Q2 2025 Graco Inc Earnings Call

Unknown Executive: If you wish to access the replay for this call, you may do so by visiting the company website at www.graco.com.

Unknown Executive: Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player.

Good morning and welcome to the second 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.graco.com.

Unknown Executive: At the request of the company, we will open the conference up for questions and answers after their 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 Securities Litigation Reform Act. Actual results may differ 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 and in Item 1A of the company's most recent quarterly report on Form 10-Q.

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.

During this call various remarks may be made by management about their expectations plans and prospects for the future.

These remarks constitute for looking statements for the purposes of the Safe Harbor, provisions of the private Securities. Litigation Reform Act,

Unknown Executive: For more information, visit www.fema.gov These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forelooking statements reflect management's current views and speak only as of the time they are made.

Actual results May differ materially from those indicated as a result of various risk factors including those in identified in item 1 a of the company's 2024 annual report on form 10K and an item 1, a of the company's most recent quarterly report on form 10 Q.

Unknown Executive: The company undertakes no obligation to update these statements in light of new information or future events.

Christopher Knutson: I'll now turn the conference over to Chris Knutson, Vice President, Controller, and Chief Accounting Officer. Good morning everyone, and thank you for joining our call.

Gov for looking statements, reflect Management's, current views and speak only. As of the time, they are made the company owner takes no obligation to update the these statements in light of new information or future events.

I'll now turn the conference over to Chris Ken, vice president controller and chief accounting officer.

Mark Sheahan: I'm here today with Mark Sheahan and David Lowe.

Christopher Knutson: I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Graco reported second quarter sales of $572 million, an increase of 3% from the second quarter of last year. Excluding acquisitions, which contributed 6% growth, sales declined 3%. Currency translation had no effect in the quarter. Reported net earnings decreased 4% to $128 million, or 76 cents per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $127 million, or 75 cents per diluted share, a decrease of 3%. The gross margin rate decreased 200 basis points in the quarter.

Speaker Change: Good morning, everyone. And thank you for joining our call. I'm here today with Mark shien and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to mark for additional commentary.

Speaker Change: Yesterday grato reported second quarter sales of 572 million and increase of 3%. From the second quarter of last year, excluding Acquisitions which contributed 6% growth sales declined 3%.

Speaker Change: Currency translation had no effect in the quarter.

Speaker Change: Reported net earnings decreased 4% to 128 million or 76 cents per diluted share. Excluding the impact of excess tax benefits from stock option exercises. Adjusted non-gaap net earnings were 127 million or 75 cents per diluted. Share a decrease of 3%.

Christopher Knutson: The impact of acquisitions accounted for nearly 80 basis points of the decline, which will continue for the remainder of the year. In addition, tariffs increased $4 million in the quarter, resulting in an additional 80 basis point decline. Price realization was not enough to offset higher product costs, resulting from lower factory volume, tariffs, and unfavorable channel and product mix in the quarter. Operating expenses increased 2% in the quarter, driven by incremental expenses from acquisitions of $9 million or $7.5 million. Excluding Expenses of Acquired Operations, Operating Expenses declined $7,000,000.00 or 5% on savings from the One Graco Initiative, lower sales and earnings-based incentives, and timing of stock-based compensation.

Speaker Change: The gross margin rate, decreased 200 basis points in the quarter, the impact of Acquisitions accounted for nearly 80 basis, points of the decline, which will continue for the remainder of the year. In addition, tariffs increased 4 million dollars in the quarter, resulting in an additional 80 basis point decline.

Speaker Change: Price realization was not enough to offset higher product costs, resulting from lower Factory, volume tariffs and unfavorable Channel and product mix in the quarter.

Speaker Change: Operating expenses increased 2% in a quarter driven by incremental expenses from Acquisitions of 9 million or 7%.

Christopher Knutson: Operating earnings decreased $4 million or 2% during the quarter due to decreased factory volume and the effect of tariffs. Operating earnings as a percent of sales were 28% for the quarter or one percentage point lower than the same period last year. Contractor segment operating margin rate per quarter was 26% compared to 31% for the same quarter last year. A decline of 5%... The acquisition of Probs decreased the contractor operating margin rate by 2 percentage points, with the remaining decline due primarily to higher tariffs and lower factory volume. interest and other decreased $3 million in the quarter.

Speaker Change: Excluding expenses of acquired operations, operating expenses declined, 7 million or 5% on savings from the 1 grow initiative, Laura sales, and earnings based incentives and timing of stock based compensation expense.

Speaker Change: Operating earnings decreased $4 million or 2% during the quarter due to decreased Factory volume and the effect of tariffs operating earnings as a percent of sales for 28% for the quarter or 1, percentage Point lower than the same period last year.

Speaker Change: Contractor segment, operating margin rate for the quarter was 26% compared to 31% for the same quarter last year, a decline of 5 percentage points, the acquisition of carbs. Decreased the contractor operating margin rate by 2 percentage points. With the remaining decline due primarily to higher tariffs and lower Factory volume.

Christopher Knutson: The volatility of the US dollar, especially against European currencies, resulted in exchange losses on net liabilities of certain foreign operations of approximately $5 million for the quarter, which we don't expect to continue. The adjusted effective tax rate was 20%, which is consistent with our expected full year tax rate of approximately 19.5% to 20.5% on an as-adjusted basis. Cash provided by operations totaled $308 million for the year, an increase of $50 million for 19... Improved inventory management through consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the Cash flow from operations, less capital expenditures, increased $93 million or 51% for the year-to-date.

Speaker Change: Interest in other decreased, 3 million in the quarter. The volatility of the US dollar is specially against European currencies. Resulted in exchange losses on net liabilities of certain foreign operations of approximately 5 million dollars for the quarter, which we don't expect to continue.

Speaker Change: The adjusted effective tax rate was 20%, which is consistent with our expected full year tax rate of approximately 19.5% to 20 and a half percent on an as adjusted basis.

Speaker Change: Cash provided by operations, total of 308 million for the year and increase of fifty million dollars or 19%.

Speaker Change: Improved Inventory management from consolidating operations under 1 Graco and lower sales and earnings based incentive payments, drove the increase.

Christopher Knutson: Cash provided by operations as a percentage of adjusted net earnings was 144% for the quarter and 125% for the year to come. Significant year-to-date uses of cash include share repurchases of 4.4 million shares totaling $361 million, dividends of $92 million, and capital expenditures of $30 million. These cash uses were offset by share issuances of $25 million.

Speaker Change: Cash flow from operations less Capital expenditures, increased 93 million or 51% for the year to date.

Speaker Change: Cash provided by operations, as our percentage of adjusted net earnings was 144% for the quarter and 125% for the year to date.

Christopher 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 a 1% favorable impact on net sales and no impact on net earnings for the full year.

Speaker Change: Significant. Year-to-date uses of cash includes share with purchases of 4.4 million shares, totaling 361 million, dividends of 92 million, and capital expenditures of $30 million. These cache uses were offset by shared issuances of 25 million.

Speaker Change: A few comments as we look forward to the rest of the year.

Christopher Knutson: Unallocated corporate expenses are projected to be $37 to $40 million for the full year.

Speaker Change: Based on current exchange races rates, assuming the same volumes mix of products. And mix of Business, by currency, as in 2024 movement. In foreign currencies would have a 1% favorable impact on net sales and no impact on net earnings for the full year.

Christopher Knutson: And finally, we expect capital expenditures to be approximately $60 to $70 million in 2025.

Speaker Change: Unallocated corporate expenses are projected to be 37 to 400 million for the full year.

Mark Sheahan: I'll now turn the call over to Mark for further segment and regional comments.

Speaker Change: And finally, we expect Capital expenditures to be approximately 60 to 70 million in 2025.

Mark Sheahan: Thank you, Chris. Good morning, everyone. All my comments will be on an organic constant currency basis. Overall sales were up 3% in the second quarter, including a 6% contribution from Korob, offsetting an organic revenue decline of 3%. Contractor accounted for more than 80% of the organic revenue decline in the quarter, with the Americas being especially weak when compared to last year's strong second quarter. EMEA in Asia Pacific grew in all segments, including the semiconductor market and in China, which were depressed for most of last year. The current trade environment is still uncertain, causing many end users to delay project decisions and take a wait-and-see approach until trade negotiations and the tariff landscape is clearer.

Mark Shien: I'll now turn the call over to mark for further segment and Regional commentary.

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

Speaker Change: Overall sales are up, 3% in the second quarter including a 6% contribution from Korea, offsetting an organic Revenue decline of 3%.

Mark Shien: Contractor accounted for more than 80% of the organic Revenue decline in the quarter.

Mark Shien: With the Americas, being especially weak, when compared to last year's strong, second quarter.

Mark Shien: the semiconductor market and in China, which were depressed for most of last year

Mark Sheahan: During the quarter, incremental costs related to tariffs were about $4 million, affecting EPS by two cents. To offset the impact from tariffs, we have announced targeted price increases beginning in September. These pricing actions are focused on key markets and geographies most impacted by tariffs, and are in addition to our normal beginning of the year price increases. We expect that these pricing adjustments, along with our mitigation efforts of product redesign, and secondary vendor sourcing will offset most of the full year impact from tariffs as they exist today. Incoming order activity remains steady during the quarter compared to the full year and consistent with billing activity as backlogs are still at normal levels across all segments.

Mark Shien: The current trade environment is still uncertain, causing many end-users to delay project decisions and take a wait and see approach until trade negotiations and the Tariff landscape is clear.

Mark Shien: During the quarter incremental, costs related to terrorists were about 4 million dollars affecting EPS by 2 cents.

Mark Shien: To offset the impact from tariffs, we have announced targeted, pricing in September.

Mark Shien: These pricing actions are focused on key markets and geographies most impacted by tariffs.

Mark Shien: and are, in addition to our normal beginning of the year price increases

Mark Shien: We expect that these pricing adjustments along with our mitigation efforts of product redesign and secondary. Vendor sourcing will offset most of the full year impact from tariffs as they exist today.

Mark Sheahan: The past six weeks rates have also been consistent with the full year run rate. The Home Center DIY channel has been our biggest challenge in the first half of the year, down low double digits. However, the current six week run rate has stabilized and exceeds the run rate of the second half of last year.

Mark Shien: In Cumming order, activity, remains steady during the quarter compared to the full year. And consistent with billing activity is backlogs are still at normal levels across all segments.

Mark Shien: The past 6 weeks, rates have also been consistent with the full year, run rate.

Mark Shien: The Home Center DIY channel has been our biggest challenge in the first half of the Year down low double digits. However, the current 6 week run rate has stabilized and exceeds the Run rate of the second half of last year.

Mark Sheahan: Now turning to some commentary on our segments and regions. Contractor segment sales declined 5% in the quarter. North America was soft in core markets as contractors delayed new investments due to ongoing housing affordability issues. and a smaller project pipeline. The Home Center Channel struggled from reduced foot traffic and reduced DIY demand in the Americas versus last year's second quarter and year-to-date and year-end results, year-to-date results. This quarter was the most challenging comparable for contractor as the second quarter of 2024 had channel fill related to significant new product launches resulting from delays, which we discussed last year.

Mark Shien: now, turning to some commentary on our segments and regions

Mark Shien: Contractor segment. Sales declined 5% in the quarter. North America was soft in core markets as contractors. Delayed new Investments due to ongoing housing affordability issues.

Mark Shien: And a smaller project pipeline.

Mark Shien: The Home Center Channel struggled from reduced foot, traffic and reduced DIY, demand in the Americas. Versus last year's second quarter and year to date and year-end results year to-day results.

Mark Sheahan: We are expecting a stronger second half with easier comparisons, the effect of our pricing actions, and our upcoming new product releases. The industrial segment declined 1% with growth in EMEA and Asia Pacific not enough to offset a decline in the Americas. Harder finishing system sales were strong with increased quoting activity and improved performance in the Americas and Asia Pacific regions. This increase was not enough to offset to fully offset declines in the other industrial product categories in the Americas. In several markets, end users are cautious and waiting to see the result of ongoing trade negotiations.

Mark Shien: This quarter was the most challenging comparable for contractor as a second quarter of 2024 had Channel Phil related to significant new product launches resulting from delays which we discussed last year.

Mark Shien: We are expecting a stronger second half with easier comparisons. The effect of our pricing actions and our upcoming new product releases.

Mark Shien: The industrial segment declined. 1% with growth in AA and asia-pacific, not enough to offset the decline in the Americas.

Powder finishing system, sales were strong with increased quoting activity and improved performance in the Americas and asia-pacific regions.

Mark Shien: This increase was not enough to offset to fully offset declines in the other industrial product categories in the Americas.

Mark Sheahan: Quoting activity worldwide is still strong, but we expect end user caution will continue until greater clarity exists in the global trade environment.

Mark Shien: And several markets end users are cautious in waiting to see the result of ongoing trade negotiations.

Mark Shien: Quoting activity worldwide is still strong, but we expect end-user caution will continue until greater Clarity exists in the global trade environment.

Mark Sheahan: Last week, we announced the acquisition of ColorService, a global manufacturer of specialized automatic precision dosing systems for powders and liquids. Known for their expertise in gravimetric dosing technology, the company delivers precise weight-based material measurements that improve consistency and efficiency in production across various industries including textiles, rubber, cosmetics, plastics, and food. Headquartered in Italy, Color Service employs approximately 140 people worldwide, and an annual revenue of 34 million euros in 2024.

Last week, we announced the acquisition of color service. A global manufacturer of specialized automatic Precision, dosing systems for powders and liquids.

Mark Shien: Known for their expertise and grab a metric dosing technology. The company delivers precise, weight-based material measurements that improved consistency and efficiency in production across various Industries, including textiles rubber Cosmetics Plastics and food.

Mark Sheahan: We expect the transaction to close in the third quarter and the business will be part of our Gamma Powder division, which is part of the industrial segment. Expansion markets were down 3% for the second quarter. As the positive momentum in the semiconductor market, which we started seeing at the end of last year, continued in the quarter. However, this was offset by a decline in the environmental business.

Mark Shien: Headquartered in Italy color service employees, approximately 140 people worldwide and an annual revenue of 34 million euros in 2024.

Mark Shien: We expect a transaction to close in the third quarter and the business will be part of our game of powder division which is part of the industrial segment.

Expansion markets were down, 3% for the second quarter.

Mark Shien: As the positive momentum in the semiconductor Market, which we started seeing at the end of last year. Continued in the quarter.

Mark Shien: However, this was offset by a decline in the environmental business.

Mark Sheahan: Moving on to our outlook. Despite headwinds from uncertain global trade environment, and the soft North American construction market, which led to our organic revenue decline in the quarter, on a full year basis, our organic revenue is flat. Our consistent incoming order rates combined with pricing actions and an easier comparable in the contractor gives us confidence as we enter the back half of the year. Accordingly, we are keeping our 2025 revenue guidance of low single digit sales on an organic constant currency basis.

Mark Shien: Moving on to our Outlook.

Mark Shien: Despite headwinds from uncertain global trade environment and the soft North American Construction Market, which led to our organic Revenue decline in the quarter on a full year basis. Our organic revenue is flat

Our consistent, incoming order rates combined with pricing actions and an easier comparable in the contractor. Gives us confidence. As we enter the back half of the year.

Mark Sheahan: That concludes our prepared remarks.

Accordingly. We are keeping our 2025 Revenue. Guidance of low single digits sales on an organic constant currency basis.

Unknown Executive: Shannon, we're ready for questions. Thank you.

Mark Shien: That concludes our repair remarks Shannon. We're ready for questions?

Unknown Executive: The question and answer session will begin at this time. To ask a question, please press star 1 when on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Your question will be taken in the order that it is received. Please stand by for your first question.

Thank you. The question and answer session will begin at this. Time to ask a question. Please, press star 1 on your telephone and wait for your name to be announced.

Mark Shien: Please press star 1 again.

Mark Shien: Your questions will be taken in the order that it is received, please stand by for your first question.

Deane Dray: Our first question comes from Deane Dray with RBC Capital Markets. Please state your question. Thank you. Good morning, everyone. Hi, Dean. Good morning, Dean.

Speaker Change: our first question comes from Dean Dre, with RBC Capital markets, please State your question,

Speaker Change: thank you. Good morning everyone.

Mark Sheahan: Hey, can we start with the price increase announcement? And this is far, far from being as seismic as it was back in 2022. And you did the first time ever, you know, entry year price increase. And this one seems certainly warranted given the tariff pressures. Can you just, you know, how is this price increase different? Can you size it? And anything about the implementation? And is this all price, any surcharges, and any color there would be great. Yeah, great. Thanks for the question.

Speaker Change: Hey Dean. Good morning, morning Dean. Hey, can we start with the um price increase announcement, and this is far at far from being a seismic as it was back in 2022. When you did the first time ever, you know, entry year price, increase and this 1 seems certainly warranted given that the Tariff pressures. Um, can you just, you know, how is this price, increase different? Um, can you size it, uh, and anything about the implementation and is this all price, any search charges, um, and any caller there would be great. Thanks.

Mark Sheahan: I think when we spoke last, we said we wanted to be patient when it came to what we wanted to do with respect to the tariffs. And as you know, things played out, I think that patience was smart, because the overall impact got, you know, less and less as facts came out and things got clarified. So nonetheless, we did start to see some of the impact hitting us. And we were also watching what was happening in the end markets that we participate in and seeing what was happening with a number of the competitors who are also raising prices.

Yeah great. Uh thanks for the question. Um I think when we spoke last we said we wanted to be patient when it came to what we wanted to do with respect to the tariffs. And as you know things played out I think that patients was smart uh because the overall impact got you know, less and less as facts came out and things got clarified. So nonetheless we did start to see some of the impact hitting us and we were also watching what was happening in the end markets that we participate in and seeing what was happening with the number of the competitors.

Mark Sheahan: So that gave us the opportunity and the confidence to know that we could also do the same thing. We are not doing anything other than trying to offset the pressure that we've got in our P&L. I characterize the increases as targeted, and, you know, targeted at the geographies and the areas where we're seeing the most input cost pain. And also, I characterize them as sort of, you know, low single digit type increases and in a few select areas within the business that will offset the tariff pressure that we see for the rest of the year, provided that the landscape stays, you know, the way that it is.

Speaker Change: Um, who are also raising prices, so that gave us, uh, the opportunity and the confidence to know that. Um, we could also do the same thing. Um, we are not doing anything other than trying to offset the pressure that we've got in our p&l. Um, I characterize the increases as targeted, um, and you know, targeted at the geographies in the areas where we're seeing the most, uh, input cost pain and also, um, I characterize them as sort of, you know, low single digit type increases in in a few select areas within the business that will offset the terror pressure that we see for the rest of the year. Um, provided that the landscape. Um stays you know, the way that it is

Unknown Executive: That's real helpful.

David Lowe: And then for David, free cash flow was one of the bright spots in the quarter, just in terms of conversion.

David Lowe: Was there anything, any one timers in there at all? Or just, you know, what do you attribute the strength of the conversion this quarter? Well, thank you. We called that out because we thought it was a pretty solid sign as to the cash generation capacity of the company. So thanks for asking the question. I would say our attention to inventory continues to contribute to what you really started to see last year with a focus on, you know, improving turns, which are, you know, less than world class in in the industrial sphere. And it was another good quarter there.

Speaker Change: That's real helpful. And then for David um, free cash flow was 1 of the bright spots in the quarter, just in terms of conversion. Was there anything, uh, any 1 timers in there at all, or just? Yeah. What do you attribute? The um, the the strength of the conversion of this quarter?

Speaker Change: Well, thank you. Um, yeah, we uh, we we call that out because, uh, we thought it was uh, ah, ah ah, pretty solid sign as to the cash generation capacity of the company. So, thanks for asking the question. I would say, our attention to inventory, uh, continues to uh contribute to uh what you really started to see last year with a uh, focus on.

David Lowe: And of course, you know, certain aspects of our One Graco initiative contributes greater efficiency. focus on expanding centers of excellence, which will make our manufacturing operation over time more efficient. Also, in small steps, are helping our cash conversions. So I'd like to think that what we saw here is not one time. Of course, our business does have a seasonal component, the contractor side of it. So we haven't done anything about that, but we feel very good about the future cash generation capacity. That's great.

Speaker Change: On, uh, you know, improving turns, which are, uh, you know, less than world class in in the industrial sphere. And it was another good quarter there. And of course, um, you know, certain aspects of our, uh, 1 Graco initiative, uh, contributes, uh, greater efficiency. Uh, um,

Focus on uh uh, expanding centers of excellence, which will make our manufacturing operation over time. More efficient, uh, also uh, in in in small steps are helping our cash conversion. So I'd like to think that what we, what we saw here, uh, is not 1 time. Of course, our business does have a seasonal component, the contractor's side of it. So, uh, we haven't done anything about that. But uh, you know, we feel very good about the uh uh future cash, generation capacity of the company.

David Lowe: Just to clarify, when you say better progress in inventory, what's interesting this quarter, we've seen a number of companies actually adding inventory to through a pre buy or some buffer inventory to kind of smooth out with all the tariff noise, but you're actually making progress and reducing inventory. Yeah, I mean, we took the I mean, again, there are some things that we absolutely need to have. And we've been aggressive where we've needed to be aggressive on the sourcing side. But But overall, to some degree, we sort of significantly expanded the raw material that we were carrying from the You know, the whole sourcing escapade of a couple years ago, and for the most part, we've been comfortable working that down to what would probably, you would say, is more normalized levels because we've got more confidence in our supply chain.

That's great. Just to clarify when you say uh better progress in inventory, what's interesting? This quarter we've seen a number of companies. Actually adding inventory, either through a pre buy or some buffer inventory, to kind of smooth out with all the Tariff noise, but you're actually making progress and reducing inventory.

Speaker Change: Yeah, I mean we took advantage. I mean again there are some things that we absolutely need to have and we've been aggressive where we've needed to be aggressive on the sourcing side. But but overall, uh, to some degree, um, we um, um,

Speaker Change: sort of significantly expanded the the the, the raw material that we were carrying, uh, from the, uh,

Speaker Change: Uh, uh, levels because we've got more confidence in our uh, supply chain.

Unknown Executive: Great caller, thank you. Thank you.

Speaker Change: Great caller. Thank you.

Michael Halloran: Our next question comes from Mike Halloran with Baird. Please state your question. Hi, good morning, everyone.

Speaker Change: Thank you. Our next question comes from Mike howerin with beard. Please State your question.

Unknown Executive: This is Pezan for Mike. Wanted to follow up on the color service acquisition. Could you maybe tell us a little bit about how the acquisition came about? You know, you mentioned in the press release that it opened up new opportunities. Can you maybe discuss the opportunity and how you see it fitting into the portfolio with a little more color, please? Yeah, Pez, thanks for the question. So actually, a few years ago, when we started to think more about external growth, in addition to our organic initiatives, we really challenged our teams to take a look not only at their existing portfolios, but other adjacent technologies that might be interesting to them.

Speaker Change: Hi, good morning everyone. This is Paden for Mike wanted to follow up on the color service acquisition. Um, could you maybe tell us a little bit about how the acquisition came about you know, you you mentioned in the press release that it opened up new opportunities. Can you maybe discuss the opportunity and how you see uh if fitting into the portfolio with a little more color, please

Mark Sheahan: And our powder team, led by Claudio Marengo, the GAMA group, they really did a nice job of looking at some opportunities that, you know, aren't necessarily powder paint, but the technologies that they understand, and they really surface this area as a potential target area for us. So that led to some discussions with the ownership and ultimately resulted in the acquisition. What we like about it is the growth rates have been pretty good, this business, you know, maybe slightly better than what we've seen in the legacy Graco businesses, at least over the last five years. It's technology that we understand, it's dosing, it's measuring, it's gravimetric measuring, which we understand and we know about.

Yeah, Pez. Thanks for the question. So uh, actually a few years ago when we started to think more about external growth and addition to our organic initiatives, we really challenged our teams to take a look not only at their existing portfolios but other adjacent technologies that might be interesting to them and our powder team uh led by Claudia Mingo the game of the game of girl. They really did a nice job of of looking at some opportunities that, you know, aren't necessarily powder paint but they technologies that they understand and they really surface. This area as a potential Target area for us so that led to some discussions with the ownership and um ultimately resulted in the acquisition, what we like about it is, you know, the growth rates have been pretty good uh this business. Um you know maybe slightly better than what we've seen in the Legacy gal businesses at least over the last 5 years.

Mark Sheahan: The location is good for us because it's closely located to our SAT business. in Italy, and the leadership team of SAT will actually be working very closely with color services leadership team to make sure that we capitalize on any integration possibilities opportunities to help them with operations production be more efficient. So it was really a combination of a lot of different things that caused us to get excited about this. They have some big customers too, which is nice. You know, they're involved with all the tire manufacturers, they get involved in the textile industry, cosmetics, so it does broaden out our portfolio a little bit beyond what we have seen in the past.

Speaker Change: Um, it's technology that we understand. Um, it's dosing. Um, it's measuring. Um, it's grabbed a metric measuring, which we, we understand and we we know about, um, the location is good for us because it's closely located to our SAT business.

Speaker Change: In Italy. And, um, the leadership team of sat will actually be working very closely with color Services leadership team to, um, make sure that we capitalize on any integration possibilities opportunities, to help them with operations, production, be more efficient. Um, so it was really a combination of a lot of different things that caused us to get excited about this. They have some big customers too, which is nice, um, you know, they're involved with all the tire, manufacturers, they get involved in. Textile industry, um Cosmetics. So it does broaden out our portfolio. A little bit beyond what we have, uh, seen in the past.

Unknown Executive: Great, no, that's helpful.

Mark Sheahan: And then if we switch gears a little bit, you know, if we look at your core kind of construction market, Um, you know, what what are you looking for to feel like your customers are gaining more confidence? Um, you know, particularly in the DIY and home center area where maybe U.S. consumers have been a little bit stressed and housing markets been tight. Um, you know, at this point, what do you think is the green shoot that that's necessary to get some of these? Um These projects moving. Well, it's got to be affordability, right? Obviously, a rate reduction would help quite a bit as long as the prices don't go up when the rates go down.

Speaker Change: Great. Now, that's helpful. Um,

Speaker Change: and then if we switch gears a little bit, you know, if we look at your core kind of construction markets,

Speaker Change: Um, you know what? What are you looking for to to feel like your customers are gaining more confidence.

Speaker Change: Um, you know, particularly in the DIY and Home Center area, where maybe us consumers have been a little bit stressed and housing Market's been tight. Um, you know, at this point what do you think is the green shoe that that it's necessary to get some of these?

Speaker Change: um,

Speaker Change: These projects moving.

Mark Sheahan: Unfortunately, when the rates went up, the prices really didn't go down as you would have expected them. So affordability is still the biggest challenge I see in the in the new construction market that we have. And that that impacts, you know, activity, obviously, it also impacts our spray foam business to a certain extent, because a lot of the new builds are using that technology in there. So I think any major shift in affordability would be very much appreciative. I know it's on the radar. We've read a lot of different reports, and we've been listening to some of the commentary coming out of Washington.

Mark Sheahan: So I think that they know that this is an issue. There are still a number of people that are locked in at low mortgage rates, and they just can't move even though they would like to move. So if you look at number of homes being sold this year, and last year, it's extremely low compared to what you would expect in a normal economic environment in a country the size of the United States. So there's there's quite a bit of pent up demand, I would say, that is yet to be unleashed, hopefully, hopefully once once the affordability gets a little bit better shape.

Well it's got to be affordability, right? Um, obviously a rate reduction would help quite a bit as long as the prices don't go up when the rates go down. Unfortunately, when the rates went up, uh the price really didn't go down as you would have expected them. So, affordability is still the biggest challenge. I I see in the, in the new construction Market, uh, that we have and that, that impacts, you know, activity. Obviously, it also impacts our spray foam business to a certain extent, because a lot of the new builds are using that technology in there. So I think, um, any major shift in affordability would be very much appreciated. I know it's on the radar. Um, we've read a lot of different reports and we've been listening to some of the commentary coming out of Washington. So I I think that they know that this is an issue. Um there are still a number of people that are locked in at low mortgage rates and they just can't move even though they would like to move. Um, so if you look at the number of homes being sold this year and last year,

Speaker Change: Here. Um it's extremely low compared to what you would expect in a normal economic environment um in a country, the size of of the United States. So there's there's quite a bit of pent-up demand. I would say that is yet to be Unleashed. Uh, hopefully, hopefully once um, once the affordability gets a little bit and better shape,

Unknown Executive: Thanks for the color, I'll pass it on. Thank you.

For the color. I'll pass it on.

Saree Boroditsky: Our next question comes from Saree Boroditsky with Jeffreys. Please state your question. Hi, thanks for taking the question. Maybe just first building on the price increase, I believe the last time you did a mid year price increase, you took less price in the following year. So would you think about something similar as we think about 2026? And then do you take any more pricing on the industrial side versus contractor given a more consumer focus? Yeah, I think that we would expect that we'll have a normal price increase at the beginning of next year to answer the first question.

Thank you. Our next question comes from sorry board. Ditki with Jeffrey's, please State your question.

Speaker Change: um, maybe just first building on

Speaker Change: Time you did a mid-year price increase. You took less price in the following year. So, would you think about something similar as we think about 2026? And then, do you take any more pricing on the industrial side versus contractor? Giving them more consumer Focus.

Mark Sheahan: And in terms of where we targeted, how we targeted, you know, both groups participated in the price increase at different levels, both contractor and industrial and expansion markets, I should add, this was something that we did across all of our business. And then maybe going on about the uncertainty that we're seeing, but some of the other markets, could you provide some more detail on what you're seeing from customer spending by ed market in the industrial segment? And do you expect any changes from some of the incentives with the one big beautiful bill? I think the latter question is big picture, long term, clarity on tax rates, favorable treatment on investments and related things in manufacturing.

Speaker Change: That we would expect that we'll have a normal price increase uh, at the beginning of next year, to answer the first question and in terms of where we targeted, how we targeted. Um, you know, both groups participated in, in the price increase at different levels, both contractor and Industrial and expansion markets, I should add. Um, this was something that we did across all of our business units.

Speaker Change: Maybe, um,

Speaker Change: More detail on what you're seeing from customer spending by Ed market and the industrial segment. And do you expect any changes from some of the incentives with the 1? Big beautiful bill.

Speaker Change: Um, uh, I think the latter, uh, question is Big Picture long-term um, Clarity on um, Clarity on tax rates. Uh,

Mark Sheahan: Over time, be real positive for Graco, reshoring, onshoring, relocation is good for our business. You know, I would say that if you're in the first part of your question, we could we could talk at length, but just to give you a flavor that. Our teams, I'll touch on a couple of specific markets, but pipelines are good, quotations active, some end users are more willing to pull the trigger when there is this cloud of uncertainty that Mark talked about than others. If I had to generalize on a global basis, I'll name certainly markets that at the moment have some positive momentum, and then some that are a little bit softer.

Speaker Change: favorable, uh, treatment on investments and and, and related things in manufacturing will

Speaker Change: Over time be a real positive for Graco, reshoring onshoring uh relocation is good for our business, you know. I would say that if you're the first part of your question we could we could talk at length but just to give you a flavor that um

Mark Sheahan: The automotive OEM market is... positive, especially the area around EV where battery activity has improved, at least recently. They tend to be large orders, so the business is lumpy. Also the automotive component supplier market is strong, especially in the Asia-Pacific market. Our vehicle service business, the dealer lubrication business has been strong, and Mark touched on the strength of powder equipment. That shows up in the architectural profile market, agricultural equipment, and also other automotive components. So we see markets being active and people pulling the pin. I would say the slower areas reflecting what we know about the business.

Speaker Change: Our teams, I'll touch on a couple of specific markets but, uh, uh, pipelines are good, uh, quotations. Active, uh, some end users are more willing to pull the trigger. When there is this, uh, cloud of uncertainty, uh, that Mark talked about, uh, than others. If I had to generalize on a global basis, I'll name certainly markets that at the moment. Have some positive momentum. Uh, and then, uh, some that are a little bit softer, uh, the automotive, uh, OEM Market is, um,

Um positive uh especially uh the area around EV uh where battery activity has uh improved uh, at least recently, they tend to be large orders. So the business is Lumpy also the automotive component supplier Market is strong, uh, especially in the asia-pacific market, our vehicle service business, the dealer uh, lubrication business has been strong and um, Mark touched on the strength of powder equipment, uh, that shows up in the architectural profile Market, agricultural equipment, and also other Automotive components.

Mark Sheahan: There are regional differences, but solar here in North America is quite soft. The transportation market, especially the truck OEMs, really have been significantly slower than we have seen. Mining, which affects our lubrication product line, we've seen a slowdown with the large customers that sell equipment to the big mines. Aerospace has sort of entered a soft patch, and no surprise, in light of the contractor discussion we had, markets like window and door and wood products are soft. So yeah, I would just say that with all that good color that David provided, you got some ups, you got some downs, but in net net terms, it's a pretty flat environment.

So we we we we see markets being active and and people pulling the pin. I would say the slower areas, uh, reflecting what we know about the business. Um, there are Regional differences, but solar here in North America is quite soft. The transportation Market, especially the truck oems uh, really. I have been significantly slower than we have seen uh mining which affects our lubrication product line. Uh, we've seen a Slowdown with the large. Um, large customers that sell equipment to uh, the Big M. The big Minds Aerospace is sort of entered, a soft patch and no surprise. In light of the contractor discussion. We had uh, markets like window and door and wood products are soft.

Saree Boroditsky: And there's still a lot of caution out there amongst our end users that, you know, wanting a little bit more clarity around what the trade landscape is going to look like. And I think once that gets cleaned up, there is a potential that there's some projects that get released and there's some pent up demand in the in the pipeline is what our teams are telling us. Appreciate all the color. Thank you.

Speaker Change: So yeah, I would just say that with all that good color. That David provided you got some UPS, you got some downs but in net. Net terms. It's it's a pretty flat environment and there's still a lot of caution out there, amongst our end users that, you know, wanting a little bit more clarity around what the trade Landscapes going to look like. And I think once that gets cleaned up, there is a potential that there's some projects that get released and there's some pent-up demand in in the in the pipeline is what our teams are telling us.

Appreciate all the color. Thank you.

Jeffrey Hammond: Our next question comes from Jeff Hammond of KeyBank Capital Markets.

Jeffrey Hammond: Please state your question. Hey, good morning, everyone. Um, just on the guide, you know, holding that the low single digit growth, you were kind of flat in the first half. So I'm just wondering that, you know, what informs kind of the better second half of the comps? Is it this next bite of the apple on price? Is it in order trends getting better? Just what gives you confidence you see the uptick? Yeah, I think it's all those things. We probably said some of them, or at least I did in my script, but we do have the price that will kick in in September, that'll be helpful.

Speaker Change: Thank you. Our next question comes from Jeff Hammond of keybanc capital markets, please State your question.

Jeff Hammond: Hey, good morning, everyone.

Speaker Change: Morning, Jeff.

Um, just on the guide, you know, holding the, the low single digit growth, you were kind of flat the first half. So I'm just wondering that, you know, what? Informs kind of the better second half as it comps. Is it this mixed by the apple on Price? Is it, you know, order Trends getting better? Just what gives you confidence? You see the uptick

Mark Sheahan: When we look at the run rates, they've been fairly consistent for a short cycle business. You know, you always get some volatility that pops in and out. But generally speaking, we feel pretty good about the incoming order rates and then comparing those to what we saw in the back half of last year. That's how we really got to the numbers that we are comfortable with. Again, do I like a little single digit? No. I mean, I'd like to see a lot more. But given the fact that we're flat, and we've had some of this turbulence in the first half of the year, I think that we feel reasonably confident that we can get to the guide by the end of the year.

Speaker Change: But generally speaking, um, we feel pretty good about the incoming order rates and then comparing those to what we saw in the back half of last year. Um, that's how we really got to the numbers that that we are comfortable with. Um, again. Uh, do I like a little single digit know? I mean, I'd like to see a lot more, but given the fact that we're flat and we've had some of this turbulence in the first half of the year, I think that we feel, you know, reasonably confident that we can get to um, get to the guys by the end of the year.

Mark Sheahan: Okay, and then along with the start free cash flow, you guys have really stepped up buyback just a little more color on You know, how are you thinking big picture about capital allocation and maybe taking a more aggressive approach approach both, you know, buybacks and in deals here going forward? Okay, well, I think, okay, I'll take a shot at that. I think you make a good point that it's really, with the cashflow that we have from operations, our business model is an and, not an or, and our first choice continues to be investing in the business, investing in new technology, because that's how we think in these business-to-business niche markets that we participate in.

Speaker Change: Okay, and then um along with the strong free cash flow, you guys have really stepped up buyback. Just a little more color on.

Speaker Change: You know how you're thinking?

Speaker Change: Big picture about Capital allocation and and maybe taking a more aggressive proposed approach both.

You know, BuyBacks and and Deals here going forward.

David Lowe: That's how you win. We've been, we like our operations. We invest aggressively in state-of-the-art automation, machine tools, and such, and we, in my 30 years here, that's not an aspect of our business model that we have ever stinted on.

Speaker Change: Okay, well, I think, okay, I I I'll take a shot at that. Um, I I think you make a good point, that it's really with, with the cash flow that we have from operations. Our business model is an and not an, or uh, and our first choice continues to be investing in the business investing in new technology. Because that's how we think in these business to business, uh, uh, Niche markets that we participate in. That's how you win. Uh, we've been, you know, we like our operations. Uh, um, we invest aggressively in the state of the art, uh, automation machine tools and such and uh, uh we um in my

David Lowe: As far as transactions, M&A goes, I think the last year has been instructive that we started a process three years ago, a discipline process, step-by-step, sometimes slow to get off the ground, but over the last nine months, we've committed to well over $300 million to deals, and as you know, we have the dry powder to do more, and there continue to be transactions in the works that we are excited about. And yes, we talk about our stock repurchase activity as being opportunistic, that's the approach that we've taken over the long, long cycle, and we think it's been successful, and we put over $360 million to work.

Speaker Change: In my 30 years here that that's not an aspect of our business model that we have ever since it on. Um,

David Lowe: I think that what will determine the future level of that activity is what we see in the market. We really do like buying when the market is less enchanted with the prospect of companies that serve cyclical markets, and from 08-09 to 2015 to 2020 to 2022, we've stepped up when we've had that opportunity.

Speaker Change: As far as, as far as transactions, uh, uh m&a goes, I think the last uh year has been instructive that uh, we started a process 3 years ago, a discipline process step by step, um, sometimes slow to get off the ground. But over the last, uh, you know, 9 months, we've, uh, committed to well over 300 million dollars, uh, to to Deals. And as, you know, we have the dry powder, uh, to do more. And they're, they're continue to be transactions in the works that, uh, we are excited about and, yes, uh, we talked about our, our stock repurchase activity, uh, as being opportunistic. Uh, that's the approach that we've taken over the long long cycle, and we think it's been successful and, uh, we put over 36060 million dollars to work. Uh, I think that, uh, what will determine, uh, uh, the, the, the future level of that activity is, uh, what we see in the market? We

Speaker Change: We really do like buying when, uh, the market is, uh, less enchanted with, uh, the prospect of, uh, companies that serve cyclical markets, and from 0809 to 2015, to 2020 to 2022. Uh, We've stepped up, uh, when we've had that opportunity.

Unknown Executive: Okay, perfect. Thanks, guys. Thanks, Jeff.

Okay, perfect. Thanks guys.

Brad Hewitt: Our next question comes from Brad Hewitt of Wolf Research.

Jeff Hammond: Thanks Jeff.

Brad Hewitt: Please state your question. Morning. Thanks for taking my question. Yeah, I have to probably peel the onion back a little bit to give you a good answer to the first question. Not having all the details in front of me, but what we did with our business is we really tried to look at it globally and holistically. And we look at the different product categories and ProPaint is one of them. But we also have a DIY base. We also have a spray foam product line, we have protective coatings equipment. And these are global businesses. So looking at the order rates and looking at the activity in the end users in the markets, you know, we put our forecast together for the remainder of the year, also knowing that the back half of our year last year wasn't robust.

Speaker Change: Our next question, comes from Brad Hewitt of wolf research. Please State your question,

Good morning. Thanks for taking my questions.

Speaker Change: So uh 1 of your significant customers in contractor is pointing to an outlook for a low single digit decline in, paint stores volume in 2025.

I know it's not entirely Apples to Apples but curious how that compares to your contractor Market volume expectations for the year. And how much visibility do you have to return to positive organic growth and contract here in the second half of the year?

Mark Sheahan: So we may have had a an easier comparison than the company that you're referencing. For us, targeting and projecting and predicting the future is always, is always a big challenge given the short cycle nature of our business. But the markets are, you know, they're not in, they're not in bad shape. There's still activity out there. Painters are still buying equipment, equipment breaks all the time. There's, there's decent activity. It's just not robust activity.

Speaker Change: Yeah, I have to probably peel the onion back a little bit to give you a good answer to the first question. Um, not having all the details in front of me. But what we did with our business is we really tried to look at it globally and holistically and we look at the different product categories and prop paint is 1 of them. But we also have a DIY base. We also have a spray foam product line we have protective Coatings equipment, um, and these are Global businesses. So, uh, looking at the order rates and looking at the activity, in the end users and the markets, um, you know, we put our forecasts together for the remainder of the Year also, knowing that the back half of our, your last year wasn't, um, robust. So, we may have had a an easier comparison than, um, the

Mark Sheahan: And I think the earlier question that I got on, you know, what we're looking for in terms of a green shoot, it's really, you know, once the affordability gets a little bit better, there will be more project activity, more people are going to be moving out of their homes into new homes, that creates a lot of remodeling activity. Yeah, I would just add that I think that I think that channel partner that you're talking about a couple of times described their their business environment is choppy. And I think that's exactly how we would define it.

Mark Sheahan: They do a good job of splitting out key markets, including their consumer DIY space, which they cited as being particularly slow. Also, the auto refinish market. And The Wood Products Markets, where they talk about things being slow, we would tend to agree. Where they talk about seeing some pockets of strength, for example, in the protective coatings market, equipment market, in our particular space, we would also agree. It's one of the challenges when you serve as many markets as we do to try to roll it all up when, as you've seen for the first six months of the year, you're right at the waterline.

That I got on, you know what we're looking for. In terms of a green shoe, it it's really you know, once the affordability gets a little bit better, there will be more project activity more. People are going to be moving out of their homes in the new homes. That creates a lot of remodeling activity. It's really trying to pinpoint exactly when that's going to happen, we're probably not the best at being able to do that. But all in all, I mean, feel pretty confident in the in the guide, um, that we're giving. Yeah, I, I would just add that. I think that, I think that General partner, that you're talking about, uh, a couple of times described their their business environment is choppy. And I think that's exactly how, uh, we would Define it as they do. A good job of splitting out key markets, including their consumer DYI space, uh, which they cited, as being particularly slow, also, the auto refinish Market. Um, and, um,

Mark Sheahan: But I would agree with everything that's been said about from the current order rate all the way through to the things that we are doing in the second half of the year, and let's hope for some increasing clarity on trade-related uncertainty. should help us should help us achieve our projected outcome.

Speaker Change: Uh, the wood products markets, uh, were they talk about, uh, things being slow? We would, we would tend to agree where they talk about, uh, seeing some pockets of strength. Uh, for example, in the protective Coatings Market equipment Market in, in our particular space, we would also agree. It's 1 of the challenges and uh when you serve as many markets as we do to try to roll it all up. When as you've seen for the first 6 months of the year, you're right at the water line. But I would agree with everything that's been said about uh uh from from the current order rate all the way through to the things that

Speaker Change: We are doing and the second half of the year, and let's hope for some increasingly increasing Clarity on uh trade related uncertainty.

Should help us, uh, should help us achieve our, uh, projected Outlook.

Unknown Executive: Okay, that's helpful.

Unknown Executive: And then as it relates to the one to 2% revenue hedge for the year related to China, I noticed you guys took that out of the slides, but it's still in the 10 Q.

Christopher Knutson: Is it fair to think the base case expectation there is for closer to a 1% headwind or maybe even less, given the year-to-date results and the rollback into China tariffs? I would say that for us, the China market has come back.

Speaker Change: Okay, that's helpful. And then as it relates to the 1 to 2% Revenue Hedge, for the year related to China, I noticed you guys took that out of the slides but it's still in the 10th Hughesville.

Christopher Knutson: This is Chris, by the way. And we, we took out the hedge as part of our outlook. I think it's still in the 10-Q as part of one of our risk factors to let everybody know that, hey, this is, you know, kind of our exposure that we have there. But we have seen, you know, activity within the China market pickup, particularly in the powder coating space. And despite the tariffs, we are optimistic that coming off of a pretty low year that we're going to have growth.

Speaker Change: I would say that for us, uh, the China Market has come back. This is Chris, by the way. Um, and we we took out the Hedge as part of our Outlook. I think it's still in the 10q as part of 1 of our risk factors to let everybody know that. Hey this is, you know, kind of our exposure that we have there. Um but we have seen, you know activity within the China Market pick up particularly in the power coding space. Um and despite the tariffs we we are optimistic that uh coming off of a pretty low year that we're going to have growth there.

Unknown Executive: All right.

Matt Summerville: Thank you.

Speaker Change: Great. Thank you.

Matt Summerville: Our next question comes from Matt Summerville with D.A. Davison. Please state your question. Thanks, I want to just talk a little bit more about M&A, you know, you're talking about your second deal in the last, you know, call it nine months or so for you guys.

Thank you. Our next question comes from Matt Somerville with da Davidson please State your question.

Mark Sheahan: Mark, do you feel like you've finally been able to establish Graco as a company that has an M&A pipeline and funnel and team in place that you can really become more of a compounder of an inorganic compounder of capital? And to that point, can you maybe speak to the actionability you see looking ahead, average deal size, things like Yeah, thanks for the question, Matt, is I've been pretty transparent on this for quite a while, we really felt as a management team that we needed to create an infrastructure and an awareness that, or while our organic growth is great, we have this, we have a nice opportunity to add to that with good strategic acquisitions.

Speaker Change: Thanks, I want to just talk a little bit more about m&a. Um, you know, you're talking about your second deal uh, in the last, you know, call it 9 months or so, for you guys. Is this Mark, do you feel like you've finally been able to establish Graco is a company that has an m&a pipeline in funnel and team in place that you can really become more of a compounder of of of an inorganic. Compounder of capital into that point. Can you maybe speak to the actionability? You see looking ahead, average deal size, things like that.

Speaker Change: Yeah. Uh, thanks for the question, Matt, as I've been pretty transparent on this for quite a while. We really felt as a management team that we needed to

Mark Sheahan: And we really had to build the pipeline up from scratch. I think I've said this, you know, if I if I'm repeating myself to you, I apologize, but I could have asked any of our leaders for their M&A target list when I got this job, and they would have given me a list, but there was no detail behind it. So now we've got really good pipelines with companies that we believe would be good strategic fits for Graco, we've talked to the owners, we understand why they fit, we have opportunities in terms of being able to make them better organizationally.

Speaker Change: Create an infrastructure and an awareness that or well our organic growth is great. Um we have this we have a nice opportunity to add to that with good strategic Acquisitions. And we really had to build the pipeline up, um, from scratch. I think I've said this, you know, if I, if I'm repeating myself to you, I apologize but I could have asked any of our leaders for their m&a, target list. When I got this job and they would have given me a list, but there would have been no detail behind it. So now we've got really good pipelines with companies that we believe would be good certificates.

Mark Sheahan: And I think that with respect to what's happening in the market right now, I think that the pricing has gotten a little bit better, compared to what it would have been, you know, back in 21, when I became CEO. So the other thing that's happened here is we've gained some really confident people within our organization, I feel like we can drive value in these businesses beyond, you know, just operational synergy value, we think that there's customers that we share in common, where we can get some leverage. We also believe that our footprint, our global footprint gives us some opportunities to maybe make some of these businesses bigger and more profitable than what they are.

Mark Sheahan: And I think we've built up some real competency within the Graco organization to be able to not only identify, but to integrate these acquisitions fairly seamlessly. And the owners, I think, are, you know, pleased with what they've seen, at least in the short term here. So I like what I see, the pipeline looks great, there are activities happening, even as we speak, you never know what's going to happen. But I feel like our chances to be able to add on inorganic growth to the organic growth machine that we have in Graco are really pretty good.

Speaker Change: Footprint, our Global footprint gives us some opportunities to maybe make some of these businesses bigger, and more profitable than what they are. And I think we built up some real competency within the griego organization, to be able to not only identify, but to integrate these Acquisitions fairly seamlessly and the owners I think are, you know, pleased with what they've seen at least in the short term here. So, I like, what I see, the pipeline looks great. There are activities happening, even as we speak, um, you never know what's going to happen, but I feel like our chances to be able to add on inorganic growth to the organic uh growth machine that we have, and Greg will um are really pretty good.

Mark Sheahan: Thanks. Just as a follow up, in realizing with expansion markets, it doesn't take all that much in absolute revenue dollars to move the organic pendulum one way or the other. But I guess I'm a little bit surprised that I would have thought the environmental business would be maybe be a bit more steady for Graco. So can you talk about what maybe drove the rollover there? And if you're seeing any wavering on the semiconductor side of the business? Sounds like you're not, but I just want to put a finer point on that. Thank you. Yeah, I mean, when you're looking at 13 weeks, it's always a little bit dangerous.

Speaker Change: Thanks. And then just as a follow-up um, in realizing with expansion markets, it doesn't take all that much and absolute Revenue dollars to uh move the organic pendulum 1 way or the other, but I guess I'm a little bit surprised that I would have thought the environmental business would be maybe be a bit more steady for Graco. So can you talk about um, what maybe drove the roll over there and it's your seeing any wavering on the semiconductor side of the business? Sounds like you're not, but I just want to put a finer point on that. Thank you.

Mark Sheahan: So, you know, we did hear that there may have been some federal money that got tied up after, you know, the first quarter, with respect to some of the environmental policies that are being talked about in Washington compared to what may have been talked about previously. I'm not that well educated on that particular topic. But I think that could have been a factor there. And we really don't think that long term anything is going to change in that category. It is a 13 week time period. So there's always a little bit of volatility that's going on there.

Yeah, I mean when you're looking at 13 weeks, it's always a little bit dangerous. So, you know, we did hear that. There may have been some federal money that got tied up after, um, you know, the first quarter with respect to some of the environmental policies that are being um, talked about, in Washington compared to, what may have been talked about previously. I'm not

Mark Sheahan: Semi we feel pretty good about. I think they might have a tough comp in the fourth quarter. But other than that, activity is good. As you know, there's all kinds of fabs being talked about globally, whether you're in Europe or here in the US. And we think we got a good chance of getting some of that business. So it feels much better than it did 18 months ago, when we had big backlogs, but not much orders. Now we've got reasonable backlogs and orders are coming in. So I feel I feel good about that.

Mark Sheahan: for the rest of the year. Thanks, Mark.

That well educated on that particular topic. But I think that could have been a factor there. And we really don't think that long term anything is going to change in that category. Um, it is a 13-week time period. So there's always a little bit of volatility, uh, that's going on there. Semi, we feel pretty good about. Um, I think they might have a tough comp in the fourth quarter, but other than that activity is good. As, you know, there's all kinds of labs being talked about globally whether you're in Europe or here in the US and we think we got a good chance of getting some of that business. So it feels much better than it did uh 18 months ago when we had big backlogs but not much orders. Now we've got reasonable backlogs and orders are coming in. So I feel I feel good about that.

Speaker Change: For the rest of the year.

Andrew Buscaglia: Our next question comes from Andrew Buscaglia with BNP Paravasexane. Please state your question. Hey, good morning, everyone. Pardon. I just want to get your thoughts on incremental margins this year, just given you had that reorganization, realignment, you have pricing coming through. So I guess what's a incremental margin for you guys look like on even just like sounds like one to 2% volume growth is is the bogey here into the back half. I think, Andrew, when we think about our incremental margins, if we can get growth across all of our groups, it always varies with the highest incrementals coming out of the industrial group.

Speaker Change: Feit smart. Yep.

Speaker Change: Our next question comes from Andrew buscaglia with BNP paragus vaccine.

Please State your question.

Gordon.

Gordon: I just want to get your thoughts on incremental margins this year. Uh just giving you that reorganization realignment um you have pricing coming through so I guess what's a

Gordon: Incremental margin for you guys. Look like, uh, even just like sounds like 1 to 2% volume. Growth is is the bogey here into the back half.

David Lowe: So if more growth comes out of there, we're going to get a little bit better.

David Lowe: But I think probably in that mid to low 30s is really where our, where we typically average from an incremental margin. Yeah, okay.

Speaker Change: Uh, I think uh Andrew when we think about our incremental margins, if we can get growth across all of our groups, it's always varies with the highest incremental coming out of the industrial group. Um so if more growth comes out of there, we're going to get a little bit better but I think probably in that mid to low 30s. Is really where our

Gordon: Where we typically average uh, from an incremental margin.

Yeah. Okay.

Mark Sheahan: Okay, and then I wanted to, you know, get a little bit more color on the comment you made in contractor around home centers. You know, obviously, that probably affects your DIY area, but what, you know, how do you see that playing out? I would imagine that's something that wouldn't wouldn't change overnight. Yeah, I don't think it's going to change overnight. The only data point that we wanted to share with you guys is that yeah, it's been tough year to date. But if we look at the last six weeks of incoming orders, they've actually, you know, stabilized, and they're actually maybe a little bit better than what we saw during the same period last year in the second half.

Gordon: Okay. And then, um,

Yeah, I wanted to, you know, get a little bit more color on. Um, the comment you made in contractor around Home Centers. Um, you know, obviously that probably affects your DIY area. But what um, you know, how how do you see that playing out? I I would imagine that's something that wasn't wouldn't change overnight.

Mark Sheahan: So maybe we've seen the worst of it. It has been difficult, I would say, for the last couple of years. We referenced foot traffic, just because I know that the large home centers have been talking about that for, you know, quite some time. And I think, you know, I believe that a lot of the DIY activity that goes through those channels on the paint side is tied to remodeling activity and new houses that are being acquired by people where they have to do some cleanup or fix up before they sell the house, the new owner comes in, and they want to change the color of the paint or whatever they do.

Gordon: Yeah, I don't think it's going to change overnight. The only data point that we want to share with you guys, was that? Yeah, it's been tough year to date. But if we look at the last 6 weeks of incoming orders, um, they've actually, you know, stabilized and they're actually maybe a little bit better than what we saw during the same period last year in the second half. So maybe we've seen the worst of it. Um, it has been difficult, I would say for the last couple of years. Um we referenced what traffic just because I know that it's a large Home Centers have been talking about that for um, you know, quite some time. And um, I think, you know, I believe that a lot of the DIY activity that that goes through, those channels on the paint side is tied to remodeling activity and new houses that are being um, acquired by people where they have to do some cleanup or fix up before they sell the house and the new owner comes in and they want to

Mark Sheahan: So I really do believe, again, going back to the earlier comments, if we can get some traction on housing, affordability, turnover, sales and purchases of new homes, I think the DIY market is going to come back. There hasn't been any, you know, real changes competitively or anything like that, that we're concerned about. And what I would just add is when that business comes back as our You know, most, you know, most experienced, most focused merchandisers in terms of art, in terms of art channel lineup. They're not famous for carrying a lot of extra inventory. And so the uptick that Mark is talking about that will eventually come should flow through to us pretty quickly.

Gordon: Housing affordability, turnover um sales and purchases of new homes. I think the DIY Market is going to come back. There hasn't been any you know real changes compatibility or anything like that that we're concerned about and what I would just add is when that business comes back as our

Gordon: You know.

Most um, you know, most experienced most uh focused uh merchandisers in terms of our in terms of our channel lineup, uh they're not famous uh for carrying uh a lot of extra inventory. And so the uptick that Mark is talking about that will eventually come should flow through to us pretty quickly.

David Lowe: You know, David, if I could ask one more, I know we're in a, you guys are embarking on more of a acquisitive period, which is great. But how do you balance that with your very high return invested capital? You know, I think some investors may worry, you know, being more acquisitive could bring that number down. So what are your return hurdles you're focused on? And how do you think about that? Well, our starting point is we, we look for businesses, even if they're in, you know, adjacent markets that have the characteristics that we like in our business.

Speaker Change: You know, David. Um, if I can ask 1 more

Speaker Change: I know we're in a, you guys are embarking on more of a inquisitive period, which is great. But how do you balance that with your very high return on invested Capital? You know, I think some investors, uh, May worry, you know, be more inquisitive could bring that number down. So what are your return hurdles you're focused on? And how do you think about that?

David Lowe: And I mean, even the most recent one that we announced a couple of weeks ago is a good example. This is a niche market. This is a niche market that serves some major industrial space. The business has a significant amount of recurring revenue, like most of our businesses. The applications that our products are used for are pretty essential in the process of these different manufacturing environments. All of that says that in a business-to-business world, if you're developing the right products with the right technology and getting them to the market, and they create value for your customers, it will translate well to the way we like to go to market and drive a value proposition that we can make money on.

Speaker Change: Well, our starting point is we, you know, we we look for businesses, even if they're in, you know, adjacent markets, that have the characteristics that that we like in our businesses. And I mean, even the, even the most recent 1, that we announced a couple of weeks ago. Uh, is a good example. This is a, this is a

Speaker Change: Markets. This is a niche market that serves uh, some some major, uh, industrial spaces. Um, the business has a, a significant amount of recurring Revenue, like most of our businesses.

Speaker Change: Uh, the a, the the applications that our products are used for, uh, are pretty essential in the process of these different, uh, uh, these different manufacturing environments.

David Lowe: I think that we keep those things in mind, that those are the characteristics that cover most of our markets and help us generate a pretty healthy return. Mark also touched on valuations. That's the other thing to this whole process. The one thing that a buyer can control is the price they're willing to pay. When we see valuations for businesses that have slipped a little bit in the recent years, and we can do the kinds of things that we think we can do, invest in the business, expand their manufacturing capacity, help them expand their global footprint, and so forth, the right price with the right niche market, we think, can create value for the shareholders.

Speaker Change: All of that says that uh in in a business to business world, if you're developing the right products with the right technology and getting them to the market, uh and they create value for your customers, it will uh you know, it will it will translate well with the way we like to go to Market and drive a value proposition that we can make money on. And I think that, uh, we keep those things, uh, we keep those things in mind that those are the characteristics of the cover. Most of our markets and help us generate a um, um, pretty healthy return Mark, also touched on valuations, you know, that's the other thing, uh, to this whole process. The 1 thing that a buyer can control is the price, they're willing to pay. And when we see valuations uh, for businesses that have uh, slipped a little bit in in in the recent years and uh, we can do the kinds of things that we think we can do investing.

Speaker Change: In the business, expand their manufacturing capacity, uh, help them, uh, expand their Global footprint and so forth. Uh, the right price with the right niche market, we think, uh, can create value for the shareholders.

Speaker Change: Thank you.

Unknown Executive: Thank you.

Joseph Ritchie: Our next question comes from the line of Joe Ritchie with Goldman Sachs.

Joseph Ritchie: Please state your question. Thank you. Good morning, guys. So I want to, I want to go back to just the timing of the pricing announcement. I'm curious, are you, you know, did you decide to wait till September to wait for the moratorium to potentially become permanent? And then just maybe just any any color you can give on the initial discussion that you've had with your customers on being able to affect the pricing increase. Yeah, well, obviously, I mean, I think we wanted to wait right out of the gates just to see what might happen in the first 30 to 60 days.

Speaker Change: Thank you. Our next question comes from the line of Joe Richie with Goldman Sachs, please State your question,

Thank you. Good morning, guys.

Speaker Change: So, I wanted to, um, I want to go back to, uh, just the timing of the pricing announcement. Uh, I'm curious. Are you, um, you know, did you decide to wait till September, um, to wait for the moratorium to potentially become permanent? And then just maybe just any any color you can give on the initial discussion that you've had with your customers uh, on being able to affect the pricing increase.

Mark Sheahan: I think that was a smart move. We didn't put a surcharge on, we did a price increase, and we think it's fair for our channel partners to get enough of a heads up to be able to communicate what that's going to be with their customers. And that's really why we You know, gave them enough time and have this hitting in the September timeframe versus doing something immediately and causing maybe some disruption in the future. Okay, it sounds like the receptivity has been pretty good from each channel. No surprises whatsoever. Okay, great. And then, and then specifically, as it relates to contractor, you know, it's interesting, like, this is the this is the area that you've gotten, you've had the most impact from a product cost standpoint, and maybe being off sides on the on the pricing and the tariff.

Speaker Change: Yeah, well obviously, I mean, I think we wanted to wait right out of the gate, just to see what might happen in the first 30 to 60 days. I think that was a smart move. Um, we didn't put a surcharge on. We did a price increase and we think it's fair for our Channel Partners to get enough of a heads up, to be able to communicate what that's going to be what their customers. And that's really why we

Speaker Change: Um you know, gave them enough time and have this hitting and the September time frame uh, versus doing something immediately and causing maybe some disruption in the market.

Speaker Change: Okay, so it sounds like they're receptivity has been pretty good from your channel partners.

No surprises whatsoever.

Mark Sheahan: So a three-point impact this quarter. I mean, is it fair to assume that as we head into the fourth quarter, you're able to recoup a lot of that three points? I'm just trying to get a sense for where margins can go from here on the contractor side. Well, if you tell me what the volume is going to be, I think that there's some potential, you know, some potential for a bit of a rebound here really depends on, you know, how the business holds up. What we did say during the prepared remarks was that last year's Q2 was really strong for contractor.

Speaker Change: Care of. So a 3-point impact this quarter. I mean is it a fair to assume that as we head into the fourth quarter you're able to recoup a lot of that 3 points. I'm just trying to get a sense for where margins can go from here on the contractor side.

Mark Sheahan: And so when you look at the comparisons and what happened a year ago versus now and the declines, I mean, I think you need to factor that in. And then, of course, we have the Korab acquisition, which is also part of the equation as well. All in all, I'm pretty happy with the performance from a profitability standpoint of the company overall and our business units. I think we all get it. We all understand we all are operating in an environment that is I would call choppy or sluggish, and we're not doing anything to damage the business.

Mark Sheahan: But we're also being very careful with our spending as we go through the rest of the year here. We spend time on cash flow you can see in the end I've Big believer that, you know, cash is king, and you got to make sure you're generating it. And that's something that our teams are focused on as well. You know, all in all, I think, given the environment that we're playing in, you know, this isn't, this isn't a bad year Yeah, makes sense. Okay, great. Thanks, guys. Yep.

Speaker Change: Well, if you tell me what the volume is going to be, I'll tell you what the margins. I I think that there's some some potential, uh, you know, some potential for a bit of a rebound here. Um, it really depends on, you know, how the business holds up. Um, well, we did say during the, uh, prepared remarks was that last year's Q2 was really strong for contractor. And so, when you look at the comparisons and what happened a year ago versus now into the declines, I mean, I think you need to factor that in. And then of course, we have the Cora acquisition, which is also, um, part of the equation as well. Um, all in all, I'm pretty happy with, um, the performance from a profitability, standpoint of the company overall, and their business units. I think we all get it. We all understand. We all are operating in an environment that is I would call choppy or sluggish and we're not doing anything to um damage the business but we're also being very careful um with our spending as we uh go through the rest of the year here. Um

We spent time on cash flow. You can see in the end

Speaker Change: I big believer that, um, you know, cash is king and you got to make sure you're generating it and that's something that our teams are focused on as well. Um, you know, all in all I think given the environment that we're playing in. Um, you know, this isn't, uh, this isn't a bad year for us.

Speaker Change: Makes sense. Okay, great. Thanks guys.

Unknown Executive: Thank you.

Yep.

Unknown Executive: As a reminder to ask a question at this time, please press star one one or your touchtone telephone.

David Lowe: Our next question comes from Walter Liptak of Seaport Research. Please state your question. Hi, thanks, everyone. Yeah, just kind of a follow on to the last one. As you guys are are working on the one great go and it sounds like a theme is lowering expenses. I wonder if you could talk a little bit more about... On the cost side, I think you said costs are down $7 million, which is down 5% compared to the organic sales decline at 3%. That looks pretty good to me.

Thank you as a reminder to ask a question at this time. Please press star 1, 1 or attached on Telephone. Our next question comes from Walter lipic of cport research. Please State your question,

Speaker Change: Hi, thanks. Uh, hi everyone. Um, yeah, you just kind of a follow on to the last 1. Uh is you guys are are working on the 1 go and uh it sounds like a theme is lowering expenses.

uh, I wonder if you talked a little bit more about, um,

on the cost side, I think you said costs were down 7 million

David Lowe: And so I wonder if you could help us understand is that is there a mix going on here or there's some benefits happening from one Graco consolidation or are these, you know, more like continuous improvement benefits that might be more sustainable? Well, I'll start and I'll let the guys chime in if I misspeak. But I think we had said that we're looking for about $16 million of reduced expenses for the full year. And I think we're on track to hit that for the full year as well. And we're tracking, you know, half the year into it.

Speaker Change: Uh, which is down 5% compared to the organic sales decline of 3%. That looks pretty good to me.

Speaker Change: and so I wonder if you could help us understand is that

Speaker Change: Um, is there a mix going on here? Or there's some benefits happening from uh 1 Graco, consolidation or these you know, more like continuous Improvement benefits that might be more sustainable.

David Lowe: So I think you could probably just assume that we're halfway through it.

Mark Sheahan: I wanted just to clarify, though, that we didn't do one Graco to cut costs, we really did to improve efficiencies, and to make our business easier to deal with, with our customers. And I've spent quite a bit of time here in the first half of the year meeting with distributors. And the feedback has been extremely positive. They are very appreciative of the fact that we've knocked down some of the silos and the barriers that we created ourselves by having separate business units. They like the fact that we're opening up our product line. They like the fact that we have coordinated our pricing efforts across business units that were not coordinated in the past.

Well, I'll start and I'll let the guys chime in if I uh misspeak. But I think we had said that we're looking for about 16 million dollars of reduced expenses uh for the full year and I think we're on track uh to hit that uh for the full year as well. And we're tracking, you know, half the year into it. So um I think you can probably just assume that we're halfway through it. Um, I wanted just to clarify those that you didn't do 1 break out at cut costs. We really did to improve efficiencies and to make our business easier to deal with with our customers. And I've spent quite a bit of time here in the first half of the Year meeting with Distributors and the feedback has been extremely positive. Um, they are very appreciative of the fact that we've knocked down some of the silos of the barriers that we created ourselves by having separate business units.

Speaker Change: Uh, they like the fact that we're opening up our product lines.

Mark Sheahan: And they like having a single point of contact within our industrial businesses that they really didn't have before.

Speaker Change: Uh they like the fact that we have coordinate, our pricing efforts across business units, that were not coordinated in the past.

Mark Sheahan: So you combine that with what we're doing on the operations side, where we're looking at the factories, and we created some complexities there as well. We announced that we're closing our Minneapolis facility, and we're going to be able to move all the production into existing facilities that we already have at Graco. That should create efficiencies that haven't shown up yet in the P&L, but once we start doing that, they will. And I think having a centralized operations team, managing all aspects of production has led to the inventory reductions that we highlighted earlier, and led to improved cash flow as well.

Speaker Change: And they like having a single point of contact within our industrial businesses that they really didn't have before. So you can buy in that with what we're doing on the operation side, where we're looking at the factories, and we created some complexities there as well. Um, we announced that we're closing our Minneapolis facility and we're going to be able to move all the production into existing facilities that we already have at Graco. That should create efficiencies, but haven't shown up yet in the p&l. But once we start doing that, uh, they will

Mark Sheahan: So it's a multifaceted The approach that we're taking with Juan Graco, it's early days, we feel really good about it, but the signs are positive.

Um and I think having the centralized operations team managing all aspects of production has led to uh the inventory, reductions that we highlighted earlier, um, and led to improved cash flow as well. So it's a multi-faceted, um,

Speaker Change: approach that we're taking with 1 Graco, its early days. We feel really good about it. Um, but the signs are positive

Unknown Executive: Thank you.

Mark Sheahan: If there are no further questions, I will now turn the conference over to Mark Sheahan. Okay, well, I appreciate everyone's participation in the call. Thank you for your time today. Have a great rest of your day.

Speaker Change: Thank you. Okay. If there are no further questions, I will now turn the conference over to mark xien.

Mark Shien: On the call, thank you for your time today.

Speaker Change: Have a great rest of your day.

Unknown Executive: This concludes our conference for today. Thank you all for participating and have a nice day.

Unknown Executive: All parties may now disconnect.

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