Graco Inc.

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. 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 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 2024 annual report on Form 10-K and in item 1A 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 or future events. I will now turn the conference over to Chris Knudson, 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 first quarter sales of $528 million, an increase of 7% from the first quarter of last year. Excluding acquisitions, which contributed 6% growth, sales grew 3% for the quarter. The effect of currency translation reduced sales by 2%. Reported net earnings increased 2% to $124 million or 72 cents per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $120 million or 70 cents per diluted share, an increase of 8%. The gross margin rate decreased 150 basis points in the quarter. The recurring impact of acquisitions accounted for nearly 100 basis points of the decline. Strong price realization was not enough to offset higher product costs resulting from lower factory volume, which accounted for the remaining decrease. Operating expenses were flat in the quarter as incremental expenses from acquisitions of $10 million or a 7% increase in total expenses were offset by savings from the OneGreco initiative and timing of stock-based compensation expense. Operating earnings increased $11 million or 8% during the quarter on increased sales volumes. Operating earnings as a percent of sales was 27% for the quarter, which is consistent with last year. Contractor segment operating margin rate for the quarter was 24% compared to 29% for the same quarter last year, a decline of 5 percentage points. The acquisition of Carab decreased the contractor operating margin rate by 3 percentage points, with the remaining decline due primarily to lower sales and factory volume. Interest and other were flat in the quarter. During the quarter, we recognized a gain on the sale of the former manufacturing and distribution facility in Switzerland of $5 million. This gain was offset by currency exchange losses and lower interest income. The adjusted effective tax rate was 20.5%, which is consistent with our expected full-year tax rate of approximately 19.5% to 20.5% on an adjusted basis. Cash provided by operations totaled $125 million, an increase of $6 million from last year. Cash provided by operations as a percent of adjusted net earnings was 104%. Significant year-to-date uses of cash include share repurchases of $238 million, dividends of $47 million, acquisition adjustments of $10 million, and capital expenditures of $11 million. These cash uses were offset by share issuances of $28 million. We repurchased 2.8 million shares, totaling $238 million during the first quarter of the year. We continue to repurchase shares in the first weeks of April, and as of market close yesterday, we have repurchased 4.4 million shares for nearly $360 million year to date. Based on this activity, we anticipate the average diluted shares outstanding for the full year 2025 to be approximately 170 million shares. A few comments as we look forward to the rest of the year. 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 no impact on net sales or net earnings for the full year. Unallocated corporate expense remains unchanged and are projected to be $39 to $42 million for the full year, or about $11 million per quarter. Finally, we expect capital expenditures to be approximately $50 to $60 million in 2025. 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. Overall, the start of the year was strong. We had 7% sales growth, including a 6% contribution from Corab and 3% organic sales growth. Corab has met our expectations as we continue our integration efforts. For the quarter, all segments and regions grew, except for contractor EMEA. which experienced slower activity in the professional paint channel. Reduced foot traffic in the home center channel also contributed to a slight decline in the contractor segment, despite robust growth in the North America pro paint channel. Last year, declines in our global semiconductor and China industrial businesses accounted for nearly 60% of the overall annual revenue shortfall. As expected, these businesses grew in the first quarter, driving positive results in both the industrial and the new expansion markets segments. Incoming order activity was steady during the quarter and consistent with billing activity. Backlogs remain at normal levels across all segments. For the past six weeks, incoming order rates have been up double digits compared to the first quarter run rate. This is only one data point, and it may include orders placed in advance of tariffs. After the close of the quarter, the announced tariffs between the United States and China will have an impact on our business. China accounted for nearly 6% of our global revenue for the full year 2024 and for this quarter. In addition, nearly 6% of our cost of goods sold has China as the country of origin. Our teams are developing plans to mitigate these impacts, but these will take time to implement. Activities we're undertaking include qualifying additional suppliers, moving component manufacturing to our U.S. factories, and redesigning products where components are either too costly or unavailable to purchase from Chinese vendors. We have about three months of finished goods inventory in China and about three months of components in our U.S. manufacturing locations that will help limit our exposure in the second quarter. We have implemented a pricing surcharge on all goods subject to tariffs shipped into China. This pricing surcharge is specifically targeted at retaliatory tariffs in China and will not affect the rest of our business in the Asia Pacific region. While we've not ruled out the possibility of additional pricing actions this year, our U.S.-based manufacturing footprint, current inventory levels, and strong financial position gives us the opportunity to be thoughtful regarding further pricing actions. Now turning to some commentary on our segments and regions. The contractor segment sales declined 1% in the quarter due to continued softness in the home center business and challenging AMEA construction markets. Pearl Paint had a strong performance in North America compared to a soft quarter last year, but it was not enough to offset these declines. We also have not seen the full benefit of products launched this year as they will be introduced over the next few quarters. These upcoming releases, coupled with the successful introduction of new products last year, should position us well for the remainder of the year. Our strategic US sourcing and manufacturing footprint will also give us an advantage in the United States versus key competitors who manufacture offshore, particularly in China. The US market represents nearly 70% of total contractor sales, excluding acquisitions. Industrial segment sales increased 5% with growth in all regions. Powder finishing system sales saw strong activity in Asia Pacific compared to a soft first quarter last year, while liquid finishing systems had steady performance across other regions. Vehicle services performed well as companies continued to make investments in their service and repair shops. Increased volume in the industrial segment drove incremental margins of nearly 100% for the quarter. Sales in the expansion markets segments increased by 12% with positive momentum in the semiconductor market, which we started seeing at the end of last year. The environmental businesses also grew in the fourth for the fourth consecutive quarter with robust activity in the groundwater testing and gas analyzer categories. Moving to our outlook. We are maintaining our full-year revenue guidance of low single-digit growth on an organic constant currency basis. Evolving trade policies and tariffs with China have created economic uncertainty that could negatively impact our full-year revenue guidance by approximately 1% to 2%. We're closely monitoring developments and will adjust our strategy if necessary. Despite these near-term challenges, Graco remains strongly positioned for long-term success as we continue to execute our proven growth strategies and invest in our businesses. That concludes our prepared remarks. Operator, we're ready for questions.