Graco Inc.

Good morning, and welcome to the fourth 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 your 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 Securities 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 1-A of the company's most recent quarterly report 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 of future events. I will now turn the conference over to Chris Knutson, Vice President, Controller, and Chief Accounting Officer.

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 fourth quarter sales of $549 million, a decrease of 3% from the same quarter last year. Acquisitions contributed 3% sales growth in the quarter. Excluding acquisitions, fourth quarter sales decreased 6%. The effect of currency translation had no significant impact on sales. Reported net earnings decreased 1% to $109 million for the quarter, or 63 cents per diluted share. excluding the impact of business reorganization charges excess tax benefits from stock option exercises and other prior year items adjusted non-gap net earnings were 110 million dollars or 64 cents per diluted share a decrease of 20 percent the gross margin rate decreased 200 basis points in the quarter realized pricing was not enough to offset sales volume declines occurring in all segments unfavorable product and channel mix and acquisition-related impacts. Machining and assembly hours declined on lower sales volume and inventory reduction efforts. Total operating expenses increased $19 million, or 15% in the quarter, mainly due to business reorganization costs of $7 million, expenses from acquired operations of $7 million, and litigation costs in the contractor segment associated with a trial that concluded in December of 2024 of $7 million. Total spent related to this legal matter was $9 million for the quarter and $16 million for the year. Reductions in volume and earnings-based expenses of $6 million partially offset this increase. Lower gross margin along with increased expenses during the quarter resulted in an operating margin rate of 24% compared to 30% for the same quarter last year. Excluding business reorganization costs, industrial segment operating margin rate for the quarter was 33% compared to 37% for the same quarter last year. And the process segment operating margin rate for the quarter was 29% compared to 28% for the same quarter last year. Excluding acquisitions and related costs, business reorganization charges, and litigation spending previously mentioned, contractor segment operating margin rate for the quarter was 27% compared to 29% for the same quarter last year. Total company operating margin rate excluding these impacts for the quarter was 29%, a decline of one percentage point compared to the same quarter last year. Excluding the impact of the pension settlement charge in 2023, Interest and other increased $2 million during the quarter, driven primarily by increased interest income on cash held. The adjusted effective tax rate was 21.5% for the quarter, due mainly to the unfavorable effects of foreign earnings taxed at higher rates. Cash provided by operations totaled $622 million for the year, a decrease of $29 million from last year, driven mostly by lower net earnings. Cash provided by operations as a percent of reported net earnings is 128% for the year. Significant year-to-date uses of cash include repurchases of 399,000 shares for $31 million, acquisitions of $242 million, dividends of $172 million, and capital expenditures of $107 million, of which $67 million related to facility expansion projects. These cash uses were offset by share issuances of $66 million. A few comments as we move forward to 2025. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency as in 2024, movement in foreign currencies would have an unfavorable impact of approximately one percentage point on net sales and two percentage points on net earnings for the full year of 2025. Unallocated corporate expenses are projected to be $39 to $42 million. The effective tax rate is expected to be 19.5 to 20.5%, excluding any impact from excess tax benefits related to stock option exercises and other one-time items. We expect capital expenditures to be approximately $50 to $60 million, as we have now completed expansion projects for nearly all of our operations. And finally, effective January 1st, 2025, the company moved to a global customer-centric operating structure, resulting in a non-recurring business reorganization charge of $8 million in the fourth quarter. Annual savings is estimated to be approximately $16 million. The new operating structure consists of three segments, industrial, expansion markets, and contractor. The industrial segment consists of the newly formed industrial division and the powder division. The company's previous industrial and lubrication equipment divisions, along with the process transfer equipment business that was part of the company's process division, combined to form the new global industrial division. The powder division remains unchanged. The company's environmental, semiconductor, high-pressure valves, and electric motors businesses, together with select future ventures and acquisitions in new or adjacent markets, have been combined to create the newly formed expansion market segments. The contractor segment remains unchanged as a reporting segment relative to prior periods. Segment operating results will be reported under the new organizational structure beginning with the first quarter of 2025. Segment information recast to conform to this new structure is available as supplemental information. I'll now turn the call over to Mark for further segment and regional commentary.

Thank you, Chris. Good morning, everyone. All my comments will be on an organic constant currency basis. I'd like to start today by welcoming Korab to the GRACO team. We closed the acquisition in November and integration activities are underway. Initial results have been as expected, generating 3% revenue growth in the fourth quarter. Korab brings high-tech dispensing and mixing solutions to GRACO in the growing paint and coating machinery and manufacturing category. This acquisition will enable us to leverage our existing products and channel while expanding our global manufacturing footprint. Overall, the year has been challenging, and the business landscape has been soft across many of our end markets. Declines in key industrial markets in China, along with weakness in our semiconductor business, drove much of the decline during the year. The softness continued into the fourth quarter, resulting in a 6% sales decline. These results were driven by lower sales volume in all segments and regions, except process North America and contractor Asia Pacific. Sales in the process segment improved during the quarter as we had growth across major project categories, including vehicle service, industrial lubrication, and environmental. While we continue to see revenue declines in the semiconductor markets globally, we had growth in North America in the quarter and have seen positive booking momentum in all regions. Protective coatings activities remain strong with growth in all regions. In particular, the container market has improved throughout the year in Asia Pacific. As Chris previously discussed, the reported results were lower during the fourth quarter compared to the rest of the year. However, excluding initiatives and unusual items in the quarter, revenue declined 6% resulting in a 12% reduction in operating earnings, which is consistent with the full year. The slower markets allowed us to speed up our M&A and reorganization activities that we believe will set us up for future growth. As we enter 2025, we expect these initiatives to drive incremental volume along with our pricing actions, resulting in strong incremental margins. In addition, our M&A pipeline remains active, and we're excited about the possibilities the new organizational structure can bring as we focus on new and adjacent markets. Now turning to some commentary on our segments and regions. Contractor declined 3% for the quarter and was down 1% for the year, driven primarily by softness in the U.S. housing and remodeling markets. Protective coatings were a bright spot with growth across all regions for both the fourth quarter and for the year. Steady performance in this market has been helped by infrastructure investments, increases in container market, along with rail, marine, and fireproofing. While the current construction environment remains mixed and pressures on housing affordability are likely to continue, our new products have been successful and are expected to contribute to growth. During the fourth quarter, we launched the new PowerShot XT electronic powered airless paint gun, which allows contractors to spray all day on a single charge. This product, along with additional 2025 releases and the full year impact of our 2024 launches, gives us optimism as we enter the new year, despite a mixed picture in the global construction markets. Industrial segment revenue declined 13% for the quarter and was down 6% for the full year. China was weak, particularly in our sealants and adhesive products, which impacts many of our key end markets, such as automotive, solar, and battery. Despite the revenue declines, Incoming order activity in China throughout 2024 has been steady, albeit at a lower level than 2023. We have seen positive signs as quoting activity has been improving and our sales team has expressed optimism as we enter the new year. The timing of completion and acceptance of powder finishing systems also resulted in a decline in the quarter. Booking activity in the powder division has improved, and we carry a slightly larger than normal backlog into the new year. Despite the tough year, the new industrial teams are energized by the full suite of Greco products and are focused on executing under the new customer-centric approach. Process was flat for the quarter, but down 8% for the year. Growth across Americas was offset by declines across EMEA and Asia-Pacific. Sales in the fourth quarter were the largest of the year and grew sequentially by 13%. Total revenue for the quarter was consistent with the prior year quarterly run rates. Order activity increased low double digits for the quarter, and our quarterly bookings were the largest we have seen in the past two years. However, backlog is back to normal, which contributed heavily to the prior year sales, especially in the semiconductor market. Moving on to our outlook. Our team demonstrated resilience, overcoming both commercial and operational obstacles in a challenging year with the dedication and resolve that define our company. We continue to generate strong cashflow and our balance sheet gives us flexibility. Over the past five years, we've invested heavily in our manufacturing footprint and automation capabilities, which puts us in a good position to meet future demand. Heading into 2025, We do anticipate that some of the challenging end market conditions we experienced last year will persist, but we are optimistic that the worst is behind us. Therefore, we are initiating a full year outlook for 2025 of low single digit sales growth on an organic constant currency basis. In closing, I'd like to thank our employees, suppliers, customers, and distributor partners around the world for their contributions throughout the year. It's been challenging, but in Graco fashion, we've been able to overcome the hurdles and set ourselves up for future long-term growth. While there are many things that contribute to our culture, it's our loyal and hardworking employees that make this company great. That concludes our prepared remarks. Operator, we're ready for the first question.