Earnings call transcript Q1 2023

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Operator

Good morning, and welcome to the First 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. 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 purposes Act. Private forward-looking harbor the constitute of provisions Securities remarks for of the safe These Litigation Reform results in including report from of materially XXXX recent annual XA may quarterly as Form company's of Actual result XX-K the on a most and of those the XX-Q. various XA identified on those indicated factors, Form report in Item Item risk differ company's

the available are website the SEC's website on www.sec.gov. and reports These at at company's www.graco.com

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

turn Corporate Executive the now to over Vice will Controller, Kathy Systems. President, Information Schoenrock, I and conference

Kathy Schoenrock

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

first sales an currency increase Graco of first translation Yesterday, of net the points XX% million, by quarter from decreased effect earnings to the Diluted year. or share an X% per sales of XX% last million. million X $XXX quarter last The earnings Reported $X.XX, $XX first quarter. for percentage reported of year. approximately were of increased over $XXX increase

as segment. the months of from our pricing XX actions coming the rate remain The taken Input mix, as This improvement the which gross costs elevated. XXX and increased channel past basis result mainly margin was we points quarter. improved Contractor in primarily is the over product have well

result. similar expect margin seeing throughout the have we costs rate and actions continue the gross and will of the as rate that quarter pricing we margin the are year. our we improvement improvements experienced first in However, remainder hold, volumes, our gross At in a taken

of XX%. to expense private quarter. occurred of the growth the Interest prepayment with This of in to gross and by $X in $XX increased improvement operating rate led the placement expenses in of first decreased last million operating million leverage, million margin that Total the Operating along quarter quarter. $X relates debt earnings growth top-line decrease expense year. our

effective adjusted and $XX the quarter comparable $XX inventory an a year. million increase in Cash fourth operations last of which XX.X%, by to rate is provided reduction The net million, primarily by year, from was improvement earnings tax totaled purchases. of driven last

We also million of payments made dividend million. capital $XX expenditures $XX and of

sales This would will be year. impacts comments unallocated of in as on the effect in forward expect few assumptions. as the expect effects range million. stock of current of half $XX the currency first rest compensation A have the translation The million earnings we expense to approximately impact updated Based by to now second no $XX on expected rates, be we higher look currency changes half. in exchange net to reflects XXXX. unfavorable result a net corporate valuation of favorable market-based the offset We in or

estimated XX% XX% is to projects. facility basis capital related to be an as-adjusted finally, rate full-year Our are to million tax and million approximately expenditures to expected $XXX $XXX with be on expansion

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

Mark Sheahan

everyone. you, Thank morning, Good Kathy.

the beginning all earnings. were We first quarter comments in an constant record with and achieved be at of revenue regions my quarter, saw morning organic currency for Asia of Contractor which in segments had growth Sales of this soft will the the the Industrial All and we exception and on basis. year the segments. XX% both demand and revenue Pacific, up operating

battery, alternative strong, remain key and energy, such Pacific, Asia as many of our In electronics. end e-mobility, markets

in by offset than construction more are and finishing. these softening However, sales powder

a order progressed, quarter full-year the on growth anticipate region and we incoming in rebounded rates the basis. As

margin first gross Pricing during quarter. actions implemented the expansion this sales and year growth drove

rate, strong all risen improvement in contractor, resulted with management, gross and company-wide Our with in price of improvements, quarter to margin in along regions, normal the in first expense These last mix our a meaningful of realization has price levels were along XXXX. incremental which that resulted good seen across XX%. businesses in favorable Graco margins

earnings, the percentage history of as sales, continued highest foreign Operating currency in despite expressed which were a the pressures. is for XX% quarter, company

With couple been strategy has costs of rising the continued to pricing Our to see pre-inflationary over for the margin rest and we restore should of the strong input performance. the cover levels. years to similar rate volumes gross year, past margin

is at which consistent the the with end Our ended of was million last consolidated it we was where quarter, when backlog $XXX year.

we While supply backlog castings, components, shortages normalized our more which key from to returning have as have chains and prevented still in improving, such levels. are electronics

Now turning mid-single-digit commentary operating Contractor for earnings. The some on quarter growth, segments. in to segment our resulting had both revenue records and revenue first

in and XXXX. pro coatings large Our ongoing demand home centers channel. in at we've not given change conditions remained unexpected but high-performance paint were the by center the home in business since businesses was experienced and softer strong, partially This offset ramp the foam

was in they realization. price product bright Growth quarter as strong the a spot had during EMEA and availability improved

the markets X% Pacific, and on hand, business other as declined the construction have weakened. Asia container shipping

residential commercial slowed contractors multifamily commercial Professional the offset for to As North expected, more starts order new and XXXX throughout painting of even books enough applications. have quarter, with improving housing single-family busy in were into XXXX during and extending decline. than much remain the America but

what first quarter. last sprayers were XXX% more XX% CED center in paint Pricing we in home than the from Operating favorably benefited earnings pro the Incremental as during larger actions experienced Contractor quarter also year. in contributed were selling units. and margins fewer quarter the versus

quarter grew operating Industrial revenue and X%, resulting earnings. record The segment in first

businesses the year. systems adhesive and overall, Backlog lower our in in the by powder liquid especially but Asia were should Our sales business, offset elevated equipment to sealant led finishing offset finishing powder and partially way start remains in which systems softer the Pacific.

product the releases in new back from half year. benefit this to expect we of Additionally,

for segment quarter both Process quarter consecutive This is The resulting and earnings. operating ninth first records. these set Process the has grew revenue XX%, that records in

drove Continued broad-based process sales strong growth and industrial environmental, the semiconductor performance. pumps, service, in vehicle lubrication, transfer

careful actions expense lubrication, along record XX% upcoming and in particularly as operating and is incremental activity a resulted process and the to our is there backlogs in around new the quarter in margins project Pricing for segment. XX% are recent build with drove elevated, product for remain Momentum margins taken, which environmental management, continues pumps robust, semiconductor, releases. excitement

on outlook. to Moving our

start End of are We existing demand our by and remain the new products year. market activity for the solid. and encouraged

increases our to trends watch second year, last lap in took continue incoming we challenging However, more half be given some we'll business comparisons the order in as will the the volume price of we we of sales on for Therefore, low growth earnings for constant organic revenue and as basis. the single-digit growth optimistic temple remain year. are currency in confirming full we a both outlook operating

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

Operator

Capital comes Our from with RBC Markets. Dray Deane Instructions] first [Operator question

Deane Dray

Good morning, everyone.

you in on Just good versus market of Thanks. expectations gave and maybe we lot performance there? the a take start regarding us can remarks prepared through color but end end just markets,

Mark Sheahan

Yes.

better the of we the product when I multiple how in across think with a year. business overall, little most anticipating started growth what QX. probably and categories we're I regions. say in really out things were That that out would across happy pretty our came than is units we broad-based played and

of has spots from the start. aggregate, I guess year, beginning to colder off kind of a good in some spots. is hotter Of and flat stayed the course, backlog and the we're there But

So, say there's can more far. much good not I so it's been than than other

Deane Dray

woods improvements out. other chain this have been seeing pressure Got to pretty it it. quarter, but the yet, through like talking And enough supply of mean to sounds and the castings have then the it you're industrials in sounds electronics smoothly. it I [indiscernible] to out in coming call still not

start expect hold? and missed how to it, you some I did do that there, in but do have will increase And the see when that take color January annual to? Thanks. So, you price might we

Mark Sheahan

question. we third do end supply on even like and a than Yes, it the hotspots of chain. Good last was say much in still the year. quarter have would of Yes. better it's I the couple

called still two inflationary improving, So, that will areas out for that I you are seeing And things still we those us. also say some creating we're are but pressure pressure. have

are up. costs Our

price we budgets and what thought is we our still what we we variance, purchase what we unfavorable set is that what We when pay actually against running had which versus call track planned.

So, implement businesses but board, increases to did our the We of beginning the price offset the the the year have regions. that. helped pricing number actions really at and in of not across in selectively, a

to work backlogs through we start they'll and help that hit. So should as

David Lowe

gaps were ago managers what this So, our chain situation. supply key at antidote that ago, her comparison an from major products. her, were with week, continued of of year we're And factory were I product keeping items, the with her do offer a with can She's interfering to a looked interfering and spoke illustrate maybe currently to she list, drew door. there her a one say, Last shipping and that. items flow I'd the XX year products to factory I is in David, that the from out that were she

I something XX. was last fewer at do week, the least talking We always probably she in about But always it at than have Graco. short. comparison, by

So, lots of progress.

across are I Mark been we has would Lots key there. still be as think our that gaps, But would system. see there something progress that made of highlighted.

Deane Dray

you. Thank

Operator

Halloran Mike question with comes from next Our Baird.

You may proceed.

Michael Halloran

it, the then efficiencies. what's of but the the Contractor in on about mean, reduction help awfully magnitude? And in you segments. what robust But I maybe you more me also, can Process drove price at those both of bit I little the how should to Mike, Probably margins, levels? referenced that sense catch-up help think cost records sustainable and some some of speak make a

about Obviously this you puts on is be rate it, thinking the before. want how the call is year takes, however, there the some to haven't the mix, and we remainder right whatever about run mean, basis? should this moving about forward here it to I been of a that it? think forward, Or are next, changes over think

Mark Sheahan

can were and Yes, information of the and combination had We've It's it's It's pricing surely that I'll share some actions preamble. they David in a in really a said with what we well. the to work you. in to Kathy Contractor, done which good chime around make just sure of as start substantial. off -- we or combination took, that this, really

pressure cost the of from the they had businesses. a As most standpoint recall, other any of probably you

And high-performance and nice side foam industrial the the were then really ago. on which years businesses. of couple And a that, are in growth higher-margin professional portfolio businesses, and paint in combination with coating the those

You home and in center that contractor with is the there. decline on rate story the the business, for combine margin a that really

us on wild of continue that this forward forward the for so to in CED. that at in incoming about the sustainable inherent There's volumes kind get levels is year. a going We cause the think far on margin card nothing other really it's concerned margin And look same that's to rates seen to that extent would orders. where we rate us gross be than we've

On growth story the other really in a Process great or businesses everywhere. that we had businesses,

combination improved got a those supply backlog and we as four the like And then again, There's There’re that And in there's the businesses. that in chains yes, process We levels. well actions our pricing product as there's look out we're we it's lubrication environmental more those our through big it, as way product our the have businesses. get businesses. lines business. units door -- -- of working at pump to there. There’re taking our the semiconductor

long believe saw and So, I sustainable. saw margin that volumes we quarter that the in you rates hang first we think as well, be the that as in there that should as there,

Michael Halloran

the Great. lack from just of on helpful. then perspective, why was a super a the outlook could That understand it's good quarter. I been forward certainly basis visibility really and And

in macro low that would I Asia, you there seeing be you don't or perspective in greater your on single-digit of are else part from a the rates indicators? but out maybe but perspective? your of Any you're have indicators areas to or leading anything process. anything just would this where order know You in called of business that that the -- thought maybe point a based leading sign business, a lot caution more Or is

Mark Sheahan

high going say Yes. forecasting -- And that we're we probably a percentage when business just really our and into in the on guidance short -- the input so the from seeing things is I account taking slightly time. I our forecast, cycle, better our by what really we're off about teams that us just to they're the and end the trying market. give hear of than would is start saying to fortune for our would teller that given in economy

comes The just appear and there's hang to outlook like to it's there enough us we most prudent going we'll -- more now, to makes on think pretty and our some definitely for where end in more this to feel markets that caution it take uncertainty I sense. the be if for best out great. at We'll good, be but on it airing if number. take business But does, time, side it's of

David Lowe

deliveries. be short-cycle part quarter, the would is agree And want something for that We about fourth what of months add that are everything way, the good talked we which, customer know. value that backlog I is service backlog quarter we best I now and as in would to build. And the have want. backlog our proposition and Yes, XX in seen by because conversion beginning really to through the we it's first a we work with said progress in here this strive business, we've you

And factor about. into business. to get would get in later do say so, really a visibility continues short And side of the Mark in the to then that be our we issue that most back legacy conversion talked little in businesses the I year. the backlog -- if We a our

Operator

question comes Boroditsky Saree from next with Jefferies. Our

may You proceed.

Saree Boroditsky

the on Congrats quarter.

margin strong, anything but weaker? gets And saw So first performance else that as quarter? following the Is a think about the some should stronger of that obviously, versus really sales that year. Or pressure China there? margins higher does margin there Industrial potentially being is reflection China reverse we in maybe prior

Mark Sheahan

really at begin the happy to business. with of and rates, high are with, that margin really they we're Well, profitability

things kind I and it. of Short go puts weeks. view as that flat the XX So, quarter other into always there's mix period, being some time and takes

be I at slightly So, no even all improve to being at or concerns higher. where volumes no about continue if they're or able them sustain maybe have to

Saree Boroditsky

the have lot still of Okay. And you cash then sheet. a obviously, on balance

how but You about bought maybe or just little on this you're us share back a buybacks update shares the year in for M&A. quarter, maybe thinking

David Lowe

that an -- focus pretty quarter I Well, our and uptick our a been organic I have discussed consistent we've capital continue we you as and we this of deploying consistent in to and to on, saw opportunities think think has first, with before, some approach R&D the constraint breaking continuing that that Minnesota ground our where touched with new new this about. CapEx We've a program warehouse that's on. product talked operation year with got the in Dayton, expansions expectations we've Mark very we're our Anoka of aggressive has. in And game lubrication

be So, year for a it's going big to capital.

I if As mentioned, our frequently. far to would items as M&A opportunities and two on to say attention the had the I conversations come you front, generalize,

market participants purchases. If there little as is, are to you're terms there looking environment, color -- and what initiatives of a individual of fewer the say be would in bit on for possible as seem I far projects

which is But I prices. would talked what solid remains at a reinforce about -- before, we've good I think, merchandise

those of I maybe think there of participants looking kinds sorts smaller of of certainly are nonstrategic number that opportunities, So small at and a deals a out that there nonstrategic are before. resemble there than number we're the hopefully, there's things but

the As repurchases. far lastly, as share

been for approach Our has opportunistic. years

modest I purchases think I'm activities the over we example, saw and an that this for there made year drive $X.XX we yes, demonstrated, about opportunity of We And think events remainder good year. XXXX. that we deployed aggressive. prices, glad billion will when we some last in can our at you be year the is

Saree Boroditsky

been yesterday, Looks it congrats the but like to do have could good on quarter. it

David Lowe

right? before, I'm you Saree, -- little yes, talked slow, told a You me

Operator

with [Operator comes Company. next Summerville question Instructions] Our Davidson Matt D.A. from

You may proceed.

Matt Summerville

any terms XX% that Graco's subject questions. to how of growth is based is impressive versus mix I get there second core a year end price price us of an can day the a much the the bit? Is out of at guess QX? the to of how yet little way directionally that was you what in price XXXX incremental to portion maybe to realized way And parse Is looking upon volume? little increase? the business couple Roughly, the forward, that overall bit trying was help of us timing be help there in a at Just increase is any the last we're of plus much versus

Mark Sheahan

Yes.

you said put And price my like of through quarter increases you I as most think actions. going really growth on our We said. I'd came stick that comments in that this give I pricing comment did there. just the overall, from some guidance to on two an what's

second in, second the got third think I one in early quarter late third put the quarter. quarter, --

before, some those. call as beginning as some, I'll tailwind the said well. too, here of anniversary up But until put at in it, year we So, we've I got did this pricing we

So, we we input some and just we today. do that all where offset did. in that's costs all, We're we're the to what trying of we that have, happy really stand

Matt Summerville

then, Mark, about there pertains And and bases, saw talk those is as contractor customer in the professional as what center please? it sell-through you on Thanks. versus maybe to your can across a channels and what follow-up, home you inventory paint both sell-in two general view

Mark Sheahan

a perspective, flat, pro sell-through would say, pretty general and on even was the I From the sell-in consistent. units,

they inventory wasn't were like inventory. wasn't and down it So, it like were building drawing they

demand have door were of So, they experiencing the that like equipment. matching was where we in sort were out of we what type the most our of locations

impact the on results. On decline their side, our center the inventory home more did of

inventories would have down QX. where little them their a bit for we think be were expected I compared to to

to orders. quick the experiencing we're in to what And store -- getting foot respond do when stores. of of their kind course, likely manage according level, traffic less inventories, the they're at they're our very demand they So, they'll and

hits in a they pretty us So, if quickly. we're inventory change responsive levels, it make

Operator

Securities. Seaport from Our next comes Walter Liptak question Global with

proceed. may You

Walter Liptak

the of a so Hi, Contractor, call getting follow-on or the bit thanks, on you've questions. -- so a some last to in Congratulations give the nice that over on besides apologize been volume you little I'm us to the quarter. I already. talk on on wonder you the I place I if this can geographic But as about maybe anything regions Any guys. want sort late, of insight the could if side?

David Lowe

really as say saw to, in occasions, are construction. in other here we've would new definitely, consider. And business, is there certainly, multifamily Contractor, we Mark in that on important of I and of the segments the it's some alluded as part which strength saw, many Well, discussed side the North in market commercial to good America an – we

We also have seen applications. good coating protective in space and the business performance and market the insulation in heavy-duty for the infrastructure

is think out area we've the I one regions. call to in tried

Asia China. be off if specific, to contractor. slow start a has to And more gotten for had we

pause. again here And we've a -- China, bit country, of I think comments, And we a talked in in is the in say for contractor coating a about going we China. construction opportunity market in side market I container have could the through the is think in the safely a big seen little protective

boom the core robust and that going were the gone getting really container a in in markets call hot logistics and 'XX tends now. environment right the a in, spot, And the be right that's back 'XX it, that's through for well in on containers to the, or world and with rebalancing I'll

So of another softness. that's area

Operator

If Sheehan. will turn the there no further over Mark are conference questions, to now I

Mark Sheahan

Chris few and Kathy Chief as years like you I congratulate our his know who Executive efforts much. would Investor new for calls Vice the In also President to few reporting last Corporate years. Officer the role Controller last also into new Thank Executive through for Schoenrock, to like Graco's will moving Knutson, I'd Chris and congratulate Vice become her many into leading closing, Technology right. David over reporting on participating President All thank you and these a excellent Lowe. of very Relations to me.

to about them to we're for the will energy very roles. get that excited and and those important bring focus They're into two I'm Graco, jobs. excited these people their

day. conclude that, we'll participating. with for a So, call. great the Thanks Have

David Lowe

you. Thank

Kathy Schoenrock

you. Thank

Operator

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

Graco (GGG) 27 Apr 232023 Q1 Earnings call transcript