Graco (GGG) 27 Jul 232023 Q2 Earnings call transcript

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's website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. [Operator Instructions].

During this call, various remarks may be made by management about their expectations, plans and prospects for the future. statements the purpose Act. Private forward-looking harbor the constitute of provisions Securities remarks for of the safe These Litigation Reform results and including quarterly XX-Q. from of materially XXXX most Annual XA may recently as the company's XA Actual result Form of on a company's XX-K of those the Form various Item identified report those indicated factors, on Report in in Item risk differ the website at reports www.graco.com SEC's These available and company's on at website www.sec.gov. are the the

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

turn I Knutson, over Vice the Chris to conference will President, now Executive Corporate Controller.

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

rates, earnings an net over translation per of adjusting should for share or excess year Yesterday, the earnings. for per $X.XX. increase million, the currency of Graco net share of diluted decreased reported second percentage million of sales on last earnings The $X Reported full quarter. increased was was on impact by $XXX quarter net point currency Diluted net last option have second X% to stock XX% tax $X.XX, XX% year. effect translation million. exchange X current second exercises, $XXX year. increase an approximately sales of or After no benefits effect the quarter earnings Based sales from of from

we the second will effects by impacts be year half the the unfavorable first in the saw expect in of offset favorable currency half. that We of

was Strong offset plus the higher product segment, price The points costs. gross product the mix, channel in rate basis favorable Contractor than realization mainly enough more and increased quarter. in XXX margin to

year, the rate moderated softened to year headwinds chains volumes start compared spending order Factory experienced pressure margin have to year-to-date. increased progressed, from and factory put increases what last have lead for normalize. factory and quarter we trends customer the as and gross cost times, supply material have as While volumes lower the on

$XX operating percentage Contractor of largely spending, the new increased compared from points growth offset margin expenses these million share-based point. the compensation and year. from expenses percentage in than $X percentage operating unfavorable factory quarter, reduction resulting margin inventory more margin X Sequentially, the operating primarily X or initiatives. operating margin point rate the to first decreased volume and rate-based channel increased mix product to Contractor million rate XX% during X quarter quarter, in operating unfavorable $X Total of related quarter, development last second to million. Gross due increases improvement increased of incremental

adjusted year, full result the tax The as-adjusted unallocated an cash can effect XX% the Nonoperating was our quarter, expenses million, we quarter. is with benefits. to investments which rate a $XX increased on For to as approximately expenses favorable but timing held corporate vary $X million be expect decreased income to and $XX interest of approximately million basis. tax certain of year consistent valuation on of full on for to changes fund XX% rate held market XX% retirement the expected by

million year facility million, of dividend estimate cash year-to-date related uses a Cash purchases. $XX with $XXX to is expenditures expansion and expenditures to XXX% were year. driven of earnings million million and $XXX reduction Cash payments increase inventory for capital in $XXX of provided by capital provided by million as operations We percent of the of an the $XX net $XXX Significant last by operations the higher totaled million. year, net mostly for from a for projects. earnings year, be

we quarter-end, expense be of $XX or a recognized the year. repaid in private as and interest this prepayment which third Finally, $XXX,XXX, of further for segment to now subsequent commentary. will debt, regional I'll our million fee year-end, including over the call Mark quarter of placement to turn

and everybody. Chris, morning, good you, Thank

in be unable comments and All softer up the Sales sales and growth an organic, second in record my We in coatings were last this the EMEA mixed, key have home spray Contractor as on in bright sales of rates reportable channels. morning spot the of protective constant product solid, many basis. segments. X% last with many performance that both been segments. year the and growth adverse results quarter all by pavement Incoming improved. and with will driven was to quarter. for a the offset currency revenue order availability component earnings, categories EMEA and center operating remained have have impacted year, foam achieved X% to pro during Process in and strong growing compared issues improved paint Industrial quarter, product

our XXXX we in actions XXXX. realization continue nearly from the the year, benefit for as our of margins and quarter, accounted the to expect continue growth we our for revenue strong XX%. in were of and With to see to margins rest of and regions businesses XXXX. all to of Price Operating pricing for volumes significantly remainder margin the and company-wide contributed the solid similar incremental costs performance for

with although has have the the end quarter. availability of backlog, customer down million $XX our of component and levels, service improvement. end modestly. chain the still allowed room improved have from with us to $XXX at consolidated Better increase component Our supply we Issues last for million quarter, availability

construction decline demand in paint channel. in a in home Now China quarter, our second center turning the pro channel, Contractor softer and by markets on North the driven low-single-digit demand segment slowing in less commentary America to some the experienced segments. revenue The

and Somewhat offsetting were these headwinds and our Spray Coatings Payment in growth High Foam businesses. Performance

in to of strong the on significant also for in home stores shortages The sales. a year, current ease. are and believe traffic paint basis. customers favorable year-to-date when the New incrementally compares started to product sales last foot key the the quarter the both were made We back channel orders out-the-door levels we that backlog in channel and introductions our quarter within decline inventory after North center a dent pro second America component to reflective

Growth in availability largely quarter EMEA product realization. due to improved strong and was the during price

economic solid, along to construction activity of the declined we home as and ago, Pacific, other related container and weaker China. the spending. on shipping with seeing in in for Despite year optimistic the construction data remains housing year in improvement starts commercial U.S. key and X% hand, a as sales, quarter, especially business existing Asia balance markets are strength the we continued the were soft contractor than are

in in operating and in as adhesive been powder alternative softer Activity our demand finishing and X%, liquid end and segment sealant resulting record solid, and Pacific. Asia business, especially offset were Incoming second in orders in by continued Industrial energy, electronics key The businesses revenue remain robust. finishing our has quarter grew somewhat battery earnings. such markets but

However, backlogs a and giving of for better equipment half year. powder in systems us second remain the elevated, confidence

The these all broad-based sales second earnings. product This for quarter XX%, categories. in set resulting quarter saw sales revenue tenth We Process grew Process records has continued growth is that consecutive records. in segment both the and operating

the the the the volume, for quarter years. operating are pricing with However, we of record key vehicle has incremental another is sustainable, and rate margin occurred service, current the margin At is pleased segment. similar the progression believe in this X volumes, strong segment we that which Steady of last good operating XX%, strong drivers and management performance this XX% and earnings and expense were in margins quarter. lubrication semiconductor for the impressive resulted automatic of

to Moving our outlook.

activity Our results us for were that year leverage. first line as be both elevated revenue organic we will backlogs, drive End constant pockets we're along characterized currency strength sales of X modest growth market give and seeing basis. Current on growth guide in essentially our confidence the full attain rates, having earnings can strong a expectations. low-single-digit months weaknesses. with of Overall, broadly order our with

our prepared Operator, concludes ready That we're for questions. remarks.

Instructions]. [Operator RBC our first from from Deane And Markets. comes Capital question Dray

on on order a of Did it was were just into there a more It quarter, expand the ship. able going were product the was It so that have on -- forth? sounded like that of of like kind you and finding the channel? paint there point that you impact back to inventory pro like an banding was this lot channel. product that rubber the either availability sounded Could

Just please. some clarity there,

Yes.

the and can too. to than a amount. year a And door did and Chris orders. in think we were the That product But might factory trying a comment, we David back think we get just was free bit some higher -- highlight a I been lot had of what huge ago, out such had I little because components that have in normal, to up we QX.

comp. little to last comparison we so looking really when I a that you're a tougher think saw why at And year, was bit

And also true would would mindset both contractor systems is it's and because we fulfillment -- David. just in that to our home a -- generally, of they when the most this think just and center, orders and them. about it's and buyers conclude pro our ago, the I with were we I've year channel of product in people. anxieties extra Yes. the paint our have sophisticated to studying And this think point-of-sale get I vendors I rates, would submitting other confirmed I add factory safe -- people

year, aggressive, along probably orders blocking components over a So Mark in said, with about I that year it were think last shipments. and it's above meaningful a we the of ago a sales exceptionally of was out-the-door some really saw combination when key were

sounds destocking, sell-through has more just That's balanced? it its really now And to selling home the right. then So the helpful. that though, is clarify All center, run on versus course?

Yes.

inventories talk in right field I that feel within looking they're traffic and level actually activity spot they're the teams to the in are of stores. now, a they're they in the activity in seeing we think good like, at the and are that given what when the foot stores,

at So level an seeing. acceptable, know, I mean, they're But that Deane, you things at really right? are centers can least given the change. now, for we home what inventory think that's major never

slide, Right. you year to worsened it the touch, outlook sales? to conditions Total but looks for And Asia have for the though traffic then not as on have just the enough light that company? -- lastly, the was on change

that's think accurate. I

Industrial about business. thing the China, if look It's that's energy CED. majority got also in meaningful, X alternative And Korea, in Japan -- is Southeast you -- I a all on going Industrial, Asia, in activity all do we and stuff. mean, really some it at think of the when mean, you with activity Australia. have nice -- you when outside saw look do think the Asia. And I we we the but I -- of that we

pretty we're got with what think we've I So comfortable there.

[Operator next question Michael Halloran Instructions]. from comes Baird. And from our

Good morning, everyone.

Hey, Mike.

questions. So Deane's up following X of

year, the thinking from following of the half back assumption thought I current the kind some then at levels, is look is you side there about? Contractor the Or be seasonality? should stability process sequential if Just on other of normal

Yes.

of they when would be. we down, have the the good backlogs still think half orders that look feel at than but the hold higher they're what back level incoming and of outlook have, still the up that the I our are pretty should that for backlogs we normally We we year.

maybe our to paint, the home a seen industrial of at historical My reluctant word and field and just this Yes. to than in coating you since this we segments, Contractor Mark have view, our for XXXX. that orders are the what about if I use But add, view much think categories operating see on time the the are my process -- the after say backlogs And segments somewhat would elevated people, enjoying juncture as than back product sense own the -- center, we that the Contractor. any people, what normal pro in increasingly, last and major years. absolutely, indicated, we is, closer the side and I in my X our space, degree I'm to model that -- protective have the we've higher is would couple backlogs experience with talking

Can lot tremendous. line top on you side moving a of highlighted no side, and environment on pieces. necessarily Process the than a indicate. pieces the fence a lot those little services, strong Vehicle of visibility you of obviously, bit things? the strength would the It's help from margins been seems Okay. side moving of the have stronger on kind drivers our of the a point, of

pricing? context on much underneath just give you on if How context, but the the things just So And markets? How all much could more some not dynamic on more picture. some vehicle give is is -- much really the just hood. that is Graco? going just services, How overall

story appreciate do been I'll segment that. wonderful ago, mean, that were that I a in that success it question just long years. the of over happened teens. I I the it's couple Yes. within margins Graco, operating the the last what's take wasn't I within because believe remember

XX%. they're we ones it's X But And really So that. beyond product over acquired some the the units growth like a that got runway still so. across expand last including multiple different it looks we've business years of been to there and number or good categories,

white our remained So the to Semiconductor Semiconductor at for night next year be strong, outlook business least has and fairly looks good.

nice a that's development there. So been

Our what around year we've last years. over are seen spending fluids in more moving environmental this than where businesses, of they we're landfills, the couple money

to Republic make Waste look at are the more you Services, little Management, they So investments. inclined a if bit

some we're so And of benefits. those realizing

market line nice extremely our really and fair The just side, it's that by vehicle business which business, lubrication feel in growing we a runway service not industrial business us. higher. there's a growth are levels. of gain the has. that drive market, amount It's about $X our billion we been a expanding for is can And to Lubrication and well. for there that I continue our team presence that also nicely in competes and OEM executing revenue improving there service hopefully, like team product has

to into and all change. make go they best in, monitored tell make you an getting money of oil that want pretty is into the expensive. And for And I And service, vehicle they vehicle you tracked, in they come sure are the it's that dealership. of because oils the a can in can do put amount these people oil is on way dealers that to your you put that is when it's accurately, lot have

you course, more that well. customers an be they're dealership they'll change hopeful to things sell and as so oil of find driving other the able And doing into then, to

question. So again, appreciate I the

our really executing great are extremely all excited that a Graco. within think We're really the I Process story there and segment about it, well. is teams

for will that was see it just your are, next No, to And trending over to levels great. what XX months? Graco's the talk means one. cash and that how inventory X what inventory flow are. it Last go Maybe you levels as

let I'm this Chris going to take one.

underway, of started some initiatives reduction where the We So it was our of that the inventory especially some which flat level do legacy has pretty to down within at inventory, currently have with is year. inventory beginning businesses. drive that are the

to of I think you'll -- supply see inventory and we component for availability. the rest of the seen year, improvements down we'll level purchases continue the continue seen with both we've product as lower chain to in that we've historically component inventory the less drive or a as than

Great. everybody. Really Thanks, it. appreciate

right. All Thanks, Mike.

from Saree Jefferies. And Instructions]. [Operator next our comes Boroditsky question from

higher Gross to want bit dollar. the down little kind on margin the focus just I despite sequentially of a margins. more stepped

So from here? margins what for accelerate what need like, see that? drove to do And to you

things. of couple a there's mean, I Well,

that as as sure, example. wasn't mix, think for favorable in was QX, it Contractor for I particularly in

out higher center of bit revenue. percentage The total coming the a of has good. home little as been realization their a price So

about offsetting comments cost. that are being the We putting pressure bit is volumes gross I you our little Chris' margin. factory something tell will that's of down a upfront on

cognizant very happened factories million. down And if at over quite all we chain. the $XX we did with the by levels have X And the as what between grown inventory bit about that are you sequentially inventory have QX, by supply wrestled last -- QX drive years look a and our

think that see year of to to back. on teams last and statement, there better the some pull what are a where selling cash showing that was our flow really is try producing make cash inventory you we the concerted that flow up And it sure take quarter we're to ago. So I action we're than pushing dramatically and

So on some decent, more maybe overall, for feel put rest a are to good points there. rates and we're in margin of year like board spot the the the I

if And think expected. drove the factory with margin in but to growth that's in they don't have the that Or this, factory lower incremental APAC? just, on we I then was in volumes, just lower came Industrial, but what would not I know volumes, -- than beat that?

on down in the business would what were to than going others. that what's you Industrial overall XXX results basis think be time I And I tell there's think in the points in quarter-over-quarter. any in like systematically period, some volatility that don't is for I XX-week going of there's anything that there. terms different

overall, like, of time levels of to profitability problems. a there There time, feel are I be again, bit from So really but absolute good. variation little no might

Summerville our And from Company. question next Matt Instructions]. D.A. & comes from [Operator Davidson

when look to rate the this quarter-on-quarter just to little base I million did few this run -- you in talk a back, of straight will? and If Process kind to quarters be back business, just and the been I the next a to where at in over quarter? maybe get think the of you quarters about do we the Mark, X bit your growth. the is -- demand this second point out of I business the there, -- consider new is feel if want cycle, context it's should quarter, And you sustainable of looking look $XXX phenomenal how you you segment in

feel So quarter turned second I I'm for view performance is what to guess just the in? guys a to you trying get relative this go-forward

drive like is different one in product where we're push competitive the think mentioned advantage. big electric a to It's pumps mention, the of have of our a a factory website. launched is there diaphragm energy the The area to really particular. Quantum. reduce called which also We we on doing exciting, across moving an good world by product we in I costs. the as And I that what every very categories, Yes. really ones result all didn't I that, is

we at that You that technology goes else pump. into it. can Nobody the look that technology, because motor has own

And out we're that to for really there. so that's is going I positioned well play a think really, several years. trend And

the we the there that applications we've into, find ground it or can comes can most they leveraged segment, the M&A stuff the applications, business And that fertile all beverage, to bolt the also, probably And that it's us the to into it's targets really and lubrication whether think be a get we extent industrial in the or for built I food that all sanitary when hunting. now operations there. attractive

Very a lot pleased for They with happening up the in Dayton, anybody moved team. We last year. in factory encourage wants built A It's good things of come process. to visit it. see new the up them and I'd that there. to

Appreciate And America? that business think home can right? like to side to talk I picture, same in color. kind of North point of sure things? true centers. about versus have you And I the relative the just matching with finer sell-in mentioned pro in paint of the pro you looked then center a it put home make want paint sell-through the was So Is I on Contractor the performance

Yes.

Both the to that reflective question, at latter that's seeing. side the a business are inventory think paint the that I they're that levels of were yes, down pro the in I quarter. on think the level

these there commercial But is And talked painters and they doing to are that So say particularly down. business, the in will involved are business. jobs, both They the pieces the of I to both pro have when and we still busy. anybody sugarcoat contractors What out home days. that. is that pro busy that's center pretty still don't I were want

relates we're texture came coatings that gloom of striping see up kind line you So the with business other that way these spray pretty slowing that hanging of got in, going doom maybe housing. like good. smooth activity the foam and that out that potential protective to in some we've interest despite residential and more for And housing in and nice it there -- and volatility and rates all help really of just niches the might that down, we're along

So bad. all in all, not too

thinking of agree with we of enough on and I side as the residential because talk of through forecast The through it commercial every contractor coming investment better certainly, Mark's both frankly, space the North in well side And forecast. the activity America, the about on as everything the should the summary. is also residential in and couple the alone, is I commercial in way in we've leave seen space recently than that and weeks, coming macro last when here I'm the in stronger. data, is construction virtually category previous

kill. -- that's a eat the be fundamentals positive we're balance you business thing, pretty And over you being by indeed advantages, ability into because underlying way, -- this are the believe of to then of are our levels, and inventory guess to about is sale, And the of this this in point to where the -- Contractor very our good drives 'XX. X was important. strategic largely old -- think what case, so say, feel or is would it because revert that because what points line. salespeople going the that most is Graco's reiterating I the and mostly the model the if what for this the seen it checks nature stocking X back on But own And And X model the have will, have I'll they retail levels. point, back I means second is important, on I if to part, -- channel that their be At And will enough. high we it that. really, we're results or partners of want if back fulfillment years wholesale or in the think this I business ago. true, if is you short-cycle and our good and this of, year

our Hammond KeyBanc Capital Markets. next from Jeff question comes [Operator Instructions]. And from

million you sequentially, down think gave I Just -- backlog was think million. I number $XX it a and $XXX said

see long reflective of back and kind you to think where period get we of how we you And were -- a start of to of wondering these I orders is to bring Just more gross kind where and that underproducing a to same impacted margin. along normal you the the down normal. inventories then backlog lower lines, what think said

that left? the much Or Just this point? is how at half? through wondering, carry you of Does are kind second reset

Yes.

backlog a us on tell hard but there. will to question, that period powder we the it's go lead need book better peg you number, for biggest room large any think wildcard business I to our time projects. customers I with still just times finishing there's within We on have certain the And given to do get that on. where backlog the they is really have, we that

And move backlog so around of their can significantly. kind

still you, -- back to don't I but customer levels. get number our I say that take out customer we got the have to a a we backlog So that service can I normal, would of amount substantial guess, for

inventory have the over the really we a On front, couple built of years. bunch last up of inventory

in factories to make management a we've dent a into things targets we got some going the nature want and that, thing. back. on as actually we that to good of and a with -- inventory that's pull initiatives And team, So incentives and

a bit think obviously, leaner efficient are implications on the flow be effective a cash business I and it makes inventory. nice. very And little more to more

put this just through been eye. went the on doing customers buying couple just We're it's doing period that not comes it we're where, and need. with shelf, components crazy. that sure ability a when to We product of making years, anything really our we being We're do last that our for the mindful to it deliver smart about sacrifice what to

just If XX. or buying buy you might that the X component, find you're you a not need, X you

to of to little there. So our products a not impact need. the Again, going our customers really ability it's bit that reset it's a deliver

the And because and have then the year. And moving just third and growth activity. maybe Okay. just you think had pieces Contractor about But the dynamics. trying tremendous understand -- moving you to pieces there last understanding color good quarter, we year, the I'm last so on comp better kind of

global take that we do to the think outlook, again, the able I what Well, factory, look have And hard rather give assumptions like. to business tried really deliver our of at out order quarter outlook the What we than we've to what the reasonable nail with year. for for a is there. been full a try rates look a

on Some units then and in put reasonable expect feel also guide year. all of forecast from things what in customers think we reduction. full backlog we from the the overlay our we the that marketplace. And confident they our business get together, I When with those assumptions for we that again,

But that, year? and blowing -- single Okay. do is your for the Contractor. obviously, is process -- just Or Contractor and up versus the within tighten you low going digit, to

Yes.

a So We -- -- don't for company. we outlook don't give specific I do we don't revenue that. full revenue don't segment. give We the global outlooks by

[Operator Instructions]. And our next question comes from Lawrence and Blair. De Maria from William

what think that year to on price ability is year. XXXX, you us the and into your you of weakness to Contractor expectation further seeing. you're increases? considering price Can And this the some drive respect for update year with some in then You and took earlier especially your the

Yes.

the And some haven't the our course, some lapped year we we segments. increase year, did in the increases of in of we in -- we're still prices third quarter. larger last did this early So of year that

what realization, So a it's for I going seen pretty tell don't you've target overall, you. price to we year, this full far think similar be would so just be would gauge have year to for I good but a the you

the to look we're terms expect I normal And next in at will do past. is future again in to pressures there. more now. year we I raise the it starting teams a seen the that be into than inflationary data to obviously, still year, expect would of we've pricing, Going early are just prices what are But -- say what in XXXX.

some not component And like was inflation they were. gone to expect and the shortages fully we Yes, than of lower But pricing early better away. again we'll so that XXXX. than it's are has in our it's need it move

in be just price speak beginning former -- implement that hope our it be as myself into to a that. when hope costs we the add that, would would the do year for that it be, And field conditions at the of and that market account would would an the we arrangements would take I'll my will ideal I they with Yes, -- guy, adjustments for world, many we've you with good times the of our be over giving that costs into from talked my the and the about year perspective their balance make throughout place would would their customers them reasons real ones window channel as be in up for sign the a that year.

last that with learned options open. future, keep of the the we now year took our will then we all was what always, in precedent we However, and that

That's then in you think great. and relates costs I products costs? versus as you and said Because also balance to maybe it mentioned I do process. new how start-up the products marketing Process margins believe -- that we new And are And sustainable.

us a So walk bit. that just through little can you

at is you're to. in of given depending of in out terms different in. which the product all out of get different then, business, upon Well, rates that that course, categories. And level time in something business margin attention we any coming got a we growth we of pay have incremental new course, products any demand And they of

energy twice said that in we is that the lot a I markets new a what transition just products And cycle, is only of electric to growth a in So cases air part publicly mentioned a think savings. expect through about at new in. the from from pumps -- Not big -- underlying we're to we grow I've we've technology the launched. big -- pumps, driving the of what from that that we coming are is

as addition margin some pricing new and also in that, launching some incremental But we're products. expansion can potentially we to realize

has plans to our by But robust driven teams has organic nice the and a it. they're business unit launch. teams -- really at every to our basis. right X-year really identifying that So it's marketing growth the company product on regular of a executing profile And engineering products and Graco single nice, types

a have that across when comes a bit -- good business are So to a I'd it segments, of product be to should you like the pipeline more think you lot give able niche-y is ideas. our fairly but in complicated know stuff it to multiple but we things I little clarity,

-- was at the I are noted it also processed, where you've guess would they but and I margins that going are dilutive be with those whether But Okay. was sustainable. all

So thank you. --

further the am I [Operator Sheahan back turn for closing. I Instructions]. conference to now Mark questions. no like And to would showing

Okay. you participation call, Well, very phone see we soon. hope your much today's for to thank today you on and

conference for you today's participating. Thank concludes call. This

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