Graco Inc.

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 .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 .graco.com and the SEC's website at .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 Knutson, Vice President, Controller, and Chief Accounting Officer.

Good morning, everyone, and thank you for joining our call. I'm here to give a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Graco reported second quarter sales of $572 million, an increase of 3% from the second quarter of last year. Excluding acquisitions, which contributed 6% growth, sales declined 3%. Currency translation had no effect in the quarter. Reported net earnings decreased 4% to $128 million, or 76 cents per diluted share, excluding the impact of excess tax benefits from stock option exercises. Adjusted non-GAP net earnings were $127 million, or 75 cents per diluted share, a decrease of 3%. The gross margin rate decreased 200 basis points in the quarter. The impact of acquisitions accounted for nearly 80 basis points of the decline, which will continue for the remainder of the year. In addition, tariffs increased $4 million in the quarter, resulting in an additional 80 basis point decline. Price realization was not enough to offset higher product costs, resulting from lower factory volume, tariffs, and unfavorable channel and product mix in the quarter. Operating expenses increased 2% in the quarter, driven by incremental expenses from acquisitions of $9 million, or 7%. Excluding expenses of acquired operations, operating expenses declined $7 million, or 5%, on savings from the One Graco initiative, lower sales and earnings-based incentives, and timing of stock-based compensation expense. Operating earnings decreased $4 million, or 2%, during the quarter, due to decreased factory volume and the effect of tariffs. Operating earnings as a percent of sales were 28% for the quarter, or 1% lower than the same period last year. Contractor segment operating margin rate for the quarter was 26% compared to 31% for the same quarter last year, a decline of 5% points. The acquisition of Prov decreased the contractor operating margin rate by 2% points, with the remaining decline due primarily to higher tariffs and lower factory volume. Interest and other decreased $3 million in the quarter. The volatility of the U.S. dollar, especially against European currencies, resulted in exchange losses on net liabilities of certain foreign operations of approximately $5 million for the quarter, which we don't expect to continue. The adjusted effective tax rate was 20%, which is consistent with our expected full-year tax rate of approximately .5% to .5% on an as-adjusted basis. Cash provided by operations totaled $308 million for the year, an increase of $50 million, or 19%. Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase. Cash flow from operations, less capital expenditures increased $93 million, or 51% for the year to date. Cash provided by operations as a percentage of adjusted net earnings was 144% for the quarter and 125% for the year to date. Significant -to-date uses of cash include share repurchases of 4.4 million shares totaling $361 million, dividends of $92 million, and capital expenditures of $30 million. These cash uses were offset by share issuances of $25 million. 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 a 1% favorable impact on net sales and no impact on earnings for the full year. Unallocated corporate expenses are projected to be $37 to $40 million for the full year. And finally, we expect capital expenditures to be approximately $60 to $70 million in 2025. I'll now turn the call over to Mark for further segment and regional commentary.

Mark Gooding Thank you, Chris. Good morning, everyone. All my comments will be on an organic, constant currency basis. Overall, sales were up 3% in the second quarter, including a 6% contribution from Corob offsetting an organic revenue decline of 3%. Contractor accounted for more than 80% of the organic revenue decline in the quarter, with the Americas being especially weak when compared to last year's strong second quarter. EMEA and Asia Pacific grew in all segments, including the semiconductor market and in China, which were depressed for most of last year. The current trade environment is still uncertain, causing many end users to delay project decisions and take a wait and see approach until trade negotiations and the tariff landscape is clearer. During the quarter, incremental costs related to tariffs were about $4 million, affecting EPS by $0.02. To offset the impact from tariffs, we have announced targeted price increases beginning in September. These pricing actions are focused on key markets and geographies, most impacted by tariffs, and are in addition to our normal beginning of the year price increases. We expect that these pricing adjustments, along with our mitigation efforts of product redesign and secondary vendor sourcing, will offset most of the full year impact from tariffs as they exist today. Incoming order activity remains steady during the quarter, compared to the full year, and consistent with billing activity, as backlogs are still at normal levels across all segments. The past six weeks rates have also been consistent with the full year run rate. The Home Center DIY channel has been our biggest challenge in the first half of the year, down low double digits. However, the current six week run rate has stabilized and exceeds the run rate of the second half of last year. Now turning to some commentary on our segments and regions. Contractor segment sales declined 5% in the quarter. North America was soft in core markets as contractors delayed new investments due to ongoing housing affordability issues, and a smaller project pipeline. The Home Center channel struggled from reduced foot traffic and reduced DIY demand in the Americas versus last year's second quarter and year end results, year to day results. This quarter was the most challenging comparable for contractor as the second quarter of 2024 had channel fill related to significant new product launches, resulting from delays which we discussed last year. We are expecting a stronger second half with easier comparisons, the effect of our pricing actions, and our upcoming new product releases. The industrial segment declined 1% with growth in the May and Asia Pacific not enough to offset a decline in the Americas. Harder finishing system sales were strong with increased quoting activity and improved performance in the Americas and Asia Pacific regions. This increase was not enough to offset, to fully offset declines in the other industrial product categories in the Americas. In several markets, end users are cautious and waiting for the next step to be seen. Quoting activity worldwide is still strong, but we expect end user caution will continue until greater clarity exists in the global trade environment. Last week, we announced the acquisition of ColorService, a global manufacturer of specialized automatic precision dosing systems for powders and liquids. Known for their expertise in gravimetric dosing technology, the company delivers precise weight-based material measurements that improve consistency and efficiency in production across various industries, including textiles, rubber, cosmetics, plastics, and food. Headquartered in Italy, ColorService employs approximately 140 people worldwide and an annual revenue of 34 million euros in 2024. We expect the transaction to close in the third quarter and the business will be part of our Gama Powder Division, which is part of the industrial segment. Expansion markets were down 3% for the second quarter as the positive momentum in the semiconductor market, which we started seeing at the end of last year, continued in the quarter. However, this was offset by a decline in the environmental business. Moving on to our outlook. Despite headwinds from uncertain global trade environments and the soft North American construction market, which led to our organic revenue decline in the quarter, on a full-year basis, our organic revenue is flat. Our consistent incoming order rates combined with pricing actions and an easier comparable in the contractor gives us confidence as we enter the back half of the year. Accordingly, we are keeping our 2025 revenue guidance of low single-digit sales on an organic constant currency basis. That concludes our repaired remarks. Shannon, we're ready for questions.