Graco Inc. Aktie

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's website at www.graco.com.

Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. [Operator Instructions]

During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute for 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 Knutson, Vice President, Controller and Chief Accounting Officer.

Good morning, everyone, and thank you for joining the call. I'm here today with Mark Sheahan, David Lowe and Sanjiv 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, Graco 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 knee 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 million to $43 million and capital expenditures of $90 million to $100 million, including approximately $50 million 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.

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.

The 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 have been converted to revenue at the end of 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 will 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 form 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 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 4 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 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 porting 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 Sanjiv Gupta at Graco. Sanjiv 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, we'll open it up for questions.

[Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets.

Thank you. Good morning, everyone. Can I add my welcome to Sanjiv and to wish David all the best. 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 geographies. And if you could elaborate a bit more on the Middle East exposure for contractor.

Yes. I guess I'd start 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. Now those projects usually take time between booking and billing. And then the overall game of 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 a little bit of a headwind for us. I wouldn't characterize them as 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 we had in the traditional paint and home center channels. But overall, booking for the quarter was only down 1%, which is okay in an environment where we're still experiencing some pain.

When it came to the environmental business, yes, the bookings and semiconductor were fantastic. We're starting to see a little bit of a pickup on our environmental business. And I would say that the HIP high-pressure business that's in there as well is also experiencing kind of growth within line of what we're expecting for the full year.

Geographically, you've seen the numbers, but Europe is doing okay. Asia is somewhat influenced by the adhesive business that I referenced Previously, on the industrial side, we're off to a bit of a slower start, but the team is pretty optimistic that we'll be able to make that up as we finish out the next 3 quarters of the year.

And North America has been okay here so far this year, where booking rates are up kind of in our low single digit -- low to mid-single-digit guide.

So all in all, I wish we would have been able to convert more of the bookings into billings. It's only 13 weeks, and we do feel like we've got -- given the order momentum that we've got a good chance to be able to get to our low single-digit guide for the full year.

Great. And then just if you could follow up with any specifics around the Middle East exposure, you called out contractor. And then I'll give you my follow-up question. Just you said tariffs were a $7 million bad guy for the quarter. Can you talk about pricing? How much price action have you taken? And is this a potential year of a second price increase what's your crystal ball say?

Yes. So I'll handle the Middle East and give just a quick thing on the tariffs, but I welcome my colleagues here to chime in on those as well. Middle East has not been a problem for us so far. As I said, we're kind of monitoring the situation. We don't have any hung up orders or anything like that, that we're really that concerned about. Maybe the bigger concern would be with respect to if this blockade extends for a longer period of time, it will create some pressure with respect to the materials that we move.

So you think about paints, adhesives, those are materials that require quite a bit of petroleum-based products. And to the extent that there is pressure there and those products increase in cost to consumers, et cetera, that may eventually make its way into our business right now, we're not that worried about it. My personal belief is that things will get cleaned up and we'll be able to move forward. But that's probably the bigger unknown risk for Graco and every other company that's out there moving those kinds of materials, at least here in the short term.

On the tariff front, I would say, overall, we're doing a good job. I think we've really offset the cost pressures that we've seen in the P&L from input costs so far year-to-date. And really, the pressure that we saw in the gross margin line in the quarter was really in a couple of areas. One, obviously, volume, running a little bit below what we were planning for, really due to the cadence of the orders coming in at a softer pace at the beginning of the quarter versus what we saw sort of at the end of the quarter. Our pricing actions are really offsetting a lot of that activity that we've had.

I also point out that the mix in the quarter, the mix of the products that came in was a little bit unfavorable for us as well. So I really have no concerns on the gross margin line for the rest of the year. I think the teams are doing a great job managing operating expenses, which are actually flat to down slightly in the quarter. So we're managing the P&L appropriately given the level of business that we had in Q1. Any other comments from you guys?

Well, on the pricing side, I think that we have -- the way that we are looking at it, we have covered tariff costs, and there have been some volume-related some volume-related things that made that a little less effective. But we have for the -- in most of our businesses beginning last year we were -- we have been pursuing around the world our annual pricing adjustment drumbeat. In fact, we started a little earlier in the regions than we would ordinarily -- the -- here in North America, we have a handful of key channel partners that we have agreed to pricing adjustments that are going to begin to become call it, live early or sometime in Q2. So we're feeling really good about the implications of what those can also help us with as we get through the balance of the year.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. .

This is Mitch Moore on for Jeff. Just on the low single-digit organic guide, just maybe with the start -- with the slower start of the year, I think it implies mid-single digit-ish growth through the remainder of the year. Could you just help us frame the segment level building blocks to get you there? And what's giving you confidence in that outlook?

Yes. If I had to point to one thing, I'd say we're up low single digit on our bookings for the first quarter. So I think our bookings rate lines up with what the guide was -- and so that gives us the confidence that we're going to be able to get within that guided range when we look out through the whole year. I don't know if you guys have any other comments you want to make.

I'll also say that, as Mark mentioned, the backlog build in the quarter, but -- also subsequent to the end of the quarter into April here, we've also seen another $21 million build in the backlog. So the order rates are there to support it. It might be a little bit lumpier on a quarter-by-quarter basis, but we have confidence we'll get there by the end of the year.

Okay. Great. And then just for my follow-up. I know we touched on tariffs a bit, but just -- is there any update you guys can provide with the updates to the Section 232 tariffs and if that changes your expectations for price costs for the year?

I will say that the change with the 232, where they're moving from a direct aluminum and steel to the full component. We're still working on assessing how much that's going to impact us. We do have some highly manufactured equipment. So when you switch to a full value of the imported goods, it would imply a higher tariff. But for us, a lot of our stuff is already manufactured here. So a lot of the import of the aluminum and steel is typically in its raw form.

Our next question comes from Bryan Blair of Oppenheimer.

Thank you. Good morning, everyone. Welcome, Sanjiv. And congratulations, David, I think you ended up a little short of Dale's tenure, but a great run nonetheless. .

Hey, I can stay at -- maybe, consider staying another 18 years.

All right. I would like to follow up on the backlog expansion in Q1 and then Q2 to date. -- just to level set, how much of the total build has been your Game business? Have there been project argument deferrals? Or is this strictly a matter of order timing -- and is this type of backlog build or the magnitude of it significantly out of the ordinary for the early part of the year?

Yes. I think that they're pretty similar. I think if I look across the legacy Graco Industrial businesses and the backlog that we've built there as well as the backlog that we built in the game business, including projects, et cetera, I didn't see anything jump off the page at me that says that they're heavily weighted toward the powder business. I think it's generally pretty consistent across both those segments.

And I would add, especially the orders that we've seen since the close of the quarter, it's been quite balanced in the -- to use our internal terminology, the Industrial division, which is the legacy Graco the original legacy Graco plus the game of business. As part of this exercise, we ran some stress tests -- and being an old sales guy, I kicked the tires pretty hard on not just the industrial side but also on the contractor side. And I kept -- I kept coming to the same place that given the level of activity we're seeing in industrial and not really relying on a meaningful uptick in contractor low single digit is achievable. .

Okay. I appreciate the color. And following up on the revised tariff framework again, just to level set, is there a meaningful assumed change in net cost impact for your operations? And perhaps more importantly, as a largely domestic manufacturer, do you see any incremental competitive advantages or opportunities under the new structure?

Yes, I don't think there's any obvious competitive advantages. And the way I'm thinking about the tariffs here short term and long term. The big question is, I think, at a stick. Are we going to have -- the tariffs that are in place today, obviously, the Supreme Court ruled the way they did, but they put in new tariffs. So -- when you look at -- if they stick incrementally, it's not going to have a big impact to Graco in terms of the absolute level that we're paying.

I will note, and we did talk about this, we will be applying for our tariff refunds like every other company. And as those come in, we -- our intention would be to highlight those in results so that you know what they are as they come in. At this point, until we actually see the refunds, we're not really going to talk about the levels or the amounts or anything like that. So I think from a modeling perspective, it would probably make some sense just to leave them out. And when they come in, we'll break them out and then you can now they are.

But to answer your question again, to reiterate, when you just think about the absolute level of tariff that this company is incurring, when the new structure that's in place, it's pretty similar to what we experienced before the new structure was put in place.

Our next question comes from Matt Summerville of D.A. Davidson.

Maybe just a minute on contractor. Can you talk about what kind of sell-in, sell-through trends you're seeing in both the home center and propane channel? And then can you also talk about how we should be thinking about the new product load-in this year maybe relative to last? And then I have a follow-up.

Yes. In terms of sell-in, sell-through, there's not a big difference. I think most of the channel partners that we do business with have been pretty careful with their inventory. And I think that they're continuing to be careful with their inventory. So I would characterize our sales and our bookings to be really pretty similar to what they're experiencing out the door. -- basis, which I think makes sense given the environment that they're playing in.

We do have, as every year, products that we're launching and we're planning to launch products here in Q2. I would not be baking in any large incremental increase compared to last year. I think it's a fairly stable, fairly similar new product launch here for the contractor business, what we've experienced in the past. We've got a couple of things that we're excited about for sure that we can talk about after they're actually launched. But again, I think it will be kind of a similar year to what we saw in '25. David, if you got any...

Yes. I -- just a coincidence, I had a conversation with commercial management earlier this morning. And just to underline 2 of Mark's points. On the home center side, the positive side of the story is the foot traffic has not deteriorated year-over-year. And the -- although it still remains off the record levels that we saw in '20 and '21 and such. So there's an opportunity for recovery there.

Those channel partners do, I would say, a very good job managing their working capital, and we feel pretty good the inventory level there is satisfactory.

On the paint store side, always of interest to us. I think the key point there is we feel -- on the -- I'd say at the ground level of the business, our commercial team indicates that the sell-through has been satisfactory. And so that in that really important space for us, call it, the retail demand is pretty -- is also pretty close to the wholesale, which is important, especially as we get some of these new products launched to that channel. And so I think that the -- where we are at vis-a-vis our partners is they're ready to go and ready to order when they see retail demand out the door demand increase .

Got it. And then as a follow-up, maybe can you guys comment on how you're thinking about the M&A outlook, funnel actionability to the funnel depth, if you will, and where you may be seeing most activity?

Yes, I'd characterize the market is still pretty favorable. I think that there's properties out there that we're interested in. Our pipelines are well populated. We're having discussions with a lot of different companies. I do think there's been over the last year or so, a renewed appetite on the part of sellers to take a look at opportunities to realize value and they're looking at strategic buyers in a lot of cases. And -- we're going to remain active. We like businesses that -- where we can add value.

I see a fair amount of opportunities within the Industrial segment, in particular. -- contractor also has a couple of things, but there's probably more lively stuff in the industrial side right now. Interestingly, I did go back and I looked at some information back from 2012 until the end of last year and 2012 was the year that we acquired Gema. About 30% of Graco's revenue that we finished the year with in 2025 is acquired businesses. So we have had a pretty good track record of acquiring businesses, integrating them, maintaining and improving our profitability over that time horizon. And that's really what we're trying to do with our M&A growth going forward.

We have a target long term, 10% top line growth, 1/3 coming from M&A. And if you look back historically, we've been able to do that. So we're proud. The teams are doing a good job and hopefully, we get some more opportunities here as we finish out the year.

Our next question comes from Brad Hewitt of Wolfe Research.

So at the gross margin line, it looks like incrementals were about 25% in the quarter. Should we think about that year-over-year margin pressure is largely driven by a pension price cost? Or are there any other factors you would highlight there?

I think it's mostly mix and a little bit on the volume side. But Chris, if you could probably give more color on that.

It was mixed volume and acquired businesses that really impacted for the quarter Price cost was not a headwind outside of having lower factory volume to absorb the overhead. .

Okay. Great. And then maybe switching over to the backlog side of things. Just curious if you can elaborate a little bit more on visibility of kind of expected backlog conversion as it relates to the rest of the year? And do you see any risk of project cancellations or maybe slippage of backlog conversion into next year?

Yes, I don't think we see any risk at this point. It's always there, but it couldn't happen, but nothing that we're concerned about on stuff that we've already booked and they're in our backlog. And I think that we said in Chris' comments that we expect most of that will convert in the second half of the year. It's hard sometimes to know the exact timing, but this is not something that we're going to keep on the books for more than that period of time.

Yes. The risk of -- Mark is right. The risk cancellation, be it in our legacy business or in even our game business. with their direct system sales activity in my experience is quite low. In the legacy business, typically, -- our stuff is among -- I'm thinking of an industrial implication for sealant equipment or for something in the paint shop. Our stuff is some of the last that is actually ordered in a project. And -- so for example, the expansion of a paint line. I mean, we're literally being dropped in a month or 2 before it's going to be commissioned and come on stream. So things that we have in our pipeline in that business is quite tangible and rarely is it canceled altogether.

On the -- in the -- on the Gema powder equipment side, I'd say that program -- that organization is even 1 step more sophisticated in direct sale activity for systems is to accept an order requires a down payment, a very meaningful down payment approaching half the project cost. And so the buyers are very committed if an order receives gets developed to that point and shows up in our backlog. In my experience, I was involved with the team at Gema for a few years. I think in the 8 or 9 years, I was involved over all that time, one project was canceled.

Our next question comes from the line of Joe Ritchie of Goldman Sachs.

David, thank you for all the help throughout the years. Wish you the best in retirement and Sanjiv, welcome. So Yes. So maybe my first question. I just want to make sure that I fully understand the -- like the backlog conversion on the powder finishing systems. So was this simply that just the orders that you were expecting to come through in the first quarter came through later than you expected them to come through? Or was there anything else related to either supply chain or manufacturing that also impacted the conversion?

Yes, I don't think there was any crazy stuff. We did get a couple of nice orders right at the end of the -- right at the end of the quarter, but we were also converting on to the backlog that we had built in the month of February out at that same time. So they kind of offset one another. But no, we're not constrained in our operations. We're not constrained with the supply chain. -- is really just kind of the cadence of these orders coming in, and we will get them out the door. We just didn't get them off the door by the end of March.

Okay. All right, helpful. And I know you touched on the margin headwind, I think, in the first quarter being largely driven by lower volumes. I'm just curious, like with the acquisitions also coming through the industrial segment, how much of an impact did the acquisitions have to the margin degradation in 1Q?

On a total company basis, it's about 50 basis points related to the acquired revenue on a total company basis. So the stuff going through industrial was by far the majority.

Okay. All right. Cool. And then one last one. So last quarter, I think we talked a little bit about these like upfront licensing revenues that you were seeing from some of your OEM customers. I didn't hear it get called out today. Just any progress on that specifically would be helpful.

Yes. We've got a couple of other ones that we're working on, but we didn't really book anything here in Q1. So that's why we were silent on it. We still like the prospects for potential to get future license agreements with a lot of the technology. We've got it running through Graco products. Every time we meet with customer or an OEM. They're excited about the compact size of these motors, the fact that they take less material that they're high torque. So we're hopeful that we're able to do more in that area, but nothing in Q1.

Yes. I know we've talked about this before, Joe. It's sort of strategic -- it's a master class in strategic selling. Frequently, we are cultivating very large companies with large decision-making bodies and organizations and keeping their processes moving 1 large organization can be relatively responsive, quick and enthusiastic -- another organization can be equally enthusiastic, but the decision-making process moves at a different pace.

So I think the nature of this is while we're excited and Mark is right about the technology, the visible results that you're going to see over time are not going to have the same degree of predictability as our standard products business.

Our next question comes from Andrew Buscaglia of BNP Paribas.

Good morning, everyone. So yes, so it seems sort of starting out a little beat with 2 years ago, same scenario, all end markets are down. And that year, you kind of struggled to overcome things. So my question is, we're kind of 2 years later, kind of in the same setup. And the question does arise amongst investors. Like is there something -- this seems to be cyclical, but is there something more structural? And maybe does Graco needs to think about -- I don't know if it's a change of tack in terms of how you get volume, whether it's to touch your pricing or what. But I think at this point, you're 3 years in, and it just seems like the top line can't grow. So are there other discussions you guys have around anything around if there is anything under the hood structurally that's changed in the last 3 years?

I will just say that we have grown the top line. And I will say that, of course, every day, we come in here, and we're doing everything we can to grow the business. when you're reporting every 13 weeks, sometimes the quarters can look better than maybe the overall business might look and sometimes they don't look as good. We have been fighting some pretty substantial headwinds with respect to half of the revenue of the company that's tied to contractor and construction. And if you look at the macro data on anything, any metric that you look at over the last 4 to 5 years, that has been a really tough market to be in.

And I'm proud that our teams have actually been able to drive the results that we have driven given the environment that we're in, we get up every day. We're working hard. We're pushing our teams. We're launching products. Our teams are incentivized around growth. So there's absolutely no reason why they shouldn't be driving for better results. There's nothing structurally wrong with the company. It's still extremely profitable. It still generates a tremendous amount of cash. And we have been also very active on redeploying that cash, both through the form of share buybacks as well as M&A.

So No, there's nothing here that I think we need to do that's different. I think that we're doing everything that we can as we always have done.

Well, on that note, I think there's a little bit of there's some enthusiasm with this recent reorganization that there's something outside of what the market is giving you that you can find some incremental growth. And I guess where are we seeing that or to date, like -- where is that evident in your numbers? And will we see more a more pronounced impact going forward from that change you guys made a year ago? .

Well, again, we did guide to low single-digit growth, organic constant currency for the full year. For the quarter, our industrial business was up mid-single digit. -- growth, which was nice to see. Our expansion markets group is up high single digits growth. And those were offset by the fact that our contractor business was down 1%. So again, going back to the earlier comments, we're happy with what we're seeing. We'd like it to be better, obviously, we're pushing the team hard. We still feel confident that we're going to get to the guide that we talked about a couple of months ago.

[Operator Instructions] Our next question comes from Walter Liptak of Seaport Research.

I wanted to ask, just get a better understanding of kind of the monthly trends. You talked about January being weak. I wonder if you could attribute that to anything. And then February, we have the war kind of heating up, but it doesn't seem like from what you said about orders that, that has been impacting the trend for orders too much. But -- so I guess I'm asking like what are you hearing from customers, both in North America and other parts of the world. And as we got more of this behind us, are you getting more confidence that the customers can just kind of work through these macro uncertainties?

Well in our businesses, there's different kinds of decision makers. On the contractor side of the business, maybe the decision making you typically can be quicker. -- or a little more reactive because generally, the buyers represent -- they're smaller organizations or entrepreneurs and such. There, I would say not -- despite all the challenges of the world and our contractor business, which, again, Mark reminds -- is reminding us that it's 50% of our overall construction broadly defined. The largest market there is here in North America and specifically the U.S. And really, we haven't seen a change in the, I call it, the momentum of that business for a while and certainly not in the last couple of months despite all the global noise because the fundamental issues are -- remain the ones that you're familiar with about affordability and even mortgage rates. I would say that as focusing on the micro and not the macro, I was really excited when for a few days, the 30-year mortgage rate got below 6% in late February.

And now of course, it's, I want to say, about 630 or 635 currently. I think it gets more the world and decision-making when you look at industrial companies and how they make their decisions. And while I've got a list here I'll spare everybody in the interest of time, -- for example, we would say, "Oh, the auto industry market was slow for us. The auto OEM market was slow for us. We had some tough comps, and we didn't see too much activity in the first quarter.

But actually, we feel pretty good about our pipeline in the automotive industry, even in some markets like China where think of combustion conversion to and requiring additional investments in the body and the pink shop. We're seeing greater inquiries and expanded pipeline from before the end of the quarter, even through the current period. And it suggests to me that big picture, big manufacturers, they know the world is a noisy place. But if they're committed to moving in certain directions, they're going to make those investments. So it's a long-winded way of saying I don't see a lot of demand implications on the things -- on the new things that we have been absorbing here in the first 4 months of the year.

Okay. Great. And then I guess thinking about the second quarter and maybe the delays of the timing of shipments, especially for some of those powder orders, do we get like a normal seasonal bump up in the second quarter plus some of the orders that should have shipped in the first? Is that how we should think about it?

Yes. I think for the contractor business, our history has always been that Q2 is the top quarter. So I don't see any changes to that cadence. And I think on the orders that we just got in and recently, I mean, those are probably going to go off more in the back half with respect to the powder business. But for the legacy industrial business, we should be able to move those a little bit quicker.

Okay. Great. And then maybe a last 1 for me is on buybacks. You guys weren't too aggressive in the first quarter. How are you thinking about buybacks versus M&A deals can you do both?

This is Sanjiv Gupta. So I -- maybe I'll take a shot at it. So again, I think very consistent with how we've always done it. We be very disciplined with our capital allocation framework. And obviously, the goal here is to drive shareholder return while having our financial flexibility. So a strong balance sheet we'll continue to preserve that.

And then whatever operating cash flow we generate, which we have been generating very positively, we'll be using that cash to fund our growth. We've talked about internal growth that will be invested in projects which meet our return thresholds.

And second priority would be the growth, which is external growth through disciplined M&A. Mark talked about it. And that really needs to meet our share needs to create the shareholder value and meet the return and integration threshold for us. And you've seen that recently with our current acquisitions, COROB, Color Service and Radia.

And then in terms of shareholder return, obviously, we'll continue with the dividend. And any excess cash will be returned to the shareholders, and we'll be doing it very opportunistically as we've always done. So in summary, very consistent with our capital allocation framework, which we have deployed in the market that will continue.

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

Okay. Thank you very much for participating today. I look forward to seeing you some time down the road here, and thanks again for your interest in Graco.

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

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. [Operator Instructions]

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.

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 am 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 more commentary.

Yesterday, Graco 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 $0.79 per diluted share. Excluding the impact of excess tax benefits from stock option rises, a nonrecurring tax benefit and the prior year business reorganization charges, adjusted non-GAAP net earnings were $0.77 per diluted share, an increase of 10%. 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 volumes 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 onetime items. Projected unallocated corporate expenses and capital expenditures are projected to be $40 million to $43 million and $90 million 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 in the COROB 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 EMEA 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 COROB, 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 1/3 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, deploying 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 COROB, which grew 25% in the quarter. Sales volume improved with this being COROB's largest fourth quarter in the past 3 years. The COROB 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 pro paint 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 Greco.

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 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 contract during the fourth quarter. We're also pleased with the performance and contributions made by COROB, Color Service and Radia this year, and we're hopeful that we will continue to see actionable opportunities in 2026. Graco has engaged employees that are focused on our key initiatives of product innovation, pursuing strategic acquisitions and advancing the One Grego 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 Radia 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 hard-working employees.

That concludes our prepared remarks. Operator, we're ready for questions.

[Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets.

I'll start off with a clarification. We haven't seen one of this get called out before the upfront licensing fee associated with the electric pumps. And there's been some inbound questions about, is this a onetimer? Or is it just the nature of this new product? And so just kind of give us some background here. You said it's going to OEs and to motor manufacturers. Is this going to be a lumpy type of revenue stream? And just some color there to start, please.

Yes, I can start. And a handful of years ago, we bought a company called ETM, and we bought the company because they make a high torque, quiet compact motor that we thought would fit pretty well within some of the Graco product lines. We actually want to find the company because we like the technology so much. We also recognize that there was potential that we could introduce that technology to other OEMs. And so we had a team that was really looking to work with those OEM manufacturers to sell motors to them. Long story short, that didn't play out real well. So a couple of years ago, we pivoted to a team now that's really focused on licensing the technology to OEMs and motor manufacturers that are noncompetitive with Graco that see the benefits of having a compact, high torque, quiet motor for their types of applications that they've got. So it's probably going to be lumpy. I'm really happy with the work that the team has done in getting some upfront agreements. There will be royalties on the back end that we'll talk about when they're meaningful enough. And of course, we'll highlight any other lumpy payments as they come in throughout the year. We want to make sure, though, Dean, that you didn't feel like you needed to model it in, in terms of our outlook for the full year on the organic constant currency. So we really have not factored in any of these upfront fees into that analysis. The motors are in Graco products today. You can find them in our contractor products. They're very well received in the marketplace. You also find them in our diaphram pumps that go into the process industries. And in our industrial markets where we're using electric motors to move paints around in factories. So it's a proven technology. We're excited about it. And it's nice to see that some of the benefits of what we did on the M&A front are paying off there.

Yes. I would just add to that, that because we already haven't successfully implemented in several of our products, into specific applications. Part of the process of an agreement with an OEM or another party is they will be used for what are defined as very specific applications.

That's all good to hear, and I appreciate that color. It's a little bit unique, but our bias would be just to include that in your operating results and not try to strip it out. But if you could highlight for us if there's any kind of lumpiness in the future quarters, that would be helpful. And then second question is more on the forward look. No surprise to us in the low single-digits organic guide. That's kind of where we were looking. What can you say in terms of the geographic conditions that you're looking at in '26. Interestingly, the traffic light slide only has the rearview mirror 2025, not the forward look. So what would be the broad brush changes any that you would highlight there? And anything about the last 5 weeks of inbound orders would be helpful, too.

Okay. Yes, Dean, when you said we hadn't made -- we hadn't updated it to -- I took personal offense. We did review process. And we did review the things. And the way I would characterize it is in the markets, especially the yellowish markets. The order rates have been steady and remained steady for the most part, where we stand. I would say that the data is, while not in any sense deteriorating, the upward momentum, the catalyst for covering a little bit more green, I think, is in our discussions and our analysis is a bit premature. So I feel pretty good about where we stand today. And yes, it does look like what we presented to you in the fourth quarter. And stay tuned, and I'm hopeful that we'll be able to color some of those dots green in the months to come.

Yes, I'd probably say that we had a low single-digit guide last year. We're coming out with a low single-digit guide. So at top level looking at, it doesn't really surprise me a whole lot that the dots didn't change colors meaningfully. I'd sort of characterize the geographic conditions as we kind of see them as low single digits, up into crazy on the upside, certainly, hopefully, we're not going to experience another leg down. We're not anticipating that. So I would characterize our overall outlook, Dean, is pretty cautious at this point, but we feel pretty confident that we can deliver low single-digit growth in 2026.

And the recent order trends?

Yes, the recent order trends would support that outlook.

Our next question is from Mike Halloran of Baird.

So maybe just a question on the fourth quarter and then reverting back to some 3Q commentary. Did you see any signs of pull-forward demand in the fourth quarter, particularly on the contractor side. And then also in the third quarter, you referenced some green shoots. Any thoughts on whether you're still seeing signs of green shoots or to David's more recent comments. Is it just pretty steady out there at this point? And maybe specifically refer to some of the green shoots you were seeing before and maybe an update on that side?

Yes. I don't think there was any pull forward. I think it was kind of normal fourth quarter from that to a point. I mean, there's always stuff that happens at the end of the year, but there's nothing out of the ordinary that comes to mind. The one thing that we did highlight is that there was a little bit of a pickup in the home center channel, whether that's sustainable or not, where that goes from here, none of us really knows, but that was encouraging to us because that has been a headwind for us for a number of quarters now. So hopefully, we're starting to see some signs of life there. I was just with our global sales team over the weekend for a meeting that they held. And we've been looking at data and talking with a lot of people. But I think there's a sense that at least here in North America, kind of a flattish outlook again on residential housing. So not like any kind of a dramatic shift there. As I said in my opening comments, being held back a little bit by affordability. Commercial is actually -- the team is pretty bullish about commercial opportunities really throughout the country, multifamily and some of the infrastructure things that are going on. So I felt like most of our salespeople were upbeat on what's going on on the commercial front in the course, those are more expensive, higher-margin products. So that's good. And then surprisingly, talking with some of the manufacturers -- paint manufacturers there, actually starting to see some hope on residential repayment, which would be great for us. As you know, the turnover in homes has been anemic the last couple of years. And to the extent that we get houses turning over again, there is a little bit more of a renewed bullishness on the residential repaint side. Of course, we've got new products coming out, too, that the team is excited about. So -- all in all, I would say that going into this year, feel a little bit better about contractor, maybe those are green shoots than we would have a year ago.

Yes. And I think that the only thing I would add is a number that we all track. Mortgage rates right now are somewhere around [ $610 million, ] which I think is the lowest that we've seen in this last cycle over several years, going back to Q4 of '23. Rates, I think, peaked out at 7.8% -- 7.9%. So it's still not that 5 handle that we'd like to see, but it's getting pretty dog-gone close. And with the pent-up demand that Mark touched on, I won't say it's a green shoot, but it's certainly something that could be an extremely positive development as the spring rolls along.

And then on the pricing side of things, what is the price assumption embedded in that low single digit? In other words, is there a volume growth assumption in that low single-digit organic growth number? And then also, could you just remind us when the pricing was implemented by segment? I know some of it was in that late 3Q time frame? Is there any that's coming in to start this year?

Yes. I think we're hoping to realize about 1.5% to -- 1% to 1.5% on the pricing front this year. Of course, it's sort of mix dependent and timing dependent. And then on the pricing rollouts, as you know, we did accelerate some of the 2026 price adjustments in the third and fourth quarter of 2025. So there wasn't -- and there haven't been a lot of price changes on Graco here in 2026. The timing of some of our larger customers and their price increases is more on a midyear basis. So we did see some benefit from those increases that we did in mid-2025, and we expect that being able to do that, those kinds of increases throughout 2026 as sort of our normal cadence.

Yes. So I would just -- yes, especially here in North America, by midyear, we hope to have price adjustments made for key channel partners and across all the legacy product families.

Our next question comes from the line of Saree Boroditsky with Jefferies.

Maybe just starting out at high level, could you just update us on your One Graco initiative, and how we should think about any benefit to sales or margin performance for this year?

Yes. So I think one of the things I would point to is the inventory reductions that we've been seeing in our factories as a result of One Graco are pretty significant once we put all the operations under one leadership team. And we looked at knocking down some of the silos that were amongst our operation units. We really identified some areas where we could make some changes, do some consolidations of different facilities and do a better job of managing inventory than we've ever done. I think, as a company. So I'm pretty happy about that. We also did obviously reduce expenses pretty significantly. Here, and you saw that show up in 2026. So I think the number that we gave last year of around $15 million, if I'm remembering correctly, Chris, is nodding. We did realize that maybe even a little bit more. So we did drive quite a bit of efficiencies in the company as a result of that. The first year, when you go through a regard, you're always going to have some growing pains, both on the internal side of the house and externally, I would say they've been minimal. I think that we've worked through any of the internal issues that we've had with sales and marketing teams in particular. And I think that as we go into 2026, these teams are fired up and ready to go. I mean sales people that now have access to multiple product lines gives them a lot more to talk to customers about. Same thing with channel partners where we had restrictions in the past. So it's hard for us to put a dollar value on the revenue impact in 2025 of the initiatives of One Graco, but we all feel very strongly as a management team that was the right thing to do, and it should give us some tailwind in 2026 and beyond.

And do you have a cost saving number then for 2026?

Well, because we rolled it out right at the end of last year and we hit the ground running in 2025, the full year benefit of One Graco, as I said, was around $15 million. There's no ongoing restructuring that we're doing costs that we're taking out related to One Graco. Of course, we're watching expenses and managing things as we always do here. But there's no ongoing cost out happening at the company.

Got it. Appreciate that. And then I think last quarter, you talked about orders coming in at low single digits. Just curious how orders performed into year-end and then so far in January.

Yes. I think what I would say is that we factor all that into the guide, right, that we're doing here for 2026. And what we've seen so far, it's early days. We're just getting through January here. We're not concerned at all on where the guide is in relation to the order rates that we're seeing from our business units.

Our next question comes from Bryan Blair with Oppenheimer.

I was wondering could little a little bit more on the upfront licensing agreements that Bayer team has won. You're very clear in that they're noncompetitive customers or at least applications and very specific there in. What are the markets or applications where you're winning that are outside of Graco exposures?

Yes. been that I've been reluctant to share any specifics on customers without getting their clarification or clearance that it's okay. I would just mention that we're licensing the technology to motor manufacturers as well as some OEMs. So with respect to the motor manufacturers, it's limited in terms of the scope of the motors that they're actually putting ETM technology into. But once they're in, they can go into multiple different applications anything from the process industries to ag industry to robotics in some cases, where they want a small compact motor that will fit better than what they currently have available today. So it's really up to them. t make sure that once it's introduced as they launch it to their customers. And with respect to specific OEMs, again, I'm not at liberty to speak to the names. But I will tell you that when we get in front of people, and we show them a Graco product that has the motor in it, that's functioning and working. It goes a long way toward building confidence with an OEM to say, okay, no, I would need to redesign the product that I have to put those motor technology into it saves energy. It's quieter. It's more compact, it's lighter weight, all features that seem to resonate well with those OEM customers.

Okay. That all makes sense. And then your team drove a pretty solid inorganic growth in '25. Messaging remains pretty favorable there. You obviously have abundant dry powder. I was just curious if you can offer any finer points on the overall size or scale of your funnel composition of the pipeline actionability? And what, if anything, has changed on those fronts over recent tests.

I think what's changed is our confidence in being able to identify strategic companies that make sense for Graco. We've been really encouraged with the handful of ones that we've done here recently. They've all been hand in glove deals for us. There's mutual benefits on both sides. There's excitement amongst our teams when they actually see how a business that's acquired can fit with their customer base or with their channel. And so I think there's some momentum within Graco, is probably building with respect to M&A. Of course, we're going to stay disciplined. I think that that's the most important element of any deal that you do. You want to make sure that you're creating shareholder value and that the companies are -- there's mutual benefit on both sides. So I'm encouraged by that. We have well over 100 names in our pipeline at any given point in time. Some are actionable at different levels. Some are out there quite a ways. I will say that as I look into early 2026, there are opportunities that will come along and to the extent that it makes sense for us to be active and purchase them, we'll be ready to go.

Our next question comes from Jeff Hammond of KeyBanc Capital Markets.

Just back on the home center, as you talk to those customers, did you get the sense of like did inventories get too low, or they're getting ahead of a price increase, or if it's underlying demand is actually getting better? Just a little more color on that.

Yes. I mean the foot traffic is still pretty light there. So I don't think they've seen a big uptick in foot traffic. It may have been some channel activity there where they just felt like they needed to get things in better shape with their inventory. We didn't launch any new products or anything significant that really impacted our business. So it's a nice dynamic. It's -- we haven't seen it for a while. I don't have a lot of -- unfortunately, I don't have a lot of color to provide that would give you anything more than maybe what you'd get if you spoke with them.

Yes. I just would underline Mark's last point, it was a bounce in a business. It was meaningful, but it follows three really depressing years. So I would be getting ahead of myself if I thought -- concluded that it suggest a major change. However, these people are good merchandisers. And when they order products they usually know what their needs are.

Okay, great. And then I think you had indicated after '24, a lot of our big capital projects are gone, but I think in CapEx, you have a tick up. Can you just talk about what's in the growth capital plans in 2016 to drive that?

Well, in addition to our maintenance CapEx, which I think over the years, we talk a number in 40% to 50% range. We're going to be starting in a couple of months, the construction of our new corporate headquarters building in the French light campus, where we already have two existing structures. And I think that the planned number for that, I think we've communicated. It is about $50 million, and most of that money will be spent in '26.

Yes. And we're also vacating our campus here in Northeast Minneapolis, which we will sell, which will offset that, but we haven't factored that into the numbers that we've given you. We will disclose that if and when happens, but it will be a noticeable reduction in the overall CapEx spend when we exit this facility.

Our next question comes from Matt Summerville of D.A. Davidson.

I was hoping you could kind of do a little bit of an end market around the horn in the industrial business, what you're seeing from your larger end market exposures and then maybe contrast that across the three regions? And then I have a follow-up.

Okay. Well, I will take this one on. I made a list of end markets and a couple of areas I call out some regions. So bear with me here. This might be a useful list or less useful. On the positive side, we have seen steady activity in the automotive space, both with EVs and with legacy companies, both in the quarter and for the full year. It was really one of the business areas where we continue to see investments here in North America and in other markets, including Asia. Our famous dealer service market, think lubrication equipment, remains strong for the full year and had another positive quarter. So that was -- this is several years in a row where we've seen the dealer business perform satisfactorily. Despite some of the lumpiness in our semiconductor space, and especially here in North America around the timing of projects, the business showed some firmness in the Asia region. And in our Process Equipment segment, some of our channel partners, especially some of the MRO companies have called out seeing pretty good performance in the food and beverage space. Mark already touched on the balance we've seen in home center, and I would add the foam insulation to that, but also it's the same thing off a very low level compared to where we were at a few years ago. Sort of on the flat or downside, the Tier 1 automotive has been a mixed picture for us, and that's typically a steady business. With some ups and down, mining has been soft, and that's one of the larger end user markets for our automatic and industrial lubrication equipment and Asia is, of course, a very big market for mining. Solar CapEx was down, although one of our sales executives just returned from Asia, and he says, well, the activity is down today or down in the prior quarter. Outside of China, the Asian manufacturers are seeing panel volume increases, and that probably bodes better things for us sometime in the future. And then I would add just a couple of other things. Certainly, here in North America, the construction-related industrial markets, furniture, cabinetry, white goods, window and door for the most part, are depressed. And I guess to maybe round it out and to give you a region, our protective coatings business was a little softer this year than it had been earlier in the year. We did see I don't know, some project order decline or less project activity in the Middle East where the oil and gas infrastructure is a big driver in spend for that equipment.

Great. And then just maybe an update, having completed now three deals in the last 15 months or so, kind of how you're thinking about the actionability of your M&A pipeline here looking over the course of 2026 and whether or not you're optimistic that we see a couple of additional deals it over the line.

Yes, I'd characterize it as pretty good, Matt. You never really know how things are going to shake out. But as we are going into the first quarter here, there's things that we're looking at like every other company is. As I said before, I think that the thing that's really changed for us is we're very confident that the companies that we're pursuing are ones that really make sense to us. And I think we've got some momentum within our organization to be able to utilize as we look at future deals, where we actually are able to get some confidence that we can add value to those companies and they can revalue to us. So I'd say it's a good picture at this point.

Our next question comes from Andrew Buscaglia with BNP Paribas.

A couple more maybe on the modeling front. So in industrial, it seems like you're not quite turn in the corner, but maybe the North America and Europe data suggests that maybe things are getting a little bit better. But how about on the margin front you had that mix headwind. I'm wondering how long if that continues into next year? Or how do you see margins playing out with those dynamics?

Yes. I think that the quarters are always a little bit difficult because you do get some lumpy projects in there. In this quarter, we did have that with our powder finishing business systems. A couple of big ones that shipped out and just sort of skewed the results. I mean, I think that the margins in industrial are fantastic. I've got no concerns whatsoever in terms of any kind of deterioration. If we can get volume rolling through the factories beyond this kind of low single digit, there's plenty of upside. You've seen the incremental margins this year. A lot of that was due to One Graco, but also decent margin performance on volumes that have been, as you said, kind of flattish here for a while. So yes, I feel good about where we're sitting on the profitability side in that business. It's really a volume story going forward.

Okay. Got it. Similar question on the modeling front with the expansion markets. You guys have done a great job getting those margins up in a short amount of time. I'm wondering, are there maybe the confidence is a little bit lower on the top line. I'm just wondering, are the higher-margin subsegments or subsectors that if they were to return to growth could be pretty influential on those margins going forward?

Yes. I mean, really all of the businesses within there are nice profitable businesses. So we don't really have any dogs in there. For sure, the semiconductor business has really high, nice margins as does our high-pressure business and our QED business. And then, of course, with the motor initiative that we've got going on there as well that just sort of adds on to the top of it. So I would say it's similar to the industrial from the standpoint that we've got the infrastructure in place. We've got the teams. And when the volumes are higher than what they are today, you'll love the incremental margins.

Our next question comes from the line of Brad Hewitt of Wolfe Research.

So I'm curious how backlog trended in the quarter. It looks like you got the backlog conversion in the game of business as expected this quarter, but any additional color there would be helpful.

Yes. I think we were -- we did a really good job in manufacturing in Q4. Again, I kind of give some of the credit to One Graco and that team being organized and making sure that we're focused on getting products out to customers that wanted them by the end of the year. As we enter 2026, I think backlogs are at a decent level. No concerns there. And we're going to be pushing product out as as quickly as we can. The powder business that you referenced is part of our backlog, obviously. And that can be lumpy because at times, you'll have projects, particularly in our SAT business, which is those vertical lines that are used to coat things like windows, aluminum extrusions, those types of things. These can be projects that can go 6 months or more. So when we look out, we have more visibility on the powder side than any other. And we're -- again, we factor all that into our organic outlook for the full year, which is, I think, very achievable.

Okay. Great. And then curious if you could help us as we think about the phasing of organic growth throughout the year in 2026. Would you expect the lowest growth in Q1? And then I know Q2 and Q3, you have easier comps. So could we be looking at maybe like mid-single-digit growth in Q2, Q3? Any thoughts there on the phasing?

I would just say, Brad, I think that our seasonality will probably hold this year. There's nothing that we look at that would change that. Typically, the way that we think about it is that if we have good business on the contractor side that we should have a stronger second and third quarter. And typically, we have project completion realization in the fourth quarter similar to what we've had this year.

For Industrial?

For industrial.

[Operator Instructions] Our next question comes from the line of Walter Liptak of Seaport Research.

I wanted to ask about, in 2025, you had that $100 million of incremental revenue. But in the profit walk, it was like $8 million in profits because of some extra costs. I wondered about like the delta there for 2026. Like how much revenue is going to be coming through with sort of a normalized profit in 2026, if that makes sense?

I would say, I think Mark referenced this in his script that from a revenue standpoint, if we get full year revenue from all of our acquisitions, that brings us to about $190 million of revenue related to what we would consider our acquisitions, which would be a COROB color service and Radia. And then from a standpoint on the margin side, when we factor in all of our purchase accounting and everything as such. I think that what you're going to see is pretty typical from these earnings rates that we saw this year, at least as a percentage of the earnings.

Yes, I think the COROB acquisition banked at this point in terms of the numbers. We all got a full year in. So it's not really going to have a meaningful impact on contract. And that was obviously the biggest one that we did. Radia margins are really good. They're not going to be materially different than what the overall contractor margin rate is. And then color service, which is part of the powder business rolls up under industrial, again, is sort of in line with our profitability there as well.

Okay. Great. And then so with the start of the year, maybe we could try a fun one. If we kind of like roll everything up, and you look at the year for positives and negatives. What I'm hearing from you is that the things that could go well could be maybe the lower mortgage rates, help the resi market or maybe some of these factory CapEx projects get lose? And then maybe on the negative side, you didn't say it, but are tariffs done for like downside impact. I guess I wonder if you could just run through your thoughts on what could go well, what could be a problem for this year.

Well, the world is a -- we're reminded where we're headquartered, that the world is complicated, unpredictable place. And certainly, when we look at the things that could go well, yes, I think you touched on a couple of them that are highly relevant here and including the fact that, once again, we're launching some new products in some of our most important markets. And hopefully, that will give us some lift. And manufacturers and contractor end users are -- when they're looking ahead, they make their decisions based on ROIs, and we continue to believe that's what our equipment generates. On the messy side, only the Good Lord knows about what the trade environment is going to be like in 2026. Certainly, tariffs were a headwind for us that we made a mid-course correction with price adjustments. And I guess we've demonstrated interim price adjustments. And we've demonstrated that we try to be nimble as well. If we see armed conflict in the Middle East or something, that could have repercussions that we don't understand today. But I think over our 100 years, the world has almost always been a turbulent unpredictable place.

Yes. I think we're pretty well covered on the tariff front. We did our pricing actions. And as we're heading into '26, we don't expect headwind. You're going to -- obviously, they're baked into the numbers anyway. So -- and as David said, I mean, none of us is ever going to know what's going to happen. I think we demonstrated that we're willing to flex, and we need to do to drive value for our investors and our shareholders, and we're prepared to do that. These are uncertain markets. And Graco's in a good spot to be able to maneuver our way through them in a smart way.

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

Okay. Well, great. Thanks, everybody, for participating. We're excited to wrap up '25 and get on to 2026. I think it's been a great year for Graco. It is our 100-year anniversary. Not many companies make it, 100 years. So we're super proud of that, and obviously, super proud of our employees for making sure that we're delivering good quality product every single day. So thank you so much. We're going to sign off. Have a great rest of the day.

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

Good morning, and welcome to the third 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 the 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 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 Knutson Vice President, Controller and Chief Accounting Officer.

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 more commentary.

Yesterday, Graco reported third quarter sales of $543 million, an increase of 5% from the same quarter last year. Excluding acquisitions, which contributed 6% growth and currency translation, which contributed another 1% growth, organic sales declined 2% in the quarter. Reported net earnings increased 13% to $138 million or $0.82 per diluted share. During the quarter, we recognized a $14 million noncash gain from a reduction in the fair value of contingent consideration related to last year's acquisition of COROB. This gain is an unallocated corporate operating expense, excluding the impact of excess tax benefits from stock option exercises and this contingent consideration fair value gain, adjusted non-GAAP net earnings was $0.73 per diluted share, an increase of 3%.

The gross margin rate was flat compared to the same quarter last year. The effects of our targeted interim pricing actions started to be realized during the quarter, offsetting 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 $5 million in the quarter, resulting in a 100 basis point decline in gross margin rate. Operating expenses decreased $6 million or 5% in the quarter. The decline was driven primarily by the recognition of the noncash gains related to the fair value contingent consideration reduction. Excluding this gain, total operating expenses increased $8 million or 6%, driven by incremental expenses from acquisitions of $10 million. Excluding expenses of acquired operations, operating expenses declined $2 million.

Adjusted operating earnings increased $5 million or 3% during the quarter. Operating earnings as a percent of sales was 28% for the quarter and consistent with the same period last year. The adjusted effective tax rate was 20%, which is consistent with our expected full year tax rate of 19.5% to 20.5% on an as-adjusted basis. Cash provided by operations totaled $487 million for the year, an increase of $51 million or 12%.

Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase. Cash provided by operations as a percentage of adjusted net earnings was 146% for the quarter and 132% 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 $138 million and capital expenditures of $34 million. These cash uses were offset by share issuances of $32 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 net earnings for the full year. Finally, projected unallocated corporate expenses and capital expenditures are $35 million to $38 million and $50 million to $60 million for the full year, respectively.

I will now turn the call over to Mark for further segment and regional commentary.

Thanks, Chris. Good morning, everyone. I'm pleased to report that sales were up 5% this quarter, with acquisitions contributing a strong 6% growth. This more than offset a modest 2% decline in organic revenue.

Our Contractor segment continues to face headwinds from subdued construction activity and cautious consumer sentiment in North America. The Industrial segment delivered a 1% sales increase, supported by acquisitions and favorable exchange rates. While growth occurred in many product categories, overall sales were set back by the timing of Powder Finishing System sales compared to last year. Expansion markets performed well, led by momentum in the semiconductor space. Third quarter order activity increased mid-single digits across all segments, driven by strategic pricing and steady demand.

Last year's third quarter had a nearly $25 million backlog reduction. Excluding this reduction, organic sales grew 4%, aligning with third quarter order rates. Backlog levels are stable and no significant challenges are expected for the rest of the year. Details on backlog reduction by segment are included in the conference call slide deck.

We announced targeted price increases during the third quarter, and those efforts are gaining traction. These actions are helping to offset the impact of tariffs, which added $5 million in cost for third quarter and $9 million year-to-date. While pricing has not fully covered these costs yet, we expect this by the end of the year. Turning to segment performance.

The Contractor segment sales increased 8% for the quarter with acquisitions contributing 11%, more than offsetting a 3% decline in organic sales. Affordability concerns have continued to affect the North American construction market with declines in both the Pro Paint and the Home Center channels. Channel partners are managing inventory tightly in response to current conditions. On a positive note, Protective Coatings equipment sales had their best performance of the year, and [ Pavement ] products saw increased demand [ afforded ] by infrastructure investments. Incoming orders grew low single digits in the quarter, giving us confidence heading into the fourth quarter.

Industrial segment sales increased 1% in the quarter, with acquisitions and currency offsetting a 2% organic revenue decline. The Americas grew 3% organically, led by good demand in vehicle service and automotive OEM projects, particularly in Liquid Finishing Systems and Sealants and Adhesives. In EMEA, gains in Process Manufacturing were not enough to offset a drop in Vertical Powder Coating Systems due to project timing.

In Asia Pacific, there was solid demand in mining, which was not enough to offset lower solar and EV investments. Despite lower organic sales overall, profitability was extremely strong with incremental margins of 220% year-to-date. Expansion market sales were up 3% with good activity in semiconductor products, partially offset by declines in the Environmental business. While semiconductor has grown this year, we are still below peak revenue and continue to face some challenges in China. Margins have been strong throughout the year, though they may be volatile quarter-to-quarter due to fluctuating volumes.

Moving on to our outlook. Year-to-date sales are up 5%, supported by the 6% increase from acquisitions, which have more than offset a slight organic revenue decline of 1%. Heading into the fourth quarter, order rates are satisfactory and year-over-year comparisons in the Contractor segment are becoming easier. As a result, we're keeping our full year revenue guidance of low single-digit growth on an organic constant currency basis. That concludes our prepared remarks. Operator, we're ready for questions.

[Operator Instructions] Our first question comes from Deane Dray of RBC.

Maybe we can start with since macro overlay and expectations is so important. Kind of -- can you zip through the end markets and regions. Just the performance of what stands out versus expectations up or down? And then any kind of the forward look, the leading indicators day rates, what you saw the first -- the last 6 weeks of orders too, please?

Yes. So I think it's a continuation really, a lot of the themes that we've been talking about all year. I think that in terms of like the Industrial end markets, I wouldn't characterize the demand is robust, but I would also say that people are still ordering products, and there's targeted opportunities in some of the areas that we talked about, like vehicle service and our Process Pump segment, which have been pretty good. And also our Liquid Finishing segment is a lot of customers are looking at converting from air operated to electric. That's created some opportunities for us as well. So it's kind of hit-and-miss depending upon the customer type, the end market that we're in.

The North America market has probably been the one where we've unfortunately seen more caution from customers just because the changing landscape with respect to the tariff situation. I think it has created some caution in some of the end markets and some of the customers. We're hopeful that, that kind of cleans up. But if I were to put my hat on from the end of last year, when we were putting our plans together, I think we were more hopeful that we would have a more stable environment in North America than what we've experienced. Our teams are still working really hard. They're still executing. There's still opportunities out there. But again, the environment is not what I would characterize as robust.

China has really actually held up pretty well for us this year, which after a couple of years of declines there, it's been nice to see. And again, it really depends on the end markets that you're in, the mining industry, in particular, in Asia Pacific and maybe to a lesser extent China, has held up pretty well. And some of the traditional industrial markets, including Adhesives, Sealants and Liquid Finishing and the Powder business have actually held up pretty well in China. So I would say that China has been a positive surprise maybe for us after a couple of years of tough business over there.

And probably the other big surprise is just the uncertainty in some of the end markets with our Industrial business. Contractor, I mean, I know we'll get into it on this call. But the issue there, again, is just affordability. Home affordability issues primarily in North America. Nothing too surprising. We're hopeful that we get a little bit of a break on that with rates coming down. The environment has been tough. Last year, as you know, we had the lowest level of housing sales in this country since 1995, and this year is even lower than that. So turnover is good for us. Houses need to sell. When houses sell, they hire contractors to paint and they fix up and they remodel and it's just good for the overall health of our Contractor business. It will get better. We're very well positioned once things firm up on the demand side and we get some volume growth. The P&L is in great shape. Profitability is super high. Incremental margins look good. Cash flow is extremely strong. So it's really just making sure that we're all set up for what will be better volume days ahead in Contractor.

And the leading indicator look, day rates, October, et cetera.

When we look at the rates and what we see coming out from some of those indicators, pretty flat, I would say, on -- in terms of housing starts, with a 30-year interest rate is now at 6.1%, which is lower than it's been in quite some time. So we're hoping that as those rates start to trend downwards, that will see some improvements come with housing movement, as Mark had previously talked about.

Yes, still a pretty sluggish environment, Dean, and we're hopeful it's going to get better, but I don't think our results are really all that bad. When you look at how hard this housing and construction industry has been hit. I never -- I don't like the fact that we're down a little bit organically in Contractor. But given the pain that's gone on in that market for a while here, it's been -- a challenge to the team, has dealt with an admirable way.

Yes, I would just add that a fairly significant portion of that market, as Mark touched on, with resale acting so slow is remodeling activity. That's one of the areas that affects both our Pro Paint side and our -- our Home Center side of our business. That actually, this was the first year that the group that does forecasting around that Harvard University, projected that category to grow that activity to grow this year that really hasn't happened. So I think that, that holds us back and we hear some of our channel partners talk about the same things, both on the Home Center side and as well as on the Paint Materials side of the business.

And then just a follow-up. I know it's a rare event for you to do a second price increase in September. But just kind of give us some color about how it was reduced? Are they all sticking and you expect this to fully offset the tariffs? What's the time frame there?

Yes. Good question. We did announce price increases in the early third quarter. We'd like to give our channel partners enough time to digest those before we actually implement them. So we didn't actually start to really have those take effect until late in the third quarter. But I would say sort of low to mid-single-digit kinds of increases across all business units, in all of the regions with the exception of the Pro Paint channel in North America and the Home Center channel in North America, and those are queued up to go in January.

Our next question comes from Mike Halloran with Baird.

Can you unpack what you're implying for the fourth quarter here. If I -- is this mainly through the pricing that hasn't come in fully being more ramped in the fourth quarter comp. Is it something you're fundamentally seeing in the demand outlook, like you be a bit more confidence in the fourth quarter. Because the inflection of growth is above normal seasonality. And so I just want to make sure I understand what those puts and takes are, to get you to that positive fourth quarter number that's implied with the guide?

Yes. I think we're -- we kept the guide. I think that, obviously, you'll do the math, and you guys can figure out that it looks like we're going to be on the low end of the guide when we get there. We're not likely to get all the way up to the high end of the low single-digit guidance. But despite where we're at year-to-date, we're down about 1%. We think with our incremental pricing actions that we put in, the order rates have been stable, that somewhat better in the third quarter than what we had seen earlier in the year. Obviously, there's some areas of business that are doing better than others. And then we also have a fairly easy comparison in Q4 with the Contractor business. So you sort of put all that together and our team, our forecasts are rolling up to hitting in somewhere in that low single-digit range.

So to be clear, it's not like you're assuming there's something fundamentally getting better in the fourth quarter. It's more steady and then you put the other factors in play and then that's how you get to that guide?

Exactly. Yes. I think that's fair.

And if you think about kind of the second part of the second question, Dean add there. When does price cost be positive for you guys? So when does that drag-in? Is it with those price increases that you said were coming in the first quarter. When you hit the fourth quarter here, does that dynamic normalize out?

Yes. I think we'll definitely see it here in Q4. Actually, if you look at Q3 gross margin, if you were to back out the impact of the COROB acquisition, our margins were actually up in Q3. So we are doing okay on the price cost. We'll see that roll through here in Q4 as well.

Our next question comes from the line of Saree Boroditsky of Jefferies.

You alluded to this just a second ago on the price, but it looks like Contractor was the only segment to have a large headwind from product cost. I think you mentioned putting in price increases in North America in January. Just maybe talk to your ability to push through price in that segment versus the others?

Yes, it's good, but we are respectful of the fact that we deal with large channel partners and conversations happen around this time of the year. They start at that level, we intentionally did not try to push price midyear with them, I think is appreciated because some of our competitors did. So we fully expect that we'll be able to realize some pricing starting at the beginning of the year with our larger channel partners. We had to raise prices in Contractor in the Spray Foam category and the High-performance Coatings category and in our Line Striping and Texture businesses. So it's not like we didn't raise prices at all in Contractor. We did hit those categories with the other industrial categories in the September timeframe.

And you will see in our international locations, the product lines, especially we're talking about the Pro Paint line, which, of course, is largely sold through some of these big channel partners here in North America. Price adjustments will be processed there now, and we'll see some benefit even before the end of the quarter in that category, too.

Appreciate the color. It looks like you turned a little less negative APAC in expansion. Just maybe some -- an update on what you're seeing there and the key driver of that decision to update that pie chart?

Yes. I think that the Asia Pacific region, as I said earlier, I think overall, the China business has actually held up better than maybe what we thought. The comments that I made during the opening remarks were targeted at the semiconductor space, where despite decent levels of demand, there's still some challenges in getting licenses and getting products into China, which we are hopefully, we'll get cleaned up at some point. That's really, I think, part of the reason why we moved a little bit to a less optimistic view in that region overall. I wouldn't call it a dramatic change, but just kind of a fine-tuning of where we see things at here as we make our way through the year.

Our next question comes from Bryan Blair of Oppenheimer.

So you're a few quarters in now with the new organizational structure. And obviously, you've been navigating a pretty choppy-sluggish backdrop. To date, how is the more market and customer-centric framework helped your teams to navigate this volatility in better position for recovery? And then on the side of M&A strategy, has there been a noticeable difference in funnel development? Just curious what "proof points" you could call out.

Thanks for asking. On the One Graco side of the house, I think that it's still fairly early days. But for sure, we're seeing a lot of margin improvement from some of the cost initiatives that we took last year, just look at the industrial incremental margins, it's probably a good benchmark for you in terms of what we've done there. And we're on track with the targeted number that we had given you last year. Those things are moving forward quite well.

Commercially, the teams are really starting to gel with respect to having distributors be able to carry multiple product lines that they weren't in the past. So we're seeing like upticks in some of the MRO business because those are broad-ranging distributors that carry multiple products, and they're very interested in being able to get access to some things like our lubrication products, for example.

We're also getting, I would say, better penetration in some of the international markets like down in Mexico, where historically maybe we're a little bit more protective in terms of who would get access to products like our Quantum Pumps which are going into a lot of different applications on the process and sanitary side. Well, now we've opened that up a bit, and we're seeing some traction there as well. The teams are working well, but it is still early days. I mean, there's growing pains that happen whenever you put multiple business units together, and then you also put the regions together.

But I'm very happy with what I'm seeing and what I'm hearing from the teams. When I meet with customers, distributors, they're really happy. Because they view this as us taking down a lot of the walls that maybe prevented them from being able to sell different product categories that they walk by applications every day and they weren't able to have access to, let's say, for example, lubrication products. Well, now they have that. So it's really a matter of getting them trained, making sure that they've got the opportunities. And then if they do and they're trained, we're going to open up those channels for them. So I'm very happy.

On the M&A front, it's kind of a continuation. I like the pipeline. We've got a lot of companies in there. We're talking with them regularly. We're on top of any of the targets that we're interested in. We've had some success this year. Obviously, with the Color Service acquisition that we announced during the quarter. There's other things in the pipeline that we're also excited about. But it is a -- for sure, it is a secondary or secondary to our organic growth strategy. We want to execute on M&A. We like these businesses where they're technology based, where we think we can add some value or they're growing or we like the management team where we can add value, and we're continuing to push those types of opportunities pretty aggressively here at Graco. So hopefully, some stuff pops here over the next 6 to 12 months. But I think we're in a good spot.

I appreciate the color. It looks like top line contribution from your acquisitions has been pretty solid, at least in combination. Maybe offer a quick update on COROB and Color Service integration. I know the latter is still quite early stage. Just how they're performing relative to the deal model to-date?

Yes. I think that for sure, COROB is coming in right where we thought it would be, which was our expectation was that we wanted to make sure that we retained what we had seen from them previously in the earlier year in terms of the revenue. So we feel really good about where that one's at. No surprises, great business, great management team, super excited on how we can help them collaborate here better in North America, particularly with some of the larger channel partners like the Home Centers and the Pro Paint side where their penetration isn't as good as some of their competition. So very good there.

Color Service, a brand new, it is part of the Gema Powder business. It's being managed by a leadership team that is actually in charge of running our SAT vertical lines business. They're both in Italy. They are closely located to one another. Those teams are really early days, but they've got ideas as well on how to integrate and how to implement some of the best practices that the game organization has shown over the years into the Color Service business model. So we're excited about that one, too. It's a nice technology business. They're solving customers' problems. They're moving materials that people care about. It fits really well with what we're trying to do.

Yes. And I would just add on the Color Service side. They take us into some large markets that historically we haven't had a lot of exposure to like the textile market, powder market, and those could be good learnings in addition to, as Mark referred to, their powder technology expertise that our Powder Equipment business is quite excited about.

Our next question comes from the line of Andrew Buscaglia of BNP Paribas.

I just want to dig in on one comment you've been making in the last several quarters on Vehicle Service. First of all, how big is that? And then it just seems to be an interesting market that's bucking a lot of trends you're seeing across I guess, general automotive? And what are the dynamics there driving such good growth for you guys?

Yes. We don't break out the revenue on that, but it is a nice business for us. Actually, it was the business that Graco started with back in 1926. So we've been in it for quite a long time. I think that the teams would tell you that probably the biggest driver of the demand here more recently has been our focus on creating Fluid Management Systems that really track the information by vehicle in terms of the amount of fluids that are being dispensed.

So going back to these are materials that people care about. They're expensive, they matter, making sure that every single vehicle gets lubricated appropriately and that they're tracking the inventory of fluids that they need to be able to make sure that, that service is done correctly. And having that tie-in to the back office systems where they can do demand planning, order planning, schedule when the guy needs to come to take out the used oil, all those things. We bring a really nice package together for a lot of the larger fleets and auto dealerships and large users of this type of equipment, and that's really been a nice recurring theme for that group, but it started with the product and the technology.

And I would just add that motivating these dealers that Mark mentioned, is the fact that along with your used car activity, this is a service -- is a very profitable area for them, and anything they can do to expand the share of wallet of either the customers or the manufacturers during the early years of a new car service period is very interesting to them.

Okay. And your free cash flow, it's been delivering really strong conversion lately. You guys probably should do over 100% free cash flow conversion this year. I think that's the second year in a row now, and you're typically historically more like an 80% to 90% converter. Is this kind of the new normal going forward? And what is behind that? And how sustainable is that going forward?

Yes. I don't know that I would -- I don't know if I have a view on whether it's a new normal or not, but I would tell you that it is something that we're focused on. Cash matters. We know that. We are challenging our teams to make sure that we're not overutilizing the balance sheet when it comes to things like inventory and accounts receivable. I will say that One Graco initiative helped clean some of that stuff up. Where in the past, you've had multiple factories, every division has their own factory. Every division had their own warehouse and operations around that. So being able to put that all under one organization has really driven a lot of improvements.

It's early days for us in terms of what we think we have available to us and improvements, but it is getting a lot of attention and focus on our end because we all know that it is a very important metric, and it is a value creator, for the company. And that's not something that we take lightly and it's not something that we have lost sight of. And I feel like we're in a really good spot to continue to drive improvements going forward. David, I don't know if you have anything else to add?

No. I think that even on the -- I think an important point is the One Graco point is that the -- we didn't take the steps as a strategy to drive operations. But as we talk to our operating team sort of quarter-by-quarter, they're finding opportunities where they can eliminate duplication activities, have these center of excellence that we've talked about before, and not only can it improve quality, it includes service levels, there's really money to be saved on the factory floor by eliminating those.

Yes. The only other thing I might add, too, just as I was thinking about it is over the last 5 years, we've added a lot of production capability here at Graco. We've expanded multiple facilities. We broke ground on a bunch of new ones. We're in really good shape, brick-and-mortar wise. We did announce earlier in the year that we're going to be consolidating operations out of our Minneapolis factory into currently existing Graco facilities, [indiscernible] in Minnesota as well as in South Dakota and down in Ohio. So being able to do that, those types of things, again, kind of lines up with One Graco. It might have been harder to do that, under the old regime, but now being able to really close a factory here and move all the production into these new state-of-the-art facilities is pretty exciting. Plus all the overhead cost infrastructure, things of keeping a factory up and running will go away.

Our next question comes from Joe Ritchie of Goldman Sachs.

I was curious around the additional disclosure you guys gave this quarter on backlog. Because I historically just never thought of you guys as a backlog company. And so I just wanted to get into better understanding as to what you were trying to, I don't know, signal, not signal by providing that information?

Yes, we thought it would be helpful, and that's why we put it in there. You're right. We don't normally talk about it. But when you just look at the third quarter in and of itself, last year, we did have a significant amount of backlog that flowed through the top line to the tune of about $25 million, $30 million, something like that. Some of that was in our Industrial business, on the Gema Powder side, on some of the Sealants Adhesive Systems that were being sold during that time period. And then part of it too, is on the Contractor side as well, where they had some new products that were a little bit late on the launch cycle last year. So they had built up some orders and got those shipped out in Q3.

What I'll say is that right now, our backlog is about where it was at the beginning of the year, and we feel like that is a really good place to be in. We don't have any more headwinds. Our backlog is in the neighborhood of $225 million, $230 million. I'm looking at Chris, he's nodding his head. At one time, our backlog was $500 million at Graco, and that was obviously when the supply chain crisis happened and all those orders come flying in and inflations hit and then everyone's put their orders in ahead of time. So we've really unwelded that now over the last years, and we're at a point now where it's really back to a more or less a book-and-ship business with the exception of maybe the game of powder business, which is more project-based.

That's super helpful. And do appreciate that context. And I know, look, I know that you guys don't give guidance outside of our expectations for growth for the entire year. But as you kind of think about maybe kind of like an early framework for 2026. What's interesting to me is that you look across your different businesses and look outside of expansion, of late, you really hadn't seen a lot of growth across Contract or Industrial, but your margin expansion in Industrial, particularly has been notable. I'm just trying to get a sense for how to think about maybe segment margins going forward into 2026? And so any kind of qualitative or quantitative comment would be helpful.

Well, I think the key -- the key to margins in our business model is going to be the volumes. I think that we believe one of our sort of bedrock way, as we think about our business is in all of our businesses, we have opportunities to improve margins. And I've demonstrated I'm not much of a forecaster in terms of when the business is going to turn. But I do believe with some volume growth, moderate volume growth in Industrial and in Contractor, when that happens, it can carry these margins that aren't bad today, I think, is your point to an even higher level.

Yes, I would just say it too, that we're really good operators at Graco. I think we do a great job in terms of getting our teams oriented around making sure that we're not spending resources that we don't need to spend. And as we add into next year, I think that, that's going to be the go in mantra that we're really going to keep a close eye on our expenses, manage that well. We get some tailwind hopefully on some of the pricing actions that we've done. And if we get a little bit of help on the -- half of our business is tied in with commercial construction, housing, those end markets, contractor type markets, if we get any help on that. As David said, the volume will really, really help the equation.

Our next question comes from Jeff Hammond of KeyBanc Capital Markets.

This is Mitch Moore on for Jeff. Maybe first, I know there's a lot of moving pieces with the macro right now, but how should we be thinking about the magnitude of the price increases for early 2026 in Contractor? And then more broadly for the segments, does the fact that this recent price -- you did this recent pricing action change your view on doing another price increase here in a couple of months?

Yes. So we're not going to comment on the level of the pricing with the home centers and the pro channel is because those negotiations are happening and our teams are working. I don't want to say anything that is -- we'll put them in a bad spot. So I would expect that we're going to get what we are proposing, which will be reasonable. It will be fact-based. It will be based on what we're seeing for input costs. We're very transparent. We share all that information with them, and also based on what we view pricing in the market to look like. So we're expecting that those will kick in the January time frame.

As of the rest of it, I think in terms of what else we might do in other business units, I'm going to leave that up to them. Obviously, to the extent that we think that we have the ability to raise prices again in 2026, we'll do that. But I think we are also cognizant of the fact that over the last 3 to 5 years, there's been a lot of pricing that's going on in our end markets. So it's really competitive based and there will likely be some targeted price increases, but we've we're aware of the fact that the market where because of all the activity on the pricing front, including the stuff that we just did my preference would be to not push quite as hard as what we have.

That's helpful. And then just maybe sticking with pricing and competition and tariffs. I was just wondering, particularly with the DIY and Pro Paint channels. Just wondering if there's been any evidence of share shift towards Graco versus some of your foreign competition?

I don't think that, that's something that we can quantify because it's really difficult. But I will tell you that in the Home Center channel in North America, which is like really the primary channel for those types of products, their business is down pretty significantly. So are we down more than our competition? Are we down the left? It's really hard to know. I just know that it's down, and their foot traffic is down, their level of business activity is down. It ties back in with this whole turnover, affordability, remodeling those markets have just been pretty flat to down, and I think we're seeing that in that channel. So it's hard to know whether we're doing -- we're not as bad as our competitors, but I don't like the fact that we're down.

Yes. Promise is, of course, everybody has a different -- somewhat different manufacturing footprint. And sometimes they go for price and sometimes they have to lump it, and I think that -- that applies really across most of our niche businesses is that we could be talking about Liquid Finishing too, and each of the major manufacturers have very different global footprint. So there's frequently a story behind the story.

But Mark's underlying point is absolutely right-on. In the short term, they are switching costs, which tend to make our relationship sticky. But big picture longterm, products have to be priced as to what the market will bear.

Our next question comes from the line of Matt Summerville of D.A. Davidson.

Just a couple of quick ones. Do you have an early read on what the Contractor kind of new product pipeline looks for 2026 is you think about maybe trying to use innovation to reinvigorate demand if we're going to be in this, I'll just call it, general housing delays, for longer? Things maybe to help stimulate a replacement cycle? Or is that something maybe you've already done in the recent past?

I would say the pipeline looks pretty similar to what we have experienced over the last few years. I'd call it more of a normal year. Some additions in the Paint category, some in the Line Striping category and some of the [indiscernible] category. But it's a good pipeline. It should help drive some demand. Yes. So I'd call it kind of a normal year next year in terms of what we're seeing.

And then you'd mentioned in Contractor, I think it was in your prepared remarks that you're seeing both Home Center and Pro Paint customers tightly manage inventory. Do you expect inventories to further decline into calendar year end? Or are they running about as lean as you would expect them to run given the environment we're in?

Yes. I think they're pretty sorted. And I think that they're -- I sense that they've got a lot of inventory that they got to get rid of or deal with here. I think that they're managing it to the levels of the business that they're seeing.

Our next question comes from Walter Liptak of Seaport Research.

I wanted to ask kind of similar to what Matt was just asking on 2026. I know you don't get a whole lot of visibility, but I wonder if you could comment a little bit about maybe in Industrial, some of those capital projects, is there a lot of quotes out there? Could they get released? And then when you think about 2026 in the One Graco and kind of the new go-to-market strategies. All things being equal, could you get another 1% or so of organic growth just from your own kind of strategic changes?

Yes. I think that -- I'll take the second one. That's what we're driving for is -- you don't go through all the work to do this without really expecting that your channel partners are going to get access to more products and sell more and have it easier to do business with. I think it translates into growth for us vis-a-vis what we would have had under the under the old regime. I haven't put a number to it. I don't know if it's a percentage thing, but that is definitely the reason why we did it.

I'll take a shot on the investment side, your first question. When we look around -- when we sell to so many different markets, it's always hard to generalize. And so we can always find three or four positive stories, a couple of disappointments. What I would say in terms of quotation activity and discussions around projects, which is while we're short cycle, we sometimes have an indication that major customer is working on, say, a new paint line or a new sealant line or something like that. We have good quotation activity in traditional Graco markets like farm and construction equipment even throughout the, call it, the turbulent times of the last couple of years, automotive as a business, both in the legacy and the EV has been consistent in making investments.

And when I talk about other -- some of the other niche markets that we serve, they get pretty small, so we can have a couple of orders, say from the commercial-aerospace market. There aren't that many manufacturers around the world, but we have heard of investment possibilities that are at least intriguing going into the coming year. But of course, there's markets that have been soft, as we've talked about late both on the construction and on the industrial side, especially those markets that serve the construction industry like window and door, furniture, some of the white goods, people that can swap over into a couple of -- two or three of our different business units.

On the construction side, I would say our premise that you've heard us talk about Walt, over the last 5 years hasn't changed. We're still under-built. We have a generation of people that if we can see some improvement in affordability, and that does start with mortgage rates. That's why we track them probably as closely as you people do. We really believe that when we have a little bit better dynamics there, there's a lot of housing to be constructed. And as we've already touched on, a lot of remodeling re-paint work that will help us.

Great. I appreciate the kind of thoughts on that macro. Maybe another one that's on 2026. When you think about the One Graco -- is there a profit component over the margin components that you talked about as well as the organic growth component. Which one is easier, which one could you see the most benefits from in 2026? Is it more top line or is it more on the profit improvement?

Yes. I think for sure, if we can get volume on the top line, it's going to really be nice for us. So I'd say that one.

[Operator Instructions] Our next question comes from Brad Hewitt of Wolfe Research.

So as we think about Contractor margins, it looks like you've done about 28% margin year-to-date, excluding COROB. I guess how do you think about incremental margins for contractor going forward? And how much volume recovery do you think is necessary to get back to kind of the 29% to 30% zone ex-COROB?

Yes. I don't think a lot of volume is needed. Obviously, the pricing is going to help us offset some of the tariff costs. Volume starts coming back, then you can -- you realize a lot of efficiencies in the factory that we're just not seeing when volumes are flat or even slightly down. So I have no concerns whatsoever in terms of them getting back up to those kinds of margin rates even with a very small amount of volume increase.

Great. And then Curious if you could provide a little more color on what you're seeing in the White [indiscernible] business from a growth perspective this year? And then from a medium-term perspective, is there potentially any change to your thoughts on the growth algorithm for that business? As a result of the proposed [indiscernible] on semiconductors?

Yes. I don't know that we are going to be able to give you like specifics on revenue for the White [indiscernible] business, but it has come back. Obviously, everyone knows that there was about a 2-year period there where a lot of those investments were not happening, but it's a cyclical business, and we recognize that. And things have picked up there, and they are getting orders, and we're happy about that. But I think as I said in the earlier comments, they're not back to the levels that they were at a couple of years ago. The macro still looks pretty favorable. There's still a lot of investment going on. I'm sure that we'll be able to get our fair share of that.

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

Okay. Well, I want to thank everyone for participating today, and I look forward to chatting with you down the road.

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

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. 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.

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 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. 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 percentage point 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 percentage points. The acquisition of COROB decreased the contractor operating margin rate by 2 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% to 20.5% 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 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. Unallocated corporate expenses are projected to be $37 million to $40 million for the full year. And finally, we expect capital expenditures to be approximately $60 million to $70 million in 2025.

I'll now turn the call over to Mark for further segment and regional commentary.

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 clear. 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 remained 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 6 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 6-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-to-date -- than year-end results -- year-to-date 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 EMEA and Asia Pacific not enough to offset a decline in the Americas. Powder finishing systems 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 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 an annual revenue of EUR 34 million in 2024. 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 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 was 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 prepared remarks. Shannon, we're ready for questions.

[Operator Instructions] Our first question comes from Deane Dray with RBC Capital Markets.

Can we start with the price increase announcement? And this is far from being a seismic as it was back in 2022 when you did the first time ever intra-year price increase, and this one seems certainly warranted given the tariff pressures. Can you just -- how is this price increase different? Can you size it? And anything about the implementation? And is this all price? Any surcharges? And any color there would be great.

Yes. 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. And 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.

So nonetheless, we did start to see some of the impact hitting us, and we were also watching what was happening in the end-markets that we participate in and seeing what's happening with a number of the competitors who are also raising prices. So 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've got in our P&L. I'd characterize the increases as targeted and targeted at the geographies and the areas where we're seeing the most input cost pain. And also, I'd 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.

That's really helpful. And then 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 what do you attribute the strength of the conversion this quarter?

Well, thank you. We called that out because we thought it was a pretty solid sign as to the cash generation capacity of the company. So 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, and it was another good quarter there. And of course, certain aspects of our One Graco initiative contributes a greater efficiency, a 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.

So 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. So we haven't done anything about that. But we feel very good about the future cash generation capacity of the company.

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 either through a prebuy or some buffer inventory to kind of smooth out with all the tariff noise. But you're actually making progress in reducing inventory?

Yes. I mean, we took -- I mean, again, there are some things that we absolutely need to have, and we've been aggressive where we needed to be aggressive on the sourcing side. But 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. And 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.

Our next question comes from Mike Halloran with Baird.

This is Paz on 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. Can you maybe discuss the opportunity and how you see it getting into the portfolio with a little more color, please?

Yes, Paz. Thanks for the question. So 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.

And our Powder team, led by Claudio Merengo at the Gema group, they really did a nice job of looking at some opportunities that aren't necessarily powder paint but technologies that they understand. And they really surface this area as a potential target area for us. So that led to some discussions with the ownership and ultimately resulted in the acquisition.

What we like about it is the growth rates have been pretty good, this business, maybe slightly better than what we've seen in the legacy Graco businesses, at least over the last 5 years. It's technology that we understand. It's dosing, it's measuring. It's gravimetric measuring, which we understand and we know about.

The location is good for us because it's closely located to our SAT business in Italy. And the leadership team of SAT will actually be working very closely with Color Services' leadership team to make sure that we capitalize on any integration possibilities, opportunities to help them with operations, production, be more efficient. So 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're involved with all the tire manufacturers, they get involved in the textile industry, cosmetics. So it does broaden out our portfolio a little bit beyond what we have seen in the past.

Great. No, that's helpful. And then 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 market has been tight? At this point, what do you think is the green shoot that is necessary to get some of these projects moving?

Well, it's got to be affordability, right? Obviously, a rate reduction would help quite a bit as long as the prices don't go up when the rates go down. Unfortunately, when the rates went up, the prices really didn't go down as you would have expected them. So affordability is still the biggest challenge I see in the new construction market that we have. And that impacts activity. Obviously, it also impacts our spray foam business to a certain extent because a lot of the new builds are using that technology in there.

So I think any major shift in affordability would be very much appreciative. I know it's on the radar. We've read a lot of different reports and we've been listening to some of the commentary coming out of Washington. So I think that they know that this is an issue. There are still a number of people that are locked in at low mortgage rates and they just can't move even though they would like to move. So if you look at the number of homes being sold this year and last year, it's extremely low compared to what you would expect in a normal economic environment in a country the size of the United States. So there's 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.

Our next question comes from Saree Boroditsky with Jefferies.

Maybe just first, building on the price increase. I believe the last time you did a midyear price increase, you took less price in the following year. So would you think about something similar as you think about 2026? And then do you take any more pricing on the Industrial side versus Contractor given the more consumer focus?

Yes. 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.

And in terms of where we targeted, how 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.

And then maybe going on about the uncertainty that you'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? And do you expect any changes from some of the incentives with the One Big Beautiful Bill?

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 -- the first part of your question, we could talk at length, but just to give you a flavor that 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 mean, certainly markets that at the moment have some positive momentum and then some that are a little bit softer. 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. And Mark touched on the strength of powder equipment. That shows up in the architectural profile market, agricultural equipment and also other automotive components.

So 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. 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. And no surprise, in light of the Contractor discussion we had, markets like window and door and wood products are soft.

So I would just say that, with all that good color that David provided, you got some ups, you got some downs. But in net-net terms, it's a pretty flat environment, and there's still a lot of caution out there amongst our end-users that wanting a little bit more clarity around what the trade landscape is going to look like. And 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.

Our next question comes from Jeff Hammond of KeyBanc Capital Markets.

Just on the guide, holding the low single-digit growth, you were kind of flat in the first half. I'm 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?

Yes, I think it's all those things. I think we probably said some of them, or at least I did in my script. But we do have the price that will kick in, in September, that will 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. But generally speaking, we feel pretty good about the incoming order rates. And 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. But given the fact that we're flat and we've had some of those 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.

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.

Okay. Well, I think -- 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. And 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've been -- we like our operations. We invest aggressively in state-of-the-art automation, machine tools and such. And we, in my 30 years here, that's not an aspect of our business model that we have ever [ stented ] on.

As far as transactions, M&A goes, I think the last year has been instructive, that we started the process 3 years ago, a disciplined process, step-by-step, sometimes slow to get off the ground, but over the last 9 months, we've committed to well over $300 million to deals. And as you know, we have the dry powder to do more. And there continue to be transactions in the works that we are excited about.

And 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, and 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. And from '08, '09 to 2015 to 2020 to 2022, we've stepped up when we've had that opportunity.

Our next question comes from Brad Hewitt of Wolfe Research.

So 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. And how much visibility do you have to return to positive organic growth in Contractor in the second half of the year?

Yes, 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. But what we did with our business is we really tried to look at it globally and holistically, and we looked 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.

And these are global businesses. So looking at the order rates and looking at the activity in the end-users in the markets, we put our forecast together for the remainder of the year. Also knowing that the back half of our year last year wasn't robust, so we may have had an easier comparison than the company that you're referencing.

For us, targeting and projecting and predicting the future is always a big challenge given the short-cycle nature of our business. But the markets are -- 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.

And 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 mean, we feel pretty confident in the guide that we're giving.

Yes. 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. And 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 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, 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 6 months of the year, you're right at the water line.

But 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. And let's hope for some increasingly -- increasing clarity on trade-related uncertainty, should help us achieve our projected outlook.

Okay. That's helpful. And then as it relates to the 1% to 2% revenue hedge for the year related to China, I noticed you guys took 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 in the China tariffs?

I would say that for us, the China market has come back. This is Chris, by the way. And 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. But we have seen activity within the China market pick up, particularly in the power coating space. And despite the tariffs, we are optimistic that, coming off of a pretty low year, that we're going to have growth there.

Our next question comes from Matt Summerville with D.A. Davidson.

I want to just talk a little bit more about M&A. You're talking about your second deal in the last, call it, 9 months or so for you guys. Is this -- 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? And to that point, can you maybe speak to the actionability you see looking ahead, average deal size, things like that?

Yes. 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 this -- we have a nice opportunity to add to that with good strategic acquisitions.

And 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 on list, but there was no detail behind it. So 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. We have opportunities in terms of being able to make them better organizationally.

And 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 '21 when I became CEO.

So 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 footprint, our global footprint, gives us some opportunities to maybe make some of these businesses bigger and more profitable than what they are.

And I think we've built up some real competency within the Graco organization to be able to not only identify but to integrate these acquisitions fairly seamlessly. And the owners, I think, are pleased with what they've seen at least in the short term here.

So 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 at Graco are really pretty good.

And then just as a follow-up, in realizing with Expansion Markets, it doesn't take all that much in absolute revenue dollars to move the organic pendulum one way or the other. But I guess I'm a little bit surprised that I would have thought the environmental business would maybe be a bit more steady for Graco. So can you talk about what maybe drove the rollover there and if you're seeing any wavering on the semiconductor side of the business? It sounds like you're not, but I just want to put a finer point on that.

Yes. I mean when you're looking at 13 weeks, it's always a little bit dangerous. So 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. And we really don't 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. As you know, there's all kinds of [ fabs ] being talked about globally, whether you're in Europe or here in the U.S., and we think we've got a good chance of getting some of that business. So 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. So I feel good about that for the rest of the year.

Our next question comes from Andrew Buscaglia with 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. So I guess what's an incremental margin for you guys look like, even just like sounds like 1% to 2% volume growth is the bogey here into the back half?

I think, Andrew, when we 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. So if more growth comes out of there, we're going to get a little bit better. But I think probably in that mid- to low 30s is really where our -- where we typically average from an incremental margin.

Yes. Okay. And then 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 what -- how do you see that playing out? I would imagine that's something that wouldn't change overnight.

Yes, I don't think it's going to change overnight. The only data point that we wanted to share with you guys is that, yes, it's been tough year-to-date. But if we look at the last 6 weeks of incoming orders, they've actually stabilized and they're actually maybe a little bit better than what we saw during the same period last year in the second half. So maybe we've seen the worst 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. And 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, the new owner comes in and they want to change the color of the paint or whatever they do.

So 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 hasn't been any real changes competitively or anything like that that we're concerned about.

And 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. And so the uptick that Mark is talking about that will eventually come should flow through to us pretty quickly.

David, if I could ask one more. I know we're in a -- you guys are embarking on more acquisitive period, which is great. But 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. So what are your return hurdles you're focused on? And how do you think about that?

Well, 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. And 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 to the way we like to go to market and drive a value proposition that we can make money on.

And 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 the buyer can control is the price they're willing to pay. And 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.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

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

Yes. Well, obviously, I mean, I think we wanted to wait right out of the gates just to see what might happen in the first 30 to 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. And that's really why we gave them enough time and have this hitting in the September time frame versus doing something immediately and causing maybe some disruption in the market.

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

No surprises whatsoever.

Okay. Great. And then specifically as it relates to Contractor, it's interesting like this is the area that you've gotten -- you've had the most impact from a product cost standpoint and maybe being offside on the pricing and the tariffs. So a 3-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 3 points? I'm just trying to get a sense for where margins can go from here on the Contractor side. .

Well, if you tell me what the volume is 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 prepared remarks was that last year's Q2 was really strong per contractor. And so when you look at the comparisons and what happened a year ago versus now in the declines, I mean, I think you need to factor that in. And then, 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, we all are operating 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, a big believer that cash is king and you got to make sure you're generating it, and 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.

[Operator Instructions] Our next question comes from Walter Liptak of Seaport Research.

Just kind of a follow-on to the last one. As you guys are working on the One Graco, 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 of 3%. That looks pretty good to me. And so I wonder if you could help us understand, is that -- is there a mix going on here? Or are there some benefits happening from One Graco consolidation? Or are these more like continuous improvement benefits that might be more sustainable?

Well, I'll start and I'll let the guys chime in if I misspeak. But I think we had said that we're looking for about $16 million of reduced expenses for the full year, and I think we're on track to hit that for the full year as well. And we're tracking half the year into it. So I think you can probably just assume that we're halfway through it.

I wanted just to clarify though that we didn't do One Graco to cut costs. We really did to improve efficiencies and to make our business easier to deal with, with our customers. And I 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. 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. And they like having a single point of contact within our Industrial businesses that they really didn't have before.

So you combine that with what we're doing on the operations 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 Graco. That should create efficiencies that haven't shown up yet in the P&L, but once we start doing that, they will. And 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.

So it's a multifaceted approach that we're taking with One Graco. It's early days. We feel really good about it, but the signs are positive.

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

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

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