Graco Inc. Q2 FY2025 earnings call

Key Points

• Chris Knutson: Second quarter sales $572M, up 3% y/y; reported net earnings down 4% to $128M; gross margin rate down 200 basis points; operating expenses up 2% driven by acquisition expenses, but excluding acquired operations, down 5%; operating earnings down 2%; cash provided by operations $308M, up 19% y/y. Unallocated corporate expenses projected $37M-$40M full year; capital expenditures expected $60M-$70M in 2025.
• Mark Sheahan: Organic constant currency sales up 3% y/y, with 6% contribution from Corob offsetting 3% organic decline; Contractor segment sales down 5%, North America soft due to housing affordability; pricing actions announced in September to offset tariff impact; acquired Color Service, a global manufacturer of specialized dosing systems, to be part of Industrial segment; incoming order activity steady, home center DIY channel stabilized with 6-week run rate exceeding second half 2024.

Second quarter sales were $572 million, a 3% increase from the prior year. Excluding acquisitions, sales declined 3%. Currency translation had no effect. The Contractor segment had an operating margin rate of 26% in the quarter, down from 31% in the prior year quarter, with a 5 percentage point decline. The acquisition of Corob decreased the contractor operating margin rate by 2 percentage points, and the remaining decline was due to higher tariffs and lower factory volume. The Industrial segment declined 1%, with growth in EMEA and Asia Pacific not offsetting Americas decline. Expansion markets were down 3% in the second quarter, with semiconductor market momentum offset by environmental business decline. Revenue contribution percentages weren't explicitly stated but segment performances were detailed as above.

Forward-Looking Statements

• On a full year basis, organic revenue is flat. Kept 2025 revenue guidance of low single-digit sales on an organic constant currency basis. Projected unallocated corporate expenses to be $37 million to $40 million for the full year. Expected capital expenditures to be approximately $60 million to $70 million in 2025.

Risks Identified

• Uncertain global trade environment causing end users to delay project decisions. Tariffs increasing costs, with $4M impact in the quarter. Volatility of U.S. dollar, especially against European currencies, resulting in exchange losses. Housing market affordability issues impacting the Contractor segment's performance.

Q: Can we start with the price increase announcement? How is this price increase different? Can you size it? And anything about the implementation? And is this all price? Any surcharges?

A: Yes. When speaking last, patience was smart as tariff impact lessened. Increases are targeted at geographies and areas with most input cost pain, low single-digit type increases in select areas to offset tariff pressure for rest of year if landscape stays.

Q: Free cash flow was one of the bright spots in the quarter. Was there anything -- any one-timers in there at all? Or just what do you attribute the strength of the conversion this quarter?

A: Attention to inventory continues to contribute, with focus on improving turns. One Graco initiative contributes to efficiency, expanding centers of excellence, and small steps helping cash conversion. Not one-time, and business has seasonal component but feels good about future cash generation.

Q: Could you maybe tell us a little bit about how the Color Service acquisition came about?

A: A few years ago, powder team led by Claudio Merengo looked at adjacent technologies, surfaced Color Service as target. Growth rates good, technology understood, location near SAT business in Italy, leadership team to work closely for integration. Broaden portfolio with big customers in tire, textile, cosmetics industries.

Q: Building on the price increase. I believe the last time you did a midyear 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 the more consumer focus?

A: Would expect normal price increase at beginning of next year. Both Contractor and industrial and expansion markets participated in price increase at different levels across all business units.

Q: Just on the guide, holding the low single-digit growth, you were kind of flat in the first half. So I'm just wondering what informs kind of the better second half? Is it comps? Is it this next bite of the apple on price? Is it order trends getting better?

A: It's all those things. Price increase kicking in in September helpful. Incoming order rates fairly consistent for short-cycle business. Comparing to back half of last year gives confidence.

Q: One 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 a return to positive organic growth in Contractor in the second half of the year?

A: Need to peel onion back, looking globally and holistically at product categories. Markets not in bad shape, still activity but not robust. Once affordability gets better, more project activity. Back half of last year not robust, so easier comparison. Confident in guide.

Q: I just want to get your thoughts on incremental margins this year, just given you have that reorganization realignment, you have pricing coming through. So I guess what's the incremental margin for you guys look like on even just like it sounds like 1% to 2% volume growth is the bogey here into the back half?

A: Incremental margins vary, highest from industrial group. If more growth from there, better. Typically mid- to low 30s average incremental margin.

Q: I know we're -- you guys are embarking on more of a acquisitive period, which is great. But how do you balance that with your very high return on invested capital. I think some investors may worry 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?

A: Starting point is looking for businesses in adjacent markets with characteristics we like. Recent acquisition is niche market with recurring revenue, essential applications. Look for businesses that can create value through inventory, customer leverage, and favorable valuations. Keep return hurdles in mind based on niche market characteristics and valuations.