GRACO INC(GGG)Q2 2026 法說會逐字稿

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. 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 opening remarks from management. I will now hand the conference over to John Bauer, Director of Investor Relations. John, please go ahead.

Good morning. I am here with Mark W. Sheahan, our President and Chief Executive Officer; Sanjiv Gupta, Chief Financial Officer and Treasurer; and Christopher Knutson, Vice President, Chief Accounting Officer, and Controller. We welcome you to our conference call to report Graco's fiscal '26 second quarter results. Before we begin, I would like to remind everyone that certain statements made during this call may be forward-looking and are subject to risks and uncertainties. Please refer to the Safe Harbor statement included in our earnings release and earnings presentation as well as our SEC filings for additional information regarding these risks and uncertainties. We will now turn the conference over to Mark W. Sheahan.

Thank you, John. Good morning, everyone. We delivered record second quarter sales of $591 million and record second quarter earnings reflecting growth across all three segments and margin expansion supported by disciplined expense management and operational execution. Contractor generated organic growth in the Americas, led by Home Center and Professional Paint. Industrial benefited from broad-based activity across core markets, while expansion markets continue to see strong semiconductor demand. Organic orders increased 5% during the quarter. The most recent six-week booking average was up 14% versus last year, and backlog as of July 17, excluding acquisitions, was up $57 million or 28% from the beginning of the year. Together, these positive trends give us confidence in a stronger second half. Capital allocation remains an important part of how we create long-term shareholder value. In May, we announced the acquisition of VELCRO Meltan, one of Graco's largest acquisitions in more than a decade. VELCRO Meltan is an attractive strategic fit that adds complementary technology, products, and customer relationships in the high-growing packaging dispense market. We expect to create additional value by applying Graco's manufacturing expertise, operating discipline, and global reach to improve profitability over time following a playbook already underway with COROB, Color Service, and Radia. At the same time, we continue to be active in evaluating additional M&A opportunities. Our strong cash position and balance sheet provide the flexibility to invest in businesses, pursue strategic acquisition, and return capital to shareholders. Turning to some of the segment performance: The contractor segment delivered record sales and earnings in the quarter. Revenue increased 4%, and organic sales were higher across both paint and home center markets in the Americas for the first time in nearly two years. We saw greater stability across many of our core markets during the quarter, supported by improved North America activity in residential repaint and remodel projects, sell-through trends across the channel, stronger customer engagement, improved execution, and targeted commercial programs. We also continue to see good demand in protective coatings and foam, which represent a more global and application-driven part of the contractor business. These areas continue to benefit from commercial construction, infrastructure, and industrial project activity including investments tied to data centers, energy, and manufacturing. The strength in these applications highlights the breadth of the contractor segment and our ability to serve customers beyond traditional residential paint. Innovation is an important way that we support customers and differentiate our offerings in the contractor business. New product introductions, including the next generation of QuickShot, the ProReach extension system, and new autonomous and semi-autonomous striping solutions are designed to improve productivity, reduce labor requirements, minimize material waste, and help customers deliver more consistent, high-quality results. Together, these factors helped drive 4% organic bookings growth in the quarter with the most recent six-week order trends improving to 14% growth over last year. In the industrial segment, sales increased 3% in the quarter, reflecting better activity across process manufacturing, machinery manufacturing, general industrial applications, semiconductor-related investment, and continued adoption of electrified product platforms. These trends reflect customer investment in productivity, automation, and infrastructure projects. Additionally, we are seeing benefit from a more coordinated commercial approach that helps teams focus execution on larger opportunities and gain specifications with OEMs. Beyond these larger investment-driven markets, we also saw healthy demand in day-to-day industrial applications including MRO channels. The quarter also reflected a few anticipated headwinds. Organic Powder Finishing Systems were lower due to the timing of order acceptance, which should occur in the second half of the year. In Asia, activity was slower to start the year with China specifically affected by prior-year pull-forward activity ahead of tariff-related pricing actions and softer automotive demand. Organic orders improved throughout the quarter with bookings increasing 3% year-to-date through July 17 and 11% over the most recent six-week period versus the prior year. Combined with a healthy backlog, these trends support our expectation for stronger performance in the second half of the year for Industrial. Expansion markets grew 3% with growth across all key businesses. Semiconductor continues to have a strong year particularly in Asia Pacific, supported by ongoing investment in semiconductor manufacturing capacity. Bookings increased 58% in the quarter bringing year-to-date bookings growth to 33% with the most recent six-week average up 36% and backlogs remain strong. Overall, Graco's growth in the quarter came from multiple end markets, products, and geographies. It was supported by improving customer activity, focused investments in attractive markets, and the advantages of a diversified portfolio. These factors continue to guide our decisions and position us for long-term value creation. Moving on to our outlook: Looking ahead, we are encouraged by the improving trends we are seeing across Graco's business segments. New product introductions and strong channel initiatives support second-half performance while our teams remain focused on the actions to capture opportunities and drive growth. We are maintaining our full-year outlook and initiating a third-quarter revenue guide of $580 million to $600 million, excluding VELCRO Meltan which is expected to close during the third quarter. Overall, our strategy remains consistent. We are building a broader growth platform through innovation, disciplined capital allocation, and targeted acquisitions while staying focused on the highest-return opportunities to drive our long-term success. With that, I will turn the call over to Sanjiv to provide more detail on our financial results for the quarter.

Thank you, Mark, and good morning, everyone. We reported second quarter sales of $591 million, an increase of 3% from last year. Acquisitions contributed 3% growth and currency translation added 1%, partially offset by a 1% unfavorable change in organic sales, driven primarily by timing of finishing systems revenue within the industrial segment. We delivered another quarter of strong earnings performance. Reported net earnings were $145 million or $0.87 per diluted share, an increase of 14% from the prior year. On an adjusted basis, excluding acquisition-related cost, amortization of acquired intangible assets, and certain tax items, adjusted earnings per share were $0.91, up 17% year-over-year. Gross margin increased 130 basis points from the prior year. The improvement reflects price realization, improved manufacturing performance, and the favorable impact of $9 million in tariff refunds net of related surcharges. While the tariff refunds provided a meaningful benefit, margin improvement was also supported by the fundamentals of our operating model and disciplined cost management across the organization. Operating expenses were essentially flat in the quarter despite inflationary pressures and the addition of acquired businesses, reflecting continued cost management, which drove an operating earnings increase of 11% and an operating margin rate of 30% of sales compared to 26% in the prior year quarter. Across the portfolio, segment profitability remained strong. Contractor and expansion markets expanded margins, while Industrial maintained its profitability although project timing impacted revenue. Turning to cash flow and capital allocation: We generated $298 million of operating cash flow through the first six months of the year, representing strong conversion of earnings into cash and continuing our long track record of strong cash generation. We remain committed to our balanced capital allocation framework. In the first half of the year, we repurchased 4.2 million shares totaling approximately $331 million, paid $898 million in dividends, and invested $29 million in capital expenditure, including strategic facility expansion projects. We continue to have significant flexibility to invest in growth while returning capital to shareholders. As we look ahead, at current exchange rates, currency is expected to provide approximately a 1% favorable impact on both full-year sales and earnings. We now expect unallocated corporate expenses to be $39 million to $42 million, capital expenditures of $90 million to $100 million, and an adjusted effective tax rate of 20% to 21% for the full year. In summary, the quarter demonstrated the strength of our operating model delivering double-digit earnings growth, significant margin expansion, strong cash generation, and continued disciplined capital allocation. Positive order trends and backlog growth during the quarter further support our confidence in the underlying health of the business. That concludes our prepared remarks. Operator, we are ready for the questions.

Thank you. Question-and-answer session will begin at this time. To ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Your question will be taken in the order that it is received. Please standby for your first question. Our first question comes from Deane Dray of RBC. Please state your question.

Thank you. Good morning, everyone. Can we start with what I want to call a momentous decision to give quarterly sales guidance. So it begs the question: why now? Obviously, you have got better visibility. You have backlog up 28%. The six-week orders look strong. Expansion markets are living up to their name. So just kind of take us through your decision to give this guidance metric, and should we expect this on a go-forward basis? Thank you.

Yeah, it is a good question, and I think you really answered the question with your commentary. We do have pretty good visibility, particularly over a 13-week time period. We thought it would be helpful to the analysts who follow the company to get our perspective on how these quarters are actually playing out because, for example, if you look at this year, we have not changed our revenue outlook for the full year. There is some volatility around the first half versus the second half, and had we provided more detail earlier, we might have given you additional information about how we saw those two halves playing out. We feel comfortable; as you said, backlogs are strong. I think this is a change that we are committing to make going forward, so it is not just a one-quarter thing that we're going to do. I think it is the right approach for the company at this time.

Great. Well, we welcome that. Thank you. And the last time I was surprised at this level was when you all had to make a second price increase midyear, which is not something you typically did. That begs the question: can you talk about price in the quarter, where you are on price versus cost, and the outlook there?

Yes. The price-cost equation remains positive. Our plan is, given that the price-cost equation is positive, we are going to stick to our historic price cadence, which is basically that we introduce price increases at the beginning of the year. That is the plan, and that is what we are going to stick to. We have realized pricing this year roughly 1.5% to 2%, consistent with how we have been doing historically.

I think we are in good shape, Deane. Of course, we always have the flexibility if we need to do something, we can. But right now, things look pretty good.

All good to hear. Congrats. Thanks.

Our next question comes from Michael Halloran of Baird. Please state your question.

Hi. Good morning, everyone.

Hi, Mike. Hey.

So, like Deane, I appreciate the third-quarter help. What I am looking for more holistically is translating how you are talking about the bookings in the front half of the year and the last six weeks into the back half of the year, and how that relationship works out. Obviously, the back half of the year implies something above 5% depending on your definition of low single-digit organic growth. Orders in the front half of the year, particularly in Q2, were kind of there. So what is the correlation and the lag? How much revenue do you think is getting pushed to the back half of the year? How much of this is just sequential momentum that you expect to continue in the back half of the year? Any help you can give on that relationship and why the visibility is higher would be appreciated.

I will start and let the team chime in. If I were to play back Q1, we had a decent Q1 but built backlog; we were not able to ship everything. We had an organic decline of about 6%, but if we had shipped more, the story would have been different. In Q2, we built even more backlog but were able to push through enough orders to generate closer to flattish organic growth, and we benefited from acquisitions as well. Year-to-date our backlogs are up about $57 million from the beginning of the year, which gives us a lot of momentum heading into the back half. We had headwinds in the powder coatings business, the Gema business, in the first half because they had a great first half last year; we expect their comps to be easier in the back half. They have also gotten nice benefit from the ColorService acquisition, which is performing ahead of plan and will become organic in the third quarter for us. Probably the biggest positive in my mind is the momentum on the contractor side. We did expect some positivity, but the broad-based nature, the fact it is happening in North America, infrastructure spending, protective coatings and foam strength — these are all nice developments since the end of the first quarter. Combine that with the backlogs, the Gema comps, and the strong semiconductor growth in our white knight business, and it gives us confidence we can hit the full-year revenue guide we put out in January. It will be more back-half loaded. I hope that helps.

No, that helps. A follow-up: you referenced participation in broader build-out through the ecosystem — large CapEx dollars. How aggressively do you think Graco is participating and what impact can it have across your segments? Are we underappreciating how much Graco can participate?

There are different ways we can participate. Semiconductor is the cleanest area — we have a specific business dedicated there and they are involved with tool manufacturing for chip production, benefiting from the build-out. On data centers, there are outside-the-building activities — putting up the building, roofs, parking lots — where our products are used. Our Gema powder business is involved in equipment that coats cabinets used for power and other applications and has seen an uptick. In our industrial business we have equipment that applies thermal interface materials that dissipate heat; our distributors are seeing activity where Graco applications are being used in cabinets and chip production-related equipment. Traditionally we participated in cell phones and consumer items, but we are broadening into commercial applications. Net-net, it's a positive versus a year or two ago.

Great. Thanks, Mike. Appreciate it.

Our next question is from Bryan Blair of Oppenheimer. Please state your question.

Thank you. Good morning, everyone.

Bryan.

Circling back to the move to provide a quarterly sales guide, I agree with that characterization and was hoping you could provide a little more detail by segment on what your team is contemplating for the third quarter so we can back into what is implied for Q4 as well.

For now, we are giving the consolidated number and it includes M&A. We have not broken it out by segment publicly. We have our own internal thoughts, but we are not prepared to give segment detail yet. This is our first step; putting a number out creates accountability and helps build the process and muscle internally.

This is our first step. We are starting with a consolidated number. We need to ensure we have internal processes and checks and balances for how we roll up and develop that number. We do have an internal forecast, but we are not ready to provide the segment-level detail yet. Give us some time and we will come back to you.

Understood. Thank you. VELCRO Meltan sounds like a very high-quality acquisition. You provided a starting EBITDA margin of around 20%. To level set, what is run-rate gross margin, and for the 27-facility footprint, what is the breakout between manufacturing, sales, and service locations?

I will start. The gross margins of that business are 50% or more, so they are good. More than half of the business is parts and accessories, which is very favorable. Starting with a high-quality business with strong gross margins gives us opportunities to drive value on the operating side. A lot of that will come with revenue growth, but we and the VELCRO Meltan team have identified areas where we think we can help them be more efficient and productive, and drive some costs out as revenue grows. Maintaining and growing their revenue is important; they have been growing nicely. This is a business I have wanted in the Graco portfolio for quite some time. You might recall in 2013 we launched a product called Invisipak where we went into this space and built a nice business. We think they can help us sell more Invisipak and we can help them sell some Graco equipment into corrugated customers. It is a very complementary acquisition.

The business has strong gross margins, a healthy parts and accessories mix, and good positioning in attractive markets. We did not build aggressive growth into the deal model, but our expectation is that the market is attractive and the business should continue to perform well. It is a hand-in-glove acquisition we are excited about.

I was just curious in terms of the 27-facility footprint, how that breaks down between manufacturing and sales and service locations?

Bryan, off the top of my head, I think they have about five manufacturing locations and the rest are sales and service offices.

Okay. Excellent. Appreciate the detail. Thank you.

Next question is from Matt Summerville of D.A. Davidson. Please state your question.

Thanks. Maybe just sticking with the acquisition: that 9% CAGR referenced in the deck — is that all organic or is there M&A in there? If there is M&A, what would the organic number look like? And does VELCRO tend to capture the same price realization that you guys capture on an annual basis, or is there some commercial opportunity? I have a follow-up.

When you look at the revenue CAGR, they have been acquisitive but their acquisitions have been very small. The 9% is an organic number.

Got it. And then on pricing: does VELCRO capture similar pricing as Graco historically, and did you underwrite that kind of 9% CAGR going forward?

They have normal pricing practices and operate in a rational pricing environment against other large competitors in the space. VELCRO has positioned themselves in applications where they can add value, particularly in the corrugated packaging market. We are not expecting to do anything dramatically different on pricing than what they have done historically. A lot of their growth has been product- and market-driven and their market position has improved over the five-year period. We do not want to disrupt that momentum.

Thank you. And then a follow-up: looking at bookings, expansion markets are excellent across any period. Should we be thinking about a sustained period where that business grows double digits? And on Industrial, do the powder projects favor Q3 or Q4 in terms of timing?

Semiconductor is a pretty lumpy end market, often running three-to-five-year hot periods. All signs indicate the current cycle is sustainable and should run for a while. Near term I think there's good momentum through the end of this year and likely into next year. Regarding powder timing, we've historically seen a strong fourth quarter in powder; we expect to see that again. Last year their third quarter was one of their slowest, and we expect installation and completion timing to pick up in both Q3 and Q4 this year.

Got it. Thank you, guys.

Our next question comes from Jeffrey Hammond of KeyBanc Capital Markets. Please state your question.

Hey everyone. Good morning. This is Mitchell Moore on for Jeffrey. My first question: you stepped into buybacks this quarter and have been doing more M&A recently. Was that purely opportunistic or should we expect a more constructive approach to deploying cash flow and cash on the balance sheet going forward?

I will let Sanjiv handle the buyback specifics, but our capital allocation framework remains the same: disciplined, balanced, and consistent. We will invest in organic growth first, pursue strategic M&A that meets our thresholds, and return cash to shareholders through dividends and opportunistic share buybacks when appropriate.

From a capital allocation framework standpoint, our strategy has not changed. It will be consistent and disciplined. We will invest in organic growth, pursue strategic M&A opportunities that meet our financial and strategic thresholds, and return cash to shareholders through dividends and opportunistic buybacks. Share buybacks will be opportunistic and based on financial returns and other uses of cash. The bottom line: the same capital allocation framework which we've deployed will continue to guide our actions.

To add color, candidly, our stock traded down to around $95 not that long ago. Our outlook is the same, cash conversion is strong, and the business is performing well. We view the current environment as a buying opportunity for Graco, which is reflected in our recent actions. We also expect M&A to contribute meaningfully over time; if you look out over five years, we believe we can deliver a meaningful contribution from acquisitions, with our teams focused on that pipeline and Graco's demonstrated ability to integrate acquisitions.

My second question is on Contractor: you mentioned this is the first time in two years that Pro Paint and Home Center channels grew in the same quarter. You talked about new product introductions and nonresidential applications. Can you speak to the confidence that the improvements you've seen this quarter and the bookings are sustainable through the year?

My impression is we may have seen the worst of the market for that business over the last several years. We're starting to see broad-based pickup versus a year ago. It's still early, so we won't get irrationally exuberant, but I'm more confident about the contractor business than I have been in recent years. New products, targeted actions to drive brand preference, and improved order trends in the last six weeks give us reason to be hopeful. The acquisition we made about 18 months ago in that area is also seeing nice order pickup and should contribute in the back half. We feel good about Contractor and expect improvement into the back half.

Thank you.

Our next question comes from Walter Liptak of Seaport Research. Please state your question.

Hi. Thanks. Good morning. I will do a follow-on on Contractor. You mentioned the data center build-out for nonresidential construction — are there new products going into that market or specific products you think are being sold for use in data center construction that support the view that your business is getting a lift from that build-out?

It's primarily the same products — capitalizing on opportunities that were not as prevalent a year ago. It is paint, protective coatings in some facility areas, roofing applications, pavement, and flooring within data centers. All the construction activities you'd expect us to be involved with are seeing decent activity and the team is capitalizing on it.

Has there been a way for you to quantify the benefit or is it too channel-driven to see direct data center-related sales?

It's not a number I would be comfortable sharing publicly, but our teams have a perspective. We collect data about actual buildings and construction activity, and we have some information. It's not hundreds of millions of dollars, but it is enough of an uptick for us to mention, and we see that activity continuing near term and likely into the next few years as data centers continue to be built out.

Okay. Great. And then on Industrial: as we continue to see improvement in general industrial markets like automotive and machinery, are some of the recent order growth trends a result of projects getting released? Are comps easier now, and are you gaining from selling strategies or is it market growth?

We do have easier comps in powder for the back half. The legacy Graco industrial business had growth in the first half in line with our low-single-digit organic guide. Any first-half pressure was tied to the powder business, and those comps will be easier. The growth is broad-based: PMI is starting to turn positive, investments are being made in machinery manufacturing and general industrial applications, and MRO channels are healthy. We've been building digital assets to interact with larger MRO partners and that is starting to bear fruit. Overall, the tempo feels pretty good as we exit Q2, and we are fairly confident the back half will be better than the front half.

Okay. Great. Thank you.

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

Okay. Well, I thank you all for participating in the call today. I look forward to seeing some of you on the road here in the next few months. Hope you have a great rest of the day. Thanks again.

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