Graco, Inc. Q3 FY2024 earnings call

Key Points

• Chris Knutson provided an overview of Q3 results: sales down 4% y-o-y, net earnings down 8%, gross margin up 50 basis points.
• Announced One Graco initiative starting January 1, 2025, with a new segment structure including 4 business divisions: Industrial, Powder, Expansion Markets, and Contractor.
• Acquired PCT Systems in September, with Corob acquisition to close in Q4, combined annual revenue nearly $130 million.
• Mark Sheahan discussed the One Graco initiative focusing on global growth, profitability, and operational efficiencies, and segment restructuring to align with customer needs.

Third quarter sales were $519 million, a 4% decrease from the same quarter last year. Reported and adjusted net earnings decreased 8% to $122 million or $0.71 per diluted share. Contractor segment sales were down 1% in the third quarter. Industrial segment sales were flat in the quarter, with strong finishing system sales in the Americas and EMEA offsetting steep declines in Asia-Pacific. Process segment sales were down 12% compared to the same quarter last year, primarily due to continued weakness in the semiconductor and mining markets.

Forward-Looking Statements

• Maintained full-year revenue guide of low single-digit decline on organic constant currency basis.
• Incoming orders over the past 6 weeks increased 11%, primarily in Industrial and Process segments.
• Backlog reduced to $230 million from $450 million, expecting normalized business going forward.

Risk Factors

• Soft demand in APAC, especially China, impacting Industrial and Process segments.
• Overcapacity in key end markets in China (automotive, battery, solar, electronics) leading to revenue declines.
• Continued headwinds in production volumes in the Contractor segment affecting product costs.

Q&A Exchange

• Q: Tour by end market and region, focus on APAC.

A: Mark Sheahan discussed China sales down, with end markets in China showing weakness in automotive, battery, solar, electronics, but construction and Japan, Korea, India doing better.

• Q: Resegmentation genesis and measurement.

A: Mark explained One Graco initiative started spring, aimed at efficiencies by targeting customers with the full product line, with efficiencies to be measured post-implementation.

• Q: Incoming orders and backlog.

A: Mark said incoming orders up 11% last 6 weeks, backlog reduced to $230 million, expecting normalized business going forward.

• Q: Gross margin and price/cost.

A: David Lowe and Mark Sheahan discussed pricing effectiveness offsetting volume declines, with input costs higher but pricing covering them.

• Q: Corob M&A and leverage.

A: Mark talked about Corob's technologies, customer overlap, historical growth in low to mid-single digits, and potential synergies in APAC and North America.

• Q: M&A pipeline and Expansion Markets.

A: Mark mentioned existing M&A pipeline, with Expansion Markets focusing on inorganic growth in new/adjacent markets.

• Q: China outlook and new segmentation.

A: Mark and David discussed China overcapacity, new segmentation focusing on global businesses, with Expansion Markets organic growth similar to Graco and inorganic potential.