Graco Q2 2025 Earnings Results & Report

Graco EPS Results

• Actual EPS: $0.75
• Consensus EPS: $0.78
• Beat/Miss: Missed by -$0.03
• One Year Ago EPS: $0.77
• EPS Beat Rate: 2 of last 8 quarters

Graco Revenue Results

• Actual Revenue: $571.81 million
• Expected Revenue: $590.57 million
• Beat/Miss: Missed by -$18.76 million
• YoY Revenue Growth: +3.40%

Graco (NYSE:GGG) designs, manufactures and markets equipment used to move, measure, control, dispense and spray fluid and coating materials. Its products include pumps, meters, fluid-handling systems and spray equipment used with paints, coatings, sealants, lubricants and other materials.

The company serves customers in industrial and process markets, as well as contractors working in areas such as painting, building maintenance and surface preparation. Graco sells its products worldwide through a network that includes distributors and direct sales.

Founded in Minneapolis in 1926 as the Gray Company, Graco began by making equipment for lubricating vehicles. It is headquartered in Minneapolis, Minnesota.

Graco Q2 2025 Earnings Call Transcript

Key Takeaways

• Negative Sentiment: In Q2, core sales declined 3% excluding acquisitions and adjusted net earnings fell 3% to $0.75 per share, as gross margins contracted 200 bps due to tariffs, lower factory volumes and unfavorable mix.
• Positive Sentiment: The company generated operating cash flow of $388 million (up 19%), achieved a 51% increase in cash flow after capex and 144% cash conversion in the quarter, and deployed $361 million to share repurchases plus $92 million in dividends.
• Positive Sentiment: Graco announced targeted low-single-digit price increases effective September to offset $4 million of Q2 tariff costs, complemented by product redesign and alternative vendor sourcing.
• Positive Sentiment: Graco agreed to acquire ColorService, an Italian precision dosing systems maker with €34 million of 2024 revenue, to enhance its industrial segment; the transaction is expected to close in Q3.
• Negative Sentiment: The Contractor segment saw a 5% organic sales decline and a five-point margin drop due to weak North American housing and DIY markets, though management anticipates a stronger second half on easier comparisons, pricing actions and new product releases.

Presentation

[Operator]

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 Securities Litigation Reform Act.

[Operator]

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 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'll now turn the conference over to Chris Knutson, Vice President, Controller, and Chief Accounting Officer.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan 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 $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 $0.76 per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $127 million, or $0.75 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.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

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 one percentage point lower than the same period last year.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Contractor segment operating margin rate for the quarter was 26% compared to 31% for the same quarter last year, a decline of five percentage points. The acquisition of COROB decreased the contractor operating margin rate by two percentage 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 19.5%-20.5% on an as-adjusted basis. Cash provided by operations totaled $308 million for the year, an increase of $50 million, or 19%.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase. Cash flow from operations left 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 year-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 net earnings for the full year.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Unallocated corporate expenses are projected to be $37 million-$40 million for the full year. Finally, we expect capital expenditures to be approximately $60 million-$70 million in 2025. I'll now turn the call over to Mark for further segment and regional commentary.

[Mark Sheahan, CEO and President at Graco Inc]

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. AMEA 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.

[Mark Sheahan, CEO and President at Graco Inc]

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.

[Mark Sheahan, CEO and President at Graco Inc]

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-to-date and year-end 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 AMEA and Asia-Pacific not enough to offset a decline in the Americas. Powder finishing system sales were strong, with increased quoting activity and improved performance in the Americas and Asia-Pacific regions.

[Mark Sheahan, CEO and President at Graco Inc]

This increase was not enough to fully offset declines in the other industrial product categories in the Americas. In several markets, end users are cautious and waiting to see the result of ongoing trade negotiations. 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 Color Service, 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, Color Service employs approximately 140 people worldwide and had an annual revenue of EUR 34 million in 2024.

[Mark Sheahan, CEO and President at Graco Inc]

We expect the transaction to close in the third quarter, and the business will be part of our Gema 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 an uncertain global trade environment 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 on the contractor, give us confidence as we enter the back half of the year.

[Mark Sheahan, CEO and President at Graco Inc]

Accordingly, we are keeping our 2025 revenue guidance of low single-digit sales on an organic constant currency basis. That concludes our prepared remarks. Shannon, we're ready for questions.

[Operator]

Thank you. The question-and-answer session will begin at this time. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Your questions will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Deane Dray with RBC Capital Markets. Please state your question.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone.

[Mark Sheahan, CEO and President at Graco Inc]

Hi, Dean.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Good morning.

[Mark Sheahan, CEO and President at Graco Inc]

Good morning, Deane.

[Deane Dray, Managing Director at RBC Capital Markets]

Hey, can we start with the price increase announcement? This is far from being as seismic as it was back in 2022 when you did the first time ever intro year price increase. This one seems certainly warranted given the tariff pressures. Can you just, how is this price increase different? Can you size it? Anything about the implementation? Is this all price? Any surcharges? Any color there would be great. Thanks.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Yeah, great. Thanks for the question. I think when we spoke last, we said we wanted to be patient when it came to what we wanted to do with respect to the tariffs. As things played out, I think that patience was smart because the overall impact got less and less as facts came out and things got clarified. Nonetheless, we did start to see some of the impact hitting us. We were also watching what was happening in the end markets that we participate in and seeing what was happening with a number of the competitors who were also raising prices. That gave us the opportunity and the confidence to know that we could also do the same thing. We are not doing anything other than trying to offset the pressure that we have got in our P&L.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

I characterize the increases as targeted, and targeted at the geographies and the areas where we are seeing the most input cost pain. I also characterize them as sort of low single-digit type increases in a few select areas within the business that will offset the tariff pressure that we see for the rest of the year, provided that the landscape stays the way that it is.

[Deane Dray, Managing Director at RBC Capital Markets]

That's real helpful. For David, free cash flow was one of the bright spots in the quarter, just in terms of conversion. Was there anything, any one-timers in there at all? Or just, yeah, what do you attribute the strength of the conversion this quarter?

[David Lowe, CFO and EVP at Graco Inc]

Thank you. Yeah, we called that out because we thought it was a pretty solid sign as to the cash generation capacity of the company. Thanks for asking the question. I would say our attention to inventory continues to contribute to what you really started to see last year with a focus on improving turns, which are less than world-class in the industrial sphere. It was another good quarter there. Of course, certain aspects of our One Graco initiative contribute to greater efficiency. Focus on expanding centers of excellence, which will make our manufacturing operation over time more efficient. Also, in small steps, are helping our cash conversion. I'd like to think that what we saw here is not one time. Of course, our business does have a seasonal component, the contractor side of it.

[David Lowe, CFO and EVP at Graco Inc]

We have not done anything about that, but we feel very good about the future cash generation capacity of the company.

[Deane Dray, Managing Director at RBC Capital Markets]

That's great. Just to clarify, when you say better progress in inventory, what's interesting this quarter, we've seen a number of companies actually adding inventory through a pre-buy or some buffer inventory to kind of smooth out with all the tariff noise, but you're actually making progress and reducing inventory?

[David Lowe, CFO and EVP at Graco Inc]

Yeah, I mean, we took a day. I mean, again, there are some things that we absolutely need to have, and we've been aggressive where we've needed to be aggressive on the sourcing side. Overall, to some degree, we sort of significantly expanded the raw material that we were carrying from the whole sourcing escapade of a couple of years ago. For the most part, we've been comfortable working that down to what would probably you would say is more normalized levels because we've got more confidence in our supply chain.

[Deane Dray, Managing Director at RBC Capital Markets]

Great color. Thank you.

[Operator]

Thank you. Our next question comes from Mike Halloran with Baird. Please state your question.

[Operator]

Hi, good morning, everyone. This is Pazan for Mike. I wanted to follow up on the Color Service acquisition. Could you maybe tell us a little bit about how the acquisition came about? You mentioned in the press release that it opened up new opportunities. Could you maybe discuss the opportunity and how you see it fitting into the portfolio with a little more color, please?

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Yeah, Paz, thanks for the question. Actually, a few years ago when we started to think more about external growth in addition to our organic initiatives, we really challenged our teams to take a look not only at their existing portfolios, but other adjacent technologies that might be interesting to them. Our powder team, led by [Claudio Marengo] of the Gema group, they really did a nice job of looking at some opportunities that are not necessarily powder paint, but technologies that they understand. They really surfaced this area as a potential target area for us. That led to some discussions with the ownership and ultimately resulted in the acquisition.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

What we like about it is the growth rates have been pretty good of this business, maybe slightly better than what we have seen in the legacy Graco businesses, at least over the last five years. It is technology that we understand. It is dosing. It is measuring. It is gravimetric measuring, which we understand and we know about. The location is good for us because it is closely located to our SAT business in Italy. The leadership team of SAT will actually be working very closely with Color Service's leadership team to make sure that we capitalize on any integration possibilities, opportunities to help them with operations, production, be more efficient. It was really a combination of a lot of different things that caused us to get excited about this. They have some big customers too, which is nice. They are involved with all the tire manufacturers.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

They get involved in the textile industry, cosmetics. It does broaden out our portfolio a little bit beyond what we have seen in the past.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Great. No, that's helpful. If we switch gears a little bit, if we look at your core kind of construction markets, what are you looking for to feel like your customers are gaining more confidence? Particularly in the DIY and home center area where maybe U.S. consumers have been a little bit stressed and housing markets have been tight. At this point, what do you think is the green shoot that is necessary to get some of these projects moving?

[Mark Sheahan, CEO and President at Graco Inc]

It has got to be affordability, right? Obviously, a rate reduction would help quite a bit as long as the prices do not go up when the rates go down. Unfortunately, when the rates went up, the prices really did not go down as you would have expected them. Affordability is still the biggest challenge I see in the new construction market that we have. That impacts activity, obviously, and also impacts our spray foam business to a certain extent because a lot of the new builds are using that technology in there. I think any major shift in affordability would be very much appreciated. I know it is on the radar. We have read a lot of different reports, and we have been listening to some of the commentary coming out of Washington. I think that they know that this is an issue.

[Mark Sheahan, CEO and President at Graco Inc]

There are still a number of people that are locked in at low mortgage rates, and they just cannot move even though they would like to move. If you look at the number of homes being sold this year and last year, it is extremely low compared to what you would expect in a normal economic environment in a country the size of the United States. There is quite a bit of pent-up demand, I would say, that is yet to be unleashed, hopefully, once the affordability gets a little bit in better shape.

[Mark Sheahan, CEO and President at Graco Inc]

Thanks for the color. I'll pass it on.

[Operator]

Thank you. Our next question comes from Saree Boroditsky with Jefferies. Please state your question.

[Saree Boroditsky, Equity Research Analyst at Jefferies]

Hi, thanks for taking the question. Maybe just first, building on the price increase, I believe the last time you did a mid-year price increase, you took less price in the following year. Would you think about something similar as we think about 2026? Do you take any more pricing on the industrial side versus contractor given the more consumer focus?

[Mark Sheahan, CEO and President at Graco Inc]

Yeah, I think that we would expect that we'll have a normal price increase at the beginning of next year to answer the first question. In terms of where are we targeted, how are we targeted, both groups participated in the price increase at different levels, both contractor and industrial and expansion markets, I should add. This was something that we did across all of our business units.

[Mark Sheahan, CEO and President at Graco Inc]

Maybe going on about the uncertainty that we're seeing, but some of the other markets, could you provide some more detail on what you're seeing from customer spending by end market in the industrial segment? Do you expect any changes from some of the incentives with the one big beautiful bill?

[David Lowe, CFO and EVP at Graco Inc]

I think the latter question is big picture, long-term. Clarity on tax rates, favorable treatment on investments, and related things in manufacturing will over time be a real positive for Graco. Reshoring, onshoring, relocation is good for our business. I would say that if you're in the first part of your question, we could talk at length, but just to give you a flavor, our teams—I'll touch on a couple of specific markets, but pipelines are good, quotations active. Some end users are more willing to pull the trigger when there is this cloud of uncertainty that Mark talked about than others. If I had to generalize on a global basis, I'll name certainly markets that at the moment have some positive momentum and then some that are a little bit softer.

[David Lowe, CFO and EVP at Graco Inc]

The automotive OEM market is positive, especially the area around EV where battery activity has improved, at least recently. They tend to be large orders, so the business is lumpy. Also, the automotive component supplier market is strong, especially in the Asia-Pacific market. Our vehicle service business, the dealer lubrication business, has been strong. Mark touched on the strength of powder equipment. That shows up in the architectural profile market, agricultural equipment, and also other automotive components. We see markets being active and people pulling the pin. I would say the slower areas, reflecting what we know about the business, there are regional differences, but solar here in North America is quite soft. The transportation market, especially the truck OEMs, really have been significantly slower than we have seen.

[David Lowe, CFO and EVP at Graco Inc]

Mining, which affects our lubrication product line, we've seen a slowdown with the large customers that sell equipment to the big mines. Aerospace has sort of entered a soft patch. No surprise, in light of the contractor discussion we had, markets like window and door and wood products are soft.

[Mark Sheahan, CEO and President at Graco Inc]

Yeah, I would just say that with all that good color that David provided, you got some ups, you got some downs, but in net terms, it's a pretty flat environment. There's still a lot of caution out there amongst our end users that are wanting a little bit more clarity around what the trade landscape is going to look like. I think once that gets cleaned up, there is a potential that there's some projects that get released and there's some pent-up demand in the pipeline is what our teams are telling us.

[Saree Boroditsky, Equity Research Analyst at Jefferies]

Appreciate all the color. Thank you.

[Operator]

Thank you. Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Please state your question.

[Jeff Hammond, Managing Director at KeyBanc Capital Markets]

Hey, good morning, everyone.

[Mark Sheahan, CEO and President at Graco Inc]

Morning, Jeff.

[Jeff Hammond, Managing Director at KeyBanc Capital Markets]

Just on the guide, holding the low single-digit growth, you were kind of flat in the first half. I am just wondering. What informs kind of the better second half? Is it comps? Is it this next bite of the apple on price? Is it order trends getting better? Just what gives you confidence you see the uptick?

[David Lowe, CFO and EVP at Graco Inc]

Yeah, I think it's all those things. I think we probably said some of them, or at least I did in my script. We do have the price that'll kick in in September. That'll be helpful. When we look at the run rates, they've been fairly consistent for a short-cycle business. You always get some volatility that pops in and out. Generally speaking, we feel pretty good about the incoming order rates. Then comparing those to what we saw in the back half of last year, that's how we really got to the numbers that we are comfortable with. Again, do I like a low single digit? No. I mean, I'd like to see a lot more.

[David Lowe, CFO and EVP at Graco Inc]

Given the fact that we're flat and we've had some of this turbulence in the first half of the year, I think that we feel reasonably confident that we can get to the guide by the end of the year.

[Jeff Hammond, Managing Director at KeyBanc Capital Markets]

Okay. And then, along with the strong free cash flow, you guys have really stepped up buyback. Just a little more color on how you're thinking big picture about capital allocation and maybe taking a more aggressive approach, both buybacks and deals here going forward.

[David Lowe, CFO and EVP at Graco Inc]

Okay. I'll take a shot at that. I think you make a good point that it's really with the cash flow that we have from operations, our business model is an and, not an or. Our first choice continues to be investing in the business, investing in new technology because that's how we think in these business-to-business niche markets that we participate in. That's how you win. We like our operations. We invest aggressively in state-of-the-art automation, machine tools, and such. In my 30 years here, that's not an aspect of our business model that we have ever stinted on. As far as transactions, M&A goes, I think the last year has been instructive that we started a process three years ago, a disciplined process, step by step. Sometimes slow to get off the ground, but over the last nine months, we've committed to well over $300 million to deals.

[David Lowe, CFO and EVP at Graco Inc]

As you know, we have the dry powder to do more. There continue to be transactions in the works that we are excited about. Yes, we talk about our stock repurchase activity as being opportunistic. That's the approach that we've taken over the long, long cycle, and we think it's been successful. We put over $360 million to work. I think that what will determine the future level of that activity is what we see in the market. We really do like buying when the market is less enchanted with the prospect of companies that serve cyclical markets. From 2008, 2009 to 2015 to 2020 to 2022, we've stepped up when we've had that opportunity.

[David Lowe, CFO and EVP at Graco Inc]

Okay. Perfect. Thanks, guys.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Thanks, Jeff.

[Operator]

Our next question comes from Brad Hewitt of Wolfe Research. Please state your question.

[Brad Hewitt, VP and Equity Research at Wolfe Research]

Morning. Thanks for taking my questions. One of your significant customers and contractors pointed to an outlook for a low single-digit decline in paint stores volume in 2025. I know it's not entirely apples to apples, but curious how that compares to your contractor market volume expectations for the year. How much visibility do you have to a return to positive organic growth and contract in the second half of the year?

[David Lowe, CFO and EVP at Graco Inc]

Yeah, I'd have to probably peel the onion back a little bit to give you a good answer to the first question, not having all the details in front of me. What we did with our business is we really tried to look at it globally and holistically. We look at the different product categories, and Pro paint is one of them, but we also have a DIY base. We also have a spray foam product line. We have protective coatings equipment. These are global businesses. Looking at the order rates and looking at the activity in the end users and the markets, we put our forecast together for the remainder of the year. Also knowing that the back half of our year last year was not robust, we may have had an easier comparison than the company that you're referencing.

[David Lowe, CFO and EVP at Graco Inc]

For us, targeting and projecting and predicting the future is always a big challenge given the short-cycle nature of our business. The markets, they're not in bad shape. There's still activity out there. Painters are still buying equipment. Equipment breaks all the time. There's decent activity. It's just not robust activity. I think the earlier question that I got on what we're looking for in terms of a green shoot, it's really once the affordability gets a little bit better, there will be more project activity. More people are going to be moving out of their homes into new homes. That creates a lot of remodeling activity. It's really trying to pinpoint exactly when that's going to happen. We're probably not the best at being able to do that, but all in all, I feel pretty confident in the guide that we're giving.

[David Lowe, CFO and EVP at Graco Inc]

Yeah. I would just add that I think that channel partner that you're talking about a couple of times described their business environment as choppy. I think that's exactly how we would define it. They do a good job of splitting out key markets, including their consumer DIY space, which they cited as being particularly slow. Also, the auto or finish market and the wood products markets. Where they talk about things being slow, we would tend to agree. Where they talk about seeing some pockets of strength, for example, in the protective coatings market and equipment market, in our particular space, we would also agree. It's one of the challenges when you serve as many markets as we do to try to roll it all up when, as you've seen for the first six months of the year, you're right at the waterline.

[David Lowe, CFO and EVP at Graco Inc]

I would agree with everything that's been said about, from the current order rate all the way through to the things that we are doing in the second half of the year. Let's hope for some increasing clarity on trade-related uncertainty. Should help us achieve our projected outlook.

[Brad Hewitt, VP and Equity Research at Wolfe Research]

Okay. That's helpful. Then, as it relates to the 1%-2% revenue headwind for the year related to China, I noticed you guys picked that out of the slides, but it's still in the 10-Q. Is it fair to think the base case expectation there is for closer to a 1% headwind or maybe even less, given the year-to-date results and the rollback into China tariffs?

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

I would say that for us, the China market has come back. This is Chris, by the way. We took out the hedge as part of our outlook. I think it's still in the 10-Q as part of one of our risk factors to let everybody know that, hey, this is kind of our exposure that we have there. We have seen activity within the China market pick up, particularly in the powder coating space. Despite the tariffs, we are optimistic that coming off of a pretty low year, we're going to have growth there.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Great. Thank you.

[Operator]

Thank you. Our next question comes from Matt Summerville with D.A. Davidson. Please state your question.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

Thanks. I wanted to just talk a little bit more about M&A. You're talking about your second deal in the last, call it, nine months or so for you guys. Mark, do you feel like you've finally been able to establish Graco as a company that has an M&A pipeline and funnel and team in place that you can really become more of a compounder, of an inorganic compounder of capital? To that point, can you maybe speak to the actionability you see looking ahead, average deal size, things like that?

[Mark Sheahan, CEO and President at Graco Inc]

Yeah. Thanks for the question, Matt. As I've been pretty transparent on this for quite a while, we really felt, as a management team, that we needed to create an infrastructure and an awareness that while our organic growth is great, we have a nice opportunity to add to that with good strategic acquisitions. We really had to build the pipeline up from scratch. I think I've said this. If I'm repeating myself to you, I apologize, but I could have asked any of our leaders for their M&A target list when I got this job, and they would have given me a list, but there would have been no detail behind it. Now we've got really good pipelines with companies that we believe would be good strategic fits for Graco. We've talked to the owners. We understand why they fit.

[Mark Sheahan, CEO and President at Graco Inc]

We have opportunities in terms of being able to make them better organizationally. I think that with respect to what's happening in the market right now, I think that the pricing has gotten a little bit better compared to what it would have been back in 2021 when I became CEO. The other thing that's happened here is we've gained some really confident people within our organization that feel like we can drive value in these businesses beyond just operational synergy value. We think that there's customers that we share in common where we can get some leverage. We also believe that our global footprint gives us some opportunities to maybe make some of these businesses bigger and more profitable than what they are. I think we built up some real competency within the Graco organization to be able to not only identify, but to integrate these acquisitions fairly seamlessly.

[Mark Sheahan, CEO and President at Graco Inc]

The owners, I think, are pleased with what they've seen, at least in the short term here. I like what I see. The pipeline looks great. There are activities happening even as we speak. You never know what's going to happen, but I feel like our chances to be able to add on inorganic growth to the organic growth machine that we have in Graco are really pretty good.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

Thanks. Just as a follow-up, in realizing with expansion markets, it does not take all that much in absolute revenue dollars to move the organic pendulum one way or the other. I guess I am a little bit surprised. I would have thought the environmental business would maybe be a bit more steady for Graco. Can you talk about what maybe drove the rollover there? If you are seeing any wavering on the semiconductor side of the business, it sounds like you are not, but I just want to put a finer point on that. Thank you.

[Mark Sheahan, CEO and President at Graco Inc]

Yeah. I mean, when you're looking at 13 weeks, it's always a little bit dangerous. We did hear that there may have been some federal money that got tied up after the first quarter with respect to some of the environmental policies that are being talked about in Washington compared to what may have been talked about previously. I'm not that well educated on that particular topic, but I think that could have been a factor there. We really do not think that long-term anything is going to change in that category. It is a 13-week time period, so there's always a little bit of volatility that's going on there. Semi, we feel pretty good about. I think they might have a tough comp in the fourth quarter, but other than that, activity is good.

[Mark Sheahan, CEO and President at Graco Inc]

As you know, there's all kinds of fabs being talked about globally, whether you're in Europe or here in the U.S.. We think we got a good chance of getting some of that business. It feels much better than it did 18 months ago when we had big backlogs, but not much orders. Now we've got reasonable backlogs and orders are coming in. I feel good about that for the rest of the year.

[Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson]

Thanks, Mark.

[Mark Sheahan, CEO and President at Graco Inc]

Yep.

[Operator]

Our next question comes from Andrew Buscaglia with BNP Paribas Exane. Please state your question.

[Andrew Buscaglia, Senior Analyst at BNP Paribas Exane]

Hey, good morning, everyone.

[Mark Sheahan, CEO and President at Graco Inc]

Morning.

[Andrew Buscaglia, Senior Analyst at BNP Paribas Exane]

I just want to get your thoughts on incremental margins this year, just given you had that reorganization, realignment. You have pricing coming through. I guess what's an incremental margin for you guys look like on even just like sounds like 1%-2% volume growth is the bogey here into the back half?

[Mark Sheahan, CEO and President at Graco Inc]

I think, Andrew, when you think about our incremental margins, if we can get growth across all of our groups, it always varies with the highest incrementals coming out of the industrial group. If more growth comes out of there, we're going to get a little bit better. I think probably in that mid to low 30% is really where we typically average from an incremental margin.

[Andrew Buscaglia, Senior Analyst at BNP Paribas Exane]

Yeah. Okay. Okay. I wanted to get a little bit more color on the comment you made in contractor around home centers. Obviously, that probably affects your DIY area, but how do you see that playing out? I would imagine that's something that wouldn't change overnight.

[David Lowe, CFO and EVP at Graco Inc]

Yeah. I do not think it is going to change overnight. The only data point that we wanted to share with you guys was that, yeah, it has been tough year to date. If we look at the last six weeks of incoming orders, they have actually stabilized, and they are actually maybe a little bit better than what we saw during the same period last year in the second half. Maybe we have seen the worst of it. It has been difficult, I would say, for the last couple of years. We referenced foot traffic just because I know that the large home centers have been talking about that for quite some time.

[David Lowe, CFO and EVP at Graco Inc]

I think, I believe that a lot of the DIY activity that goes through those channels on the paint side is tied to remodeling activity and new houses that are being acquired by people where they have to do some cleanup or fix up before they sell the house. Then a new owner comes in, and they want to change the color of the paint or whatever they do. I really do believe, again, going back to the earlier comments, if we can get some traction on housing, affordability, turnover, sales, and purchases of new homes, I think the DIY market is going to come back. There has not been any real changes competitively or anything like that that we are concerned about.

[David Lowe, CFO and EVP at Graco Inc]

What I would just add is when that business comes back as our most experienced, most focused merchandisers in terms of our channel lineup, they're not famous for carrying a lot of extra inventory. The uptick that Mark is talking about that will eventually come should flow through to us pretty quickly.

[Andrew Buscaglia, Senior Analyst at BNP Paribas Exane]

David, if I could ask one more, I know we're in a, you guys are embarking on more of an acquisitive period, which is great. How do you balance that with your very high return on invested capital? I think some investors may worry being more acquisitive could bring that number down. What are your return hurdles you're focused on, and how do you think about that?

[David Lowe, CFO and EVP at Graco Inc]

Our starting point is, we look for businesses, even if they're in adjacent markets, that have the characteristics that we like in our businesses. I mean, even the most recent one that we announced a couple of weeks ago is a good example. This is a niche market. This is a niche market that serves some major industrial spaces. The business has a significant amount of recurring revenue, like most of our businesses. The applications that our products are used for are pretty essential in the process of these different manufacturing environments. All of that says that in a business-to-business world, if you're developing the right products with the right technology and getting them to the market and they create value for your customers, it will translate well with the way we like to go to market and drive a value proposition that we can make money on.

[David Lowe, CFO and EVP at Graco Inc]

I think that we keep those things in mind, that those are the characteristics that cover most of our markets and help us generate a pretty healthy return. Mark also touched on valuations. That's the other thing to this whole process. The one thing that a buyer can control is the price they're willing to pay. When we see valuations for businesses that have slipped a little bit in the recent years, and we can do the kinds of things that we think we can do, invest in the business, expand their manufacturing capacity, help them expand their global footprint, and so forth. The right price with the right niche market, we think, can create value for the shareholders.

[Andrew Buscaglia, Senior Analyst at BNP Paribas Exane]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please state your question.

[Joe Ritchie, Managing Director at Goldman Sachs]

Thank you. Good morning, guys.

[Mark Sheahan, CEO and President at Graco Inc]

Hey, Joe.

[Joe Ritchie, Managing Director at Goldman Sachs]

I want to go back to just the timing of the pricing announcement. I'm curious, did you decide to wait till September to wait for the moratorium to potentially become permanent? And then just maybe just any color you can give on the initial discussion that you've had with your customers on being able to affect the pricing increase.

[Mark Sheahan, CEO and President at Graco Inc]

Yeah. Obviously, I mean, I think we wanted to wait right out of the gates just to see what might happen in the first 30-60 days. I think that was a smart move. We didn't put a surcharge on. We did a price increase, and we think it's fair for our channel partners to get enough of a heads-up to be able to communicate what that's going to be with their customers.

[Mark Sheahan, CEO and President at Graco Inc]

That's really why we gave them enough time and had this hitting in the September timeframe versus doing something immediately and causing maybe some disruption in the market.

[Joe Ritchie, Managing Director at Goldman Sachs]

Okay. So it sounds like the receptivity has been pretty good from your channel partners.

[Mark Sheahan, CEO and President at Graco Inc]

No surprises whatsoever.

[Joe Ritchie, Managing Director at Goldman Sachs]

Okay. Great. Then specifically, as it relates to contractor. It's interesting. This is the area that you've had the most impact from a product cost standpoint and maybe being offsides on the pricing and the tariffs. A three-point impact this quarter, I mean, is it fair to assume that as we head into the fourth quarter, you're able to recoup a lot of that three points? I'm just trying to get a sense for where margins can go from here on the contractor side.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

If you tell me what the volume's going to be, I'll tell you what the margins are going to be. I think that there's some potential for a bit of a rebound here. It really depends on how the business holds up. What we did say during the preparatory marks was that last year's Q2 was really strong for contractor. When you look at the comparisons and what happened a year ago versus now and the declines, I mean, I think you need to factor that in. Of course, we have the COROB acquisition, which is also part of the equation as well. All in all, I'm pretty happy with the performance from a profitability standpoint of the company overall and our business units. I think we all get it. We all understand.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

We all are operating in an environment that is, I would call, choppy or sluggish, and we're not doing anything to damage the business, but we're also being very careful with our spending as we go through the rest of the year here. We spent time on cash flow. You can see in the end, I'm a big believer that cash is king, and you got to make sure you're generating it. That's something that our teams are focused on as well. All in all, I think, given the environment that we're playing in, this isn't a bad year for us.

[Joe Ritchie, Managing Director at Goldman Sachs]

Yeah. Makes sense. Okay. Great. Thanks, guys.

[Chris Knutson, VP, Controller, and Chief Accounting Officer at Graco Inc]

Yep.

[Operator]

Thank you. As a reminder to ask a question at this time, please press star one one on your touchstone telephone. Our next question comes from Walter Liptak of Seaport Research. Please state your question.

[Walter Liptak, Industrial Analyst at Seaport Research Partners]

Hi. Thanks, everyone. Just kind of a follow-on to the last one. As you guys are working on the one great goal, and it sounds like a theme is lowering expenses. I wonder if you could talk a little bit more about, on the cost side. I think you said costs were down $7 million, which is down 5% compared to the organic sales decline at 3%. That looks pretty good to me. I wonder if you could help us understand, is there a mix going on here, or are there some benefits happening from one great goal consolidation, or are these more like continuous improvement benefits that might be more sustainable?

[Mark Sheahan, CEO and President at Graco Inc]

I'll start, and I'll let the guys chime in if I misspeak. I think we had said that we're looking for about $16 million of reduced expenses for the full year. I think we're on track to hit that for the full year as well. We're tracking half the year into it. I think you could probably just assume that we're halfway through it. I wanted just to clarify, though, that we didn't do one great goal to cut costs. We really did it to improve efficiencies and to make our business easier to deal with our customers. I've spent quite a bit of time here in the first half of the year meeting with distributors, and the feedback has been extremely positive. They are very appreciative of the fact that we've knocked down some of the silos and the barriers that we created ourselves by having separate business units.

[Mark Sheahan, CEO and President at Graco Inc]

They like the fact that we're opening up our product lines. They like the fact that we have coordinated our pricing efforts across business units that were not coordinated in the past. They like having a single point of contact within our industrial businesses that they really didn't have before. You combine that with what we're doing on the operation side, where we're looking at the factories, and we created some complexities there as well. We announced that we're closing our Minneapolis facility, and we're going to be able to move all the production into existing facilities that we already have at Gray Gulch. That should create efficiencies that haven't shown up yet in the P&L, but once we start doing that, they will.

[Mark Sheahan, CEO and President at Graco Inc]

I think having the centralized operations team managing all aspects of production has led to the inventory reductions that we highlighted earlier and led to improved cash flow as well. It's a multifaceted approach that we're taking with one great goal. It's early days. We feel really good about it, but the signs are positive.

[Operator]

Thank you. If there are no further questions, I will now turn the conference over to Mark Sheahan.

[Mark Sheahan, CEO and President at Graco Inc]

Okay. I appreciate everyone's participation in the call. Thank you for your time today. Have a great rest of your day.

[Operator]

This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

Participants

Executives

• David Lowe, CFO and EVP
• Chris Knutson, VP, Controller, and Chief Accounting Officer
• Mark Sheahan, CEO and President

Analysts

• Brad Hewitt, VP and Equity Research at Wolfe Research
• Andrew Buscaglia, Senior Analyst at BNP Paribas Exane
• Matt Summerville, Managing Director and Senior Research Analyst at D.A. Davidson
• Joe Ritchie, Managing Director at Goldman Sachs
• Saree Boroditsky, Equity Research Analyst at Jefferies
• Analyst at Baird
• Jeff Hammond, Managing Director at KeyBanc Capital Markets
• Deane Dray, Managing Director at RBC Capital Markets
• Walter Liptak, Industrial Analyst at Seaport Research Partners