Graco Inc.

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 the opening remarks from management. During this call, various remarks may be made by management about their expectations, plans, and prospects for the future. These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the Private Security Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in item 1A of the company's 2023 annual report on Form 10-K. and in item 1A of the company's most recent quarterly reports on Form 10-Q. These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knudson, Executive Vice President, Corporate Controller.

Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheehan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Graco reported second quarter sales of $553 million, a decrease of 1% from the same quarter last year. Reported net earnings decreased 1% to $133 million or 77 cents per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $132 million or 77 cents per diluted share, an increase of 3%. The effect of currency translation had no significant impact on sales or net earnings for the quarter. The gross margin rate increased 230 basis points in the quarter. Realized pricing and lower product costs were more than enough to offset sales volume declines from the industrial and process segments. We had favorable factory volume in contractor as we built inventory ahead of the new product introductions. Total operating expenses increased $5 million or 4% in the quarter, mainly due to $3 million associated with the relocation to a new distribution center and $2 million related to product development spending, growth initiatives, and other corporate items. Gross margin rate improvement, primarily in contractor, was able to offset lower sales volumes and increased expenses in the industrial and process segments during the quarter, resulting in operating margin rate of 29%, an improvement of one percentage point from the same period last year. Contractor operating margin rate increased four percentage points to 31% compared to the second quarter last year. Interest and other decreased $1 million during the quarter, driven primarily by lower interest expense as our long-term debt was repaid in 2023. The adjusted effective tax rate was 20%, which is consistent with our expected full-year tax rate of approximately 19.5% to 20.5% on an as-adjusted basis. Cash provided by operations totaled $258 million for the year, a decrease of $24 million from last year, driven mostly by timing of inventory purchases related to new product launches and lower net earnings. Cash provided by operations as a percent of reported net earnings was 101% for the year. Significant year-to-date uses of cash include repurchases of 224,000 shares for $18 million, dividends of $86 million, and capital expenditures of $73 million of which $47 million related to facility expansion projects. These cash uses were offset by share issuances of $42 million. A few comments as we look forward to the second half of the year. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency as in 2023, movement in foreign currencies would have no impact on net sales or net earnings for the full year. Our full year estimates for unallocated corporate expense and capital expenditures remain unchanged and can be found in a conference call slide deck on page 10. I'll now turn the call over to Mark for further segments and regional commentary.

Thank you, Chris. Good morning, everyone. All my comments this morning will be on an organic constant currency basis. Sales in the second quarter were below expectations. Contractor performed well, but weakness in process and industrial more than offset that growth. Contractor had record sales in the quarter on strong demand globally for new products. Asia Pacific continued to experience deteriorating demand in the quarter with noted declines across many key product categories, including semiconductor, sealants and adhesives, and industrial lubrication. Incoming order rates in Asia Pacific for both the industrial and process segments were down double digits, and we expect that current conditions will remain for the balance of the year. Despite lower sales, our profitability remains strong, our factories performed well, and we're seeing good price realization, which led to an improved gross margin rate in the second quarter. Company-wide operating margins were also higher as our teams have done a good job managing their spending during what is shaping up to be a challenging revenue environment. Consolidated operating profit margin was up nicely in the quarter, and all segments were at or greater than 29%. Our consolidated Backlog has now returned to pre-COVID levels, except for the powder coating business, which remains slightly elevated. Now turning to some commentary on our segments. Contractor sales rebounded nicely in the second quarter, growing by 6% when compared to last year. Year-to-date sales in contractor are now flat, erasing the deficit that we saw in the first quarter. Our new products are being well-received by customers everywhere. But North America was particularly strong with 9% sales growth in the quarter. Asia Pacific was another bright spot, and the container market started to improve after minimal activity last year. The positive momentum created by our new products is encouraging. With additional products launching in the second half of the year, we remain cautiously optimistic that contractor will post growth for the full year. Operating margins in contractor remained strong at 31% for the quarter and 30% for the year. Improved operating performance and lower input costs drove the increase despite higher new product development spending. The industrial segment declined 4% during the quarter. Overall, we're seeing less project activity in many geographies, and we believe that there is excess manufacturing capacity in parts of Asia Pacific. Growth in North America came primarily from backlog reduction and pricing, which was not enough to offset weak results in Asia Pacific, particularly China. There's also a slowing of activity in end markets, which have been strong the past couple of years, such as solar and battery. In EMEA, activity has slowed with some projects either being delayed or shifted to future quarters. We expect the operating environment in both EMEA and Asia Pacific to remain tough for the remainder of the year. Despite volume declines, operating margins for the quarter improved sequentially and were flat with last year, reflecting favorable price and cost dynamics. Moving on to the process segment, sales were down 9% compared to the same quarter last year with declines in all regions. Vehicle services and environmental equipment sales were positive for the quarter, But they were not enough to offset the broad-based weakness in our industrial lubrication, process transfer equipment, and semiconductor businesses. We expect softness to continue in both AMEA and Asia Pacific, particularly in the semiconductor and mining markets for the rest of the year. Moving on to the outlook. Our first half results were below expectations in our industrial and process segments. The strength in contractor will not be enough to offset this, so we are lowering our full year 2024 guidance to a low single-digit revenue decline on an organic, constant currency basis. While overall economic conditions are challenging, we continue to invest in our growth strategies and will manage the business for the long term. That concludes our prepared remarks. Operator, we're ready for questions.