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 questions and answers after the opening prepared 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. Forelook and 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 am 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 more commentary. Yesterday, Brecker reported fourth quarter sales of $593 million, an increase of 8% from the same quarter last year. Acquisitions contributed 4%, currency translation 2%, and organic sales another 2% to growth in the quarter. Reported net earnings increased 22% to $133 million, or 79 cents per diluted share. Excluding the impact of excess tax benefits from stock option exercises, a non-recurring tax benefit, and a prior year business reorganization charges, adjusted non-GAAP net earnings were 77 cents per diluted share, an increase of 20%. The gross margin rate increased 80 basis points compared to the same quarter last year. The effects of our targeted interim pricing actions more than offset higher product costs resulting from lower factory volume, unfavorable effects of lower margin rates from acquired operations, and incremental tariffs. Tariffs affected product costs by $4 million in the quarter, resulting in a 70 basis point decline in the gross margin rate. For the full year, tariffs of $14 million had an unfavorable impact of 60 basis points on the gross margin rate. Operating expenses decreased $1 million, or 1%, in the quarter. The decline was driven primarily by business reorganization costs of $7 million and litigation costs of $9 million from the prior year that did not recur. Offsetting these costs were incremental expenses of acquired operations of $7 million and higher incentive-based costs. Contractor segment operating margin rate for the quarter was 24% and was consistent for the same period last year, excluding business reorganization charges and litigation spending. Expansion markets segment operating margin was 28% compared to 20% for the same quarter last year. Expansion markets had upfront electric motor license fee revenue of $5 million in the quarter and $7 million for the full year. These upfront license fees increased the operating margin rate for the quarter by 9 percentage points and 3 percentage points for the full year. Total company adjusted operating earnings increased $21 million or 15% during the quarter. Adjusted operating earnings as a percentage of sales was 27% for the quarter, compared to 25% for the same period last year. The full year adjusted effective tax rate was 20.5%, which is consistent with our expected full year and prior year tax rate on an as-adjusted basis. Cash provided by operations totaled $684 million for the year, an increase of $62 million, or 10%. Excluding acquisitions, inventory was $336 million, down $46 million for the full year, and down $140 million from its peak of $476 million at the end of 2022. Inventory is currently at its lowest level since June 2021. Cash provided by operations as a percentage of adjusted net earnings was 153% for the quarter and 137% for the year to date. Significant year-to-date uses of cash include share repurchases of 5.1 million shares, totaling $423 million, dividends of $183 million, acquisitions of $135 million, and capital expenditures of $46 million. These cash uses were offset by share issuances of $37 million. A few comments as we move forward to 2026. Based on current exchange rates, assuming similar volumes, mix of products, and mix of business by currency as in 2025, movement in foreign currencies would have a 1% favorable impact on net sales and net earnings for the full year 2026. The effective tax rate is expected to be 20% to 21%, excluding any impact from excess tax benefits related to stock option exercises and other one-time items. Projected unallocated corporate expenses and capital expenditures are projected to be $40 to $43 million and $90 to $100 million, excluding approximately $50 million up for facility expansion projects for the full year, respectively. Finally, 2027 will be a 53-week year with an extra week occurring in the fourth quarter. I will now turn the call over to Mark for further segment and regional commentary.

Thank you, Chris. Good morning, everyone. I'm pleased to report record sales in both the fourth quarter and for the full year. Sales were up 8% in the fourth quarter, with acquisitions contributing 4% of the growth. Organic sales at constant currency were up 2% from growth in both the industrial and contractor segments. Despite continued sluggish conditions in core construction markets, improved performance in the home center channel, and double-digit growth and the CORA business allowed contractors to achieve organic growth in every region this quarter. Our industrial business had 11% growth in the quarter with strong organic performance in both the Americas and MAF due to broad-based market improvement and the timing of completion and acceptance of systems-based projects. For the year, acquisitions contributed $113 million of revenue or 5% growth. We have successfully integrated CORA while also completing the acquisitions of Radia and Color Service. Together, these businesses are expected to generate nearly $190 million in full year revenue. They have extended our market reach, provided new product lines and innovation, and expanded our manufacturing footprint. Our acquisition pipeline is strong. and we are committed to generating one-third of our long-term revenue growth through executing smart and disciplined strategic acquisitions. In 2025, operating cash flow of $684 million was up 10% from 2024 and was 137% of our adjusted net earnings for the year. This impressive cash flow has allowed us to invest $135 million in acquisitions, deploy nearly $50 million in capital expenditures, and return over $600 million to shareholders in dividends and share repurchases. We finished the year in a net cash position of $600 million. In summary, our balance sheet is strong, providing us with the flexibility to achieve our long-term objectives. Turning to segment performance. Contractor segment sales increased 8% in the fourth quarter, with acquisitions contributing 5%, currency translation 2%, and organic sales another 1% of the growth. The biggest driver of the organic growth was Corab, which grew 25% in the quarter. Sales volume improved, with this being Corab's largest fourth quarter in the past three years. The Corab acquisition has performed as expected. and the Radia acquisition brings added capabilities to this attractive and growing space. The home center channel had growth in the quarter. However, foot traffic in the channel is still light. The propane channel grew sequentially despite slower sales compared to last year. The overall market for contractor equipment is flat, with affordability concerns keeping activity subdued. Despite flat conditions, we've been investing in new products, which along with our pricing actions and the acquisitions previously mentioned, are having a positive impact on our outlook this year. Turning to the industrial segment, we delivered a strong fourth quarter with sales up 11% driven by a combination of solid organic performance and contributions from the color service acquisitions. Organic growth of 5% was primarily the result of project completions in powder finishing systems, as well as good growth in the Americas and EMEA, offsetting declines in Asia Pacific, particularly China. For the full year, China grew in both revenue and bookings. Incremental margins for this segment were remarkably strong at 76% for the quarter and 117% for the full year, reflecting the benefits of one Graco. Expansion markets declined 6% in the quarter, but grew for the full year with high single-digit full-year sales growth in our semiconductor business. During the quarter, we had declines in our semiconductor, high-pressure valve, and environmental businesses as compared to last year when we saw increased activity in all regions. Despite the quarterly decline, we had sequential revenue growth with this being our largest revenue quarter of the year. As Chris mentioned, our electronic motor business recognized upfront license fees resulting from from the work our team has done to introduce this technology to OEMs and motor manufacturers. This proven technology is in Graco products today, and while we're optimistic about opportunities for signing more license agreements in the coming years, our revenue outlook does not include any estimates for upfront license fees in 2026. Moving on to our outlook. As we reflect on the past year, we are pleased that revenue grew in each segment and region. Both the industrial and expansion market segments grew organically for the full year, and we are optimistic about the growth in contractor in the fourth quarter. We're also pleased with the performance and contributions made by Corab, Color Service, and Radia this year, and we're hopeful that we will continue to see actionable opportunities in 2026. Ricoh has engaged employees that are focused on our key initiatives of product innovation, pursuing strategic acquisitions, and advancing the One Greco operating model. We're offering 2026 revenue guidance of low single-digit organic growth on a constant currency basis and mid-single-digit growth after factoring in expected incremental sales from the color service and radio acquisitions. In closing, as we enter our 100th year, I would like to thank our employees, suppliers, distributor partners, and customers around the world for their contributions. While the last few years have been challenging for manufacturers like Graco, we navigated the obstacles and delivered meaningful value to our customers and shareholders. There are many things that contribute to our confidence in the future, but none more than our loyal and hardworking employees. That concludes our prepared remarks. Operator, we're ready for questions.