishing some of these incremental relationships that we know are going to be there over a long-term basis.
Speaker Change: I would just add that on maybe the less exciting side but important side of integration on the financial side, I think both Chris and I would say that for us, a relatively substantial size transaction, the
Speaker Change: We're building up the reporting and control mechanisms and we feel very good about what we've done so far and get really excellent support from our new colleagues at Korob. [inaudible]
All Sims are encouraging. Thanks again.
Speaker Change: Our next question comes from Jeff Hammond with Keeping Capital Markets. Please state your question.
Hey, good morning, everyone. Hi, Jeff.
Speaker Change: I appreciate the color on China and the focus there. Can you maybe just speak more broadly to...
You know, where else? [inaudible]
Speaker Change: You use as a big, sourcing countries and then vice versa where you're doing considerable export, where there'd be some retaliatory tariffs maybe not to the extent but still some tariffs.
David Liptak, Joseph Ritchie, David Liptak, Joseph Ritchie,
Speaker Change: Yeah, I'm sure that David and Chris could probably do a better job of giving you some details maybe after the call in terms of, you know, major sourcing but I would say that China is probably at the top of the list in terms of, you know, a country where we source, you know, the largest amount of materials outside of the United States. [inaudible]
and we did.
Speaker Change: Like every other company run the math, let's just say on this
Speaker Change: 10% tear off that all imports are being subject to now in the United States and I would just tell you it's...
Speaker Change: Very minimal, it's not a meaningful number for us, of course with those ratcheting up to
Speaker Change: Larger percentages that that math might change, but at least it's [inaudible]
Speaker Change: Far as things stay right now, when you think about us and the tariff impact on our cost of goods sold, you should really be thinking about China.
Speaker Change: And I would just add to that because I think that's exactly the point, maybe it also is an explaining thing.
The Way
Speaker Change: We talk about the impact of tariff is different perhaps than some of the other companies you follow and it goes to the fact that at least [inaudible]
Speaker Change: with where we stand today in the case of most the tariffs that really isn't the big story.
Speaker Change: The big story is what would happen to demand, certainly in a market like China, if the kinds of tariffs that...
Speaker Change: We're looking at stay in place and having for bed that became more than norm in some of the other places.
The top line would be the story.
Speaker Change: I think it's reflective of the fact that we have this 80, 80 plus percent.
U.S. Manufacturing Footprint.
Speaker Change: and as Mark touched on, even on the market demand side. Yes, there's some obvious downsides with potential tariffs from our trading partners. On the other hand, there's some upside two.
Speaker Change: Not just perhaps a made-in-the-USA preference but our ability to get products. Most of our products in the hands of our domestic customers without a lot of change in our product cost structure.
Speaker Change: Okay, that's, that's really helpful. Um, and then contractor, I think you mentioned, you know, the professional paint channel being weak and it's been, it's been choppy for some time. Just wondering what you're hearing from the customer base there. [inaudible]
Speaker Change: Just in general kind of given one uncertainty and just kind of the incremental weakness in housing here more recently.
Speaker Change: The overall number down for Contractor in North America, and then outside of their Europe , I think, is it?
Speaker Change: Region where we have seen some of the professional products pull back a little bit compared to a year ago.
Speaker Change: Obviously, we're well positioned, you know, to be there in the event that the housing data gets better, and we're hopeful that that happens. There's a ton of factors that go into that, but notwithstanding the things that we can't control like that, we do feel really good about and that's what we're going to do.
Speaker Change: The stuff that we have underway, that we can manage, and that is our new products that we're launching are good, strong relationships and trying to gain more market share from existing customers that we have and doing a good job of. [inaudible]
Speaker Change: maintaining those not only by maybe not moving our prices, but in a case like we're in right now but also continue to deliver world-class customer service and support, which I think really does resonate with people in times like this. [inaudible]
Speaker Change: So, who knows what's going to happen macro wise? I think that
Speaker Change: If it rolls out the way that everyone hopes it does, and we start building houses here again in North America and there's more housing activity where our business is really well positioned to capitalize on that and you know, both on the top line and on the bottom line.
Great. Thank you. Yep.
Our next question comes from Andrew Buscaglia with BMP Parabas X-Fingh, please state your question.
Hey, good morning, guys.
Andrew Hey: How you perceive that pricing power when you have certain customers, some large customers, a sure when Williams comes to mind, you know, just where you might not have as easy a time passing that pricing along. Can you talk about that dynamic?
Speaker Change: You know, just how you view your piping power specifically in that and that segment [inaudible]
Speaker Change: Yeah, I would probably just refer back to the, you know, a couple years ago when inflation was going crazy and we did have to go to those customers and ask for price increases along with, you know, virtually everyone else and a lot of those customers were also passing. [inaudible]
Speaker Change: Price increases off on their customers as well and they understood they get it they want to see the data we're transparent we share it with them. [inaudible]
So I really don't think we would have any [inaudible]
Speaker Change: Major Issues, if we had to do that, but I will say…
Speaker Change: that I also believe that if we don't have to do that because we are a U.S.-based company...
You know.
Speaker Change: That could put us in a really nice position with those customers too, you'll be the companies that are importing things and assembling them in the US and then needing to have
Speaker Change: Higher Price is because of the tariffs that they're facing. So we'll see how it plays out. I like where we are is a company. I like our position particularly with respect to this particular market. And again, we'll see how things play out. We'll see how things play out.
Captain.
Speaker Change: Yeah, okay. You know, you talk about some of your end markets. I'm wondering if you could specifically talk about your expansion markets, which grew for the first time in a while. And I think.
Speaker Change: Some of that may be a function of easy comps, but anything incrementally you're seeing there and I'm wondering if you're starting to see the effects of the reorganization helping, you know, drive some incremental demand going forward.
Yeah, it was really nice.
Speaker Change: Yeah, really a nice quarter for expansion markets. They were kind of up across the board, up 12 overall, America's up 9, Europe up 4, AP, you know, up butting.
Speaker Change: 29 or something like that. But in general, you know, good demand across all the different product groups, white night, our semiconductor business did start to rebound toward the end of last year. We saw some of those.
Speaker Change: Order's coming in the first quarter so that that really helped us out our environmental business also saw a decent growth and you know kind of a kind of a nice across the board. They did have a tough year last year. That's what you're supposed to do in the first quarter of the year.
Speaker Change: You know, some of that is an easy comp, but you know, nonetheless, I think it's doing well in terms of one Graco.
This is the one
Speaker Change: Group where, you know, we really put these businesses together and we asked the teams to do a couple things. One.
Speaker Change: you know, look for opportunities to leverage across the businesses that are in the portfolio.
Speaker Change: But also, look for some adjacent spaces for us to expand into through our M&A strategy, and so I would say that, you know, one Graco cost out initiative really didn't impact this group [inaudible]
Speaker Change: Most of that was impactful more on the industrial side of our business, which again, going back to the 100% incremental margins, I think it showed up there and then to a lesser extent on the contractors side. I would just add more tactically on one, Graco. These are early days. [inaudible]
Speaker Change: Product Line Activity, for example, a process distributor in Asia getting involved with the sealants in the heat service side of the business, a...
Speaker Change: Finishing Distributor, moving into some other product categories and so from a call at the
Speaker Change: working with channel partners that are already significant channel partners and and and leveraging that I think that we're putting some of the building blocks in place at the street level which of course one Graco has always been about long term growth.
Speaker Change: We've had some encouraging reports at the inside the point and I have an attachment for the liquid finishing business because I spend a lot of time in that business. [inaudible]
A couple of our sales guys.
Speaker Change: who go into large manufacturers, one just recently got out of a large agricultural equipment company, has sold a lot of finishing equipment in the factory, and was able to present a new automation product line to factory management.
Speaker Change: We don't have the order yet because big decisions like that in a factory take time, but we have several data points.
Speaker Change: and these are the on-the-ground and user activities that I'm pretty optimistic will drive real business for us that in the past, with our very neural focus, we just wouldn't have gotten.
Okay, that's great, Halloran. Thanks [inaudible]
Speaker Change: Our next question comes from Walter Liptak with Feeport Research. Please state your question.
So, hi, good morning. This is Walt Liptak with Seaport.
Morning Walt. Morning Walt.
Speaker Change: One to ask about the contractor business in Asia, the volume of plus one looked pretty good to me. I think that had been weaker. I wonder if you could talk about the trend there and was this the sort of a thing where you're doing more.
Speaker Change: Import into China. I'll finish products where you could have more of a headwind later in the year.
Speaker Change: Yeah, I think the APN general for contractor up 35%, but only 1% volume in price. And I think that that was really mostly driven by pretty good business over in Australia, New Zealand, you know, offsetting more of a sluggish environment in places like China.
Speaker Change: Okay, all right, great. And, you know, going back to the tariff issues, you know, when you guys think about, you know, some of the longer term mitigation things like reshoring or vertically integrating some of that China supply. Bye.
Speaker Change: You know, I guess one question is how much of that you know is electronics and things that you might not be able to duplicate that easily and have to resort to pricing. [inaudible]
Speaker Change: And then, you know, at what point do you have the confidence that, you know, this is the tariffs that we'll be living with for a while and you can make investments into, you know, your own vertical integration or into new suppliers.
Speaker Change: Yeah, I kind of like where we sit, you know, with our strong U.S.
Speaker Change: You know, avoid the terror so I think we sit pretty well there we do have factory in China as I mentioned so we are looking at ways and maybe we can utilize that a little bit more for the Chinese market and maybe perhaps for exporting more into the Asian Pacific region what we've done historically so [inaudible]
Speaker Change: Our teams are working pretty hard at that stuff. You know, for sure there's there's likely a subset of the cost of goods sold that is China right now and we're looking at ways that we can potentially find other other sources for those those types of components. [inaudible]
Speaker Change: And again, our teams are working really hard on that as well. I don't know what the terrif situation is going to be tomorrow, let alone three months from now or by the end of the year. But again, I think we're hopeful that the temperature is cool off a little bit and that
Speaker Change: The current level is the worst that is going to be out there and hopefully we see some progress and that would cause some of those activities I mentioned to maybe take a different form than what we're looking at right now.
Speaker Change: Okay, all right, great. And then maybe last one for me, you talked a little bit about April , and it sounds like April so far is okay, which is a little bit surprising to me, because I thought that you would have, you know, there was more of a pause. [inaudible]
Speaker Change: Going on, I wonder if there's anything anecdotally you can tell me about projects and timing or just how your customers are thinking about the projects that they've thought about doing for this year. [inaudible]
Speaker Change: Probably better than what some people would have expected it to be and we thought it was a relevant data point to share with you guys and we'll just see how things play out here for the next couple of months. I do think that in the end, you know, a lot of this has to do with confidence.
Speaker Change: And it's hard to get confident when you don't know where the world is going to tilt. So hopefully over the next month or so we get a little bit more consistency and people know the playing field that they're on and that I think will go a long way toward.
Speaker Change: Um, giving people, you know, more confidence than maybe what they've had in the last couple of weeks. Yeah, I think that's exactly right, you know, the the while we while we are certainly what you would consider to be a short cycle company
Speaker Change: Our customers, especially in the industrial area, are not short cycle buyers.
Speaker Change: The companies that maybe have been pulling trigger in March or April , I'm talking about large manufacturers, automotive.
Aerospace
in the U.S.
Speaker Change: It would be a little surprising to me if they just pulled the pin because of some disruptive news now.
Speaker Change: I guess the converse for that is as Mark alluded to, if we're playing with uncertainty or approximate levels of uncertainty like we felt like we've experienced the last month, that could have consequences, you know.
Speaker Change: Later in the year and next year, but it's a little too early to say that everything is shaken up.
Okay, great. Yeah, I appreciate that insight. Thank you
Speaker Change: Thank you, as a minor test, a question at this time. Please press star 111 or you touch on telephone. Our next question comes from Matt Summerville with D.A. Davidson, please state your question.
Matt Somerville: I'm sorry I just want to get back to the view that there may be a little bit of biohead activity. Are you seeing that uniformly across the businesses and product lines or is this relegated to maybe a few key areas inside the company that that sort of surge that you want to call up that you've seen in order activity in April thus far? And then I will follow up. [inaudible]
Matt Somerville: Yeah, no, I think it's kind of better cross the board, if I obviously are distributors in China, you know, with a love for us to
Matt Somerville: ship and product at the prices that were in existence before these tariffs kicked in and we made it really clear that surcharge is they're going to have to cover so and that that was not included in any of the order activity that I quoted earlier so I think it's kind of just across the board of course we are heading into the
Matt Somerville: The key buying season for the contractor business, so that can influence things a little bit too.
Got it, and then just as a follow-up
Speaker Change: Maybe a little bit more detailed commentary, obviously but Kora, a few months ago, but what you're seeing from an M&A standpoint and if
Speaker Change: The level of buyback activity we've seen year-to-date out of Graco is suggestive of anything having to do with with M&A, so talk about the formal actionability things like that.
Speaker Change: Yeah, I'll talk about the funnel. It would handle the share by the back. The funnel's good. I think we've really done a nice job, as I said before, building a pipeline of companies that we're very interested in acquiring. I think that there's activity happening all the time. I think our teams are...
Speaker Change: Much more engaged and understand how deploying capital into businesses like Korov can...
Speaker Change: helped make Graco and larger, more profitable, more meaningful companies for our customers and...
Speaker Change: I think that we're very encouraged by what we see in the pipeline, and of course, you know, M&A is always a...
Speaker Change: A bit of a wild card, but I feel really good about the prospects for us being able to not only.
Execute and...
You know, [inaudible]
Speaker Change: Transact Deals, but also our ability to deliver really good performance on the companies that we've acquired. So we're building that M&A muscle and it's exciting.
Speaker Change: David, share about that? Yeah, I think overall we also feel good about our recent Repurchase Activity during 2025 and the prices that we've acquired are Graco Shares.
Speaker Change: I think it's worth noting that considering the small number, relatively small number of shares purchased in 24 and in the current year, we've taken care of about three years of normal share creep.
Speaker Change: Certainly, though, with all of that said, we remain opportunistic as the mark of offers buyers attractive price points from time to time, as you all well know.
Speaker Change: Our strong financial position and proven cash generation capacity offers us the flexibility.
to aggressively invest in our business.
Speaker Change: To pursue acquisitions along the lines that Mark just talked about, as well as direct our cash flow towards our shareholders with both dividends and buybacks throughout the cycle.
Thank you guys [inaudible]
Thanks, Matt.
Speaker Change: If there are no further questions, I will now turn the conference over to Mark Sheahan.
Mark Sheahan: All right. Well, thank you all for participating. We're off to a good start here, Graco. We have great business and we're continuing to push with our two initiatives and look forward to chatting with you next quarter. Have a great day. Thank you.
Mark Sheahan: This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect and act.
Speaker Change: David Liptak, Joseph Ritchie, Andrew Buscaglia, Michael Halloran, Michael Halloran
The with the the and the Basement
David Liptak, Joseph Ritchie, Joseph Ritchie, Deane Dray, Matt Summerville, Mark Sheahan
Speaker Change: David Liptak, Joseph Ritchie, Michael Halloran, Michael Halloran, Michael Halloran, Michael Halloran
[music]
Speaker Change: Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. At the request of the company, we will open the conference up for questions and answers after the opening remarks from management.
Speaker Change: During this call, various remarks may be made by management about their expectations, plans and process for the future.
Speaker Change: These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the private security's litigation will form back [inaudible]
Speaker Change: Actual results made different materially from those indicated as a result of various risk factors including those identified in item 1a of the company's 2024 annual report on Form 10-K ey and in item 1a of the company's most recent quarterly report on Form 10-K ey
Speaker Change: Foreign 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 on future events.
Speaker Change: How an Alternate Conference over the Chris Knutson, Vice President, Controller, and Chief Accounting Officer.
Chris Knutson: Good morning everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary.
Chris Knutson: reported NetEarnings increased 2% to $124 million or 72 cents per diluted chair.
Chris Knutson: Excluding the impact of excess tax benefits from stock option exercises, adjusted non-gaft net earnings for $120 million or $0.70 per diluted share, an increase of 8%.
Chris Knutson: The gross margin rate decreased 150 basis points in the quarter. The recurring impact of acquisitions accounted for nearly 100 basis points of the decline. Strong price realization was not enough to offset higher product costs resulting from lower factory volume which accounted for the remaining decrease. [inaudible]
Chris Knutson: Operating expenses were flat in the quarter as incremental expenses from acquisitions of $10 million or a 7% increase in total expenses were offset by savings from the one Graco initiative and timing of stock based compensation expense.
Chris Knutson: Operating earnings increased $11 million or 8% during the quarter on increased sales volume.
Chris Knutson: Operating earnings as a percent of sales was 27% for the quarter which is consistent with last year. Contractor segment operating margin rate for the quarter was 24% compared to 29% for the same quarter last year at a client of 5% points.
Chris Knutson: The acquisition of Kharab decreased the contractor operating margin rate by three percentage points with the remaining decline due primarily to lower sales and factory volume.
Chris Knutson: Interest and other were flat in the quarter. During the quarter, we recognized the gain on the sale of the former manufacturing and distribution facility in Switzerland of $5 million. This gain was offset by currency exchange losses and lower interest income. [inaudible]
Chris Knutson: The adjusted effective tax rate was 20.5%, which is consistent with our expected full-year tax rate of approximately 19.5% to 20.5% on an as adjusted basis.
Chris Knutson: Cash provided by operations totaled $125 million dollars and increase of $6 million dollars from last year. Cash provided by operations as a percent of adjusted net earnings with 104 percent.
Chris Knutson: Significant year-to-date use of cash include share repurchases of $238 million, dividends of $47 million, acquisition adjustments of $10 million, and capitol expenditures of $11 million. These cash uses were offset by share issuances of $28 million. $1 million.
Chris Knutson: We repurchased 2.8 million shares totaling $238 million during the first quarter of the year.
Chris Knutson: We continue to re-purchase shares in the first weeks of April and as of market closed yesterday, we have re-purchased 4.4 million shares for nearly $360 million here-to-date
Chris Knutson: Based on this activity, we anticipate the average diluted share is outstanding for the full year 2025 to be approximately 170 million shares.