Graco (NYSE:GGG) released first-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
Graco reported first-quarter sales of $540 million, marking a 2% increase year-over-year, with acquisitions contributing 5% growth and currency translation adding 3%, offset by a 6% decline in organic sales.
Net earnings decreased by 5% to $119 million, with a decrease in gross margin by 60 basis points due to higher product costs, lower factory volume, and tariffs, which increased costs by $7 million.
Operating expenses rose by 7%, primarily due to acquisitions and currency effects, while operating earnings decreased by 4%, with the operating margin in the industrial segment dropping from 34% to 32%.
The company maintains its 2026 revenue guidance of low single-digit organic growth on a constant currency basis and mid-single-digit growth including acquisitions.
Graco highlighted a positive backlog increase of $26 million, driven by the industrial segment, with expectations for improved conversion in the second half of the year.
Strategically, Graco is focusing on further acquisitions, with a well-populated pipeline, particularly in the industrial segment.
The company is celebrating its centennial and continues to prioritize innovation and customer support as part of its long-term strategic direction.
New product launches in the contractor segment are expected to be similar to last year, with no major deviations anticipated.
Management expressed confidence in offsetting tariff impacts through pricing actions and noted a solid cash flow performance, with plans for continued share repurchases and dividends.
Full Transcript
Chris Knudsen (Vice President, Comptroller and Chief Accounting Officer)
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@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 2025 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 Knudsen, Vice President, Comptroller and Chief Accounting Officer. Good morning everyone and thank you for joining the call. I’m here today with Mark Sheehan, David Lowe and Sanjeev Gupta. I’ll begin with a brief overview of our first quarter results and then turn the call over to Mark for additional commentary. Yesterday, Baker reported first quarter sales of $540 million, up 2% from the same quarter last year. Acquisitions contributed 5% growth and currency translation added 3% growth, partially offset by a 6% decline in organic sales. Reported net earnings were $119 million, down 5% or $0.70 per diluted share, excluding excess tax benefits from stock option exercises. Adjusted non-GAAP net earnings were $0.66 per diluted share, down 6%. Gross margin decreased 60 basis points versus the first quarter last year. The benefit from our pricing actions helped offset higher product costs from lower factory volume, lower margin rates from acquired operations and incremental tariffs. Tariffs increased product costs by $7 million in the quarter. Operating expenses increased $9 million, or 7% in the quarter, excluding $5 million in incremental expenses from acquired operations and the effects of currency translation. Expenses were flat in the quarter. The operating margin rate in both our contractor and expansion market segments was 24%, consistent with the same period Last year, industrial segment operating margin was 32%, down from 34% in the prior year quarter. The decline is due primarily to unfavorable volume and tariffs that were not offset by price realization. Total company operating earnings decreased $6 million, or 4% in the quarter. Operating earnings as a percentage of sales were 26% compared to 27% in the same period last year. The adjusted effective tax rate was 20% in line with our expected full year adjusted tax rate of 20 to 21%. Cash provided by operations totaled $120 million for the year, down $5 million or 4%. Cash provided by operations as a percentage of adjusted net earnings was 107% for the quarter year to date. Uses of cash include share repurchases of 189,000 shares totaling $16 million, dividends of $49 million and capital expenditures of $12 million. These uses were partially offset by share issuances of $40 million. A few comments as we look forward to the rest of the year, Based on current exchange rates and assuming similar volume, product mix and business mix as in 2025, currency is expected to have a 1% favorable impact on net sales and a 2% favorable impact on net earnings for the full year. 2026. For the full year, we continue to expect unallocated corporate expenses of 40 to 43 million dollars and capital expenditures of 90 to 100 million dollars, including approximately 50 million dollars for facility expansion projects. 2027 will be a 53 week year with an extra week occurring in the fourth quarter. And finally, in the attached materials, we updated our outlook slide to highlight performance by segment and region, with the size of each color dot indicating its relative size versus the others. With that, I’ll turn the call over to Mark for more details on our segment and regional performance.
Mark Sheehan
Thank you, Chris Good morning Everybody. Overall sales increased 2% in the quarter, with acquisitions contributing 5% and foreign currency adding another 3%. That growth was partially offset by a 6% decline in organic revenue. Organic revenue started the year slower than expected, particularly in January, but business activity improved steadily as the quarter progressed, with bookings up 3% at actual currency rates, driving nearly a $26 million increase in backlog, primarily in our industrial segment. If those orders had been converted to revenue within the quarter, organic revenue at actual currency rates would have increased 2% and total sales, including acquisitions, would have been up 7%. The Middle East region represents about $35 million of sales on a full year basis for Graco. To date, we’ve not seen any significant impact on demand or operations. Though the environment remains uncertain, we are staying close to our customers and channel partners and are monitoring order patterns and logistics carefully. From an exposure standpoint, the contractor segment would be the most impacted, primarily related to our protective coating product application. Let me provide some additional color on our segments and regions. In the contractor segment, sales increased 2% in the quarter, with acquisitions and currency translation each contributing 3%, partially offsetting a 4% decline in organic revenue within the segment. Our foam, polyurea and protective coatings businesses continued to be bright spots supported by strong global demand tied to infrastructure, border wall and data center projects. That said, construction demand remains softer than we would like particularly, particularly in the Americas. Housing starts are expected to be relatively flat year over year with fewer new home sales and only modest improvement in existing home sales. Overall, the market has shown limited growth over the past four years and we expect those conditions to persist this year. Turning to the industrial segment, sales increased 4% in the quarter, with acquisitions contributing 8% and currency translation adding another 4%. This growth was partially offset by an 8% decline in organic revenue. Despite the organic decline, bookings were up 5% at actual currency rates, driving a $23 million increase in backlog. If those orders have been converted to revenue within the quarter, organic revenue at actual currency rates would have increased 6%. Industrial Americas performed well, delivering revenue growth despite lower project based activity. In our powder group, bookings in the region were up double digits, supported by broad based strength across multiple end markets. EMEA (Europe, the Middle East, and Africa) and Asia Pacific were more heavily impacted by the timing of completion and acceptance of project based activity, which drove the decline in the quarter. That said, both regions saw activity improve as the quarter progressed, with quoting levels moving higher in our expansion markets Segment Organic revenue declined 5% in the quarter, driven primarily by our semiconductor business, which was coming off an exceptionally strong prior year comparison. Semiconductor delivered its largest quarter of the year in 2025, growing 51%. Despite the tough comparison, semiconductor demand remained solid, with first quarter bookings up at least 20% in each region. We’re also seeing improvement in our environmental business. While the year started slowly, activity has picked up meaningfully with a strong start to the second quarter and bookings are trending positive year to date. Moving on to the outlook despite the slow start to the year, we’re encouraged by demand trends across our broader end markets. We saw a meaningful pickup in both ordering and quoting activity in our industrial and semiconductor businesses throughout the quarter, and based on current order rates, strength in these areas should help offset continued softness in the contractor segment. As a Result, we’re maintaining our 2026 revenue guidance of low single digit organic growth on a constant currency basis and mid single digit growth, including contributions from acquisitions. Looking ahead, second half comparisons are more favorable reflecting an easier contractor comparison in the third quarter and the expected timing of project activity in the industrial businesses towards the end of the year. Finally, I’d like to take a moment to welcome Sanjeev Gupta Dagreko. Sanjeev comes from General Motors where he spent more than 20 years in finance and operating roles across the globe, most recently as CFO of GM International. He brings deep experience across corporate finance, operations, manufacturing and supply chain, and a strong track record of leading global teams. In addition, I want to recognize and thank David Lowe for his more than 30 years of dedicated service as he prepares for retirement. David’s leadership, deep financial expertise and steady guidance have played an important role in shaping our company and supporting our long term success. On behalf of the entire organization, I want to thank David for his many contributions and wish him the best in his next chapter. In closing, I want to take a moment to recognize an important milestone for our company. On April 26, we will celebrate our centennial. This milestone reflects the strength of our people, the durability of our business model, and the deep relationships we’ve built with customers and partners around the world. While we’re proud of our history, this anniversary is really about the future. Continuing to invest in innovation, supporting our customers, and building on the foundation that has sustained the company for a century. That concludes the prepared remarks.
Operator
Operator. We’ll open it up for questions. Thank you. The question and answer session will begin at this time. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Dean Dray of RBC Capital Markets. Please state your question.
Dean Dray (Equity Analyst at RBC Capital Markets)
Thank you. Good morning, everyone. Morning, Dean. Hey, can I add my welcome to Sanjeev and to wish David all the best. Appreciate that. Thank you. Thank you. Since we’re in kind of an uncertain macro here, Mark, maybe you can just kind of take us through the major verticals and kind of what surprised you versus expectations. I know housing remains tough, but semiconductor looks like that’s a positive side. And then just same thing on the. The geographies. And if you could elaborate a bit more on the Middle East exposure for contractor. Thanks.
Mark Sheehan
Yeah, I guess I would start out at a high level and just say that our Industrial bookings in the quarter were actually up mid single digits, which was good and unfortunately we weren’t able to convert that into revenue that you all saw. But in terms of how that mid single digit booking growth took place, it was really across multiple product categories. Look at finishing process. Our lubrication businesses, both ale automatic lubrication as well as our vehicle service business and a little bit of pressure in our sealant and adhesive business offset some of that. But overall I was pretty happy with the growth in industrial in the quarter. The powder business again was influenced mostly by some project activity on the bookings front that booked right at the end of the quarter that we just couldn’t convert. Those projects usually take time between booking and billing. And then the overall Gamma powder business again in aggregate was in line with our long term expectation for the full year of kind of the low single digit organic growth, constant currency. Obviously the home center and the paint channel continue to be, you know, a little bit of a headwind for us. I wouldn’t characterize them as, you know, down significantly, but they were down in the quarter. We did see nice growth in the areas that I mentioned in my script on the high performance coatings and foam business that wasn’t quite enough to offset all of the headwinds that …
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