Good morning, and welcome to the first quarter Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company website 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 2023 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, Executive Vice President, Corporate Controller.

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 first quarter sales of $492 million, a decrease of 7% from the first quarter of last year. Reported net earnings decreased 5% to $122 million or $0.71 per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $113 million or $0.65 per diluted share, a decrease of 12%. The effect of currency translation had no significant impact on sales or net earnings for the quarter. The gross margin rate increased 30 basis points in the quarter. Strong price realization and lower product costs were more than enough to offset unfavorable product and channel mix from the Industrial and Contractor segments. Total operating expenses increased $5 million or 4% in the quarter, mainly due to higher stock-based compensation and additional investment in new product development. Gross margin rate improvement was not enough to offset sales volume declines and increased operating expenses during the quarter, resulting in operating margin rate decline of 260 basis points. Interest and other expenses decreased $7 million during the quarter, driven primarily by higher interest income on cash held and lower interest expense as our long-term debt was repaid in 2023. The adjusted effective tax rate was 19.8%, 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 $119 million, an increase of $28 million from last year, driven mostly by favorable changes in working capital items, more than offsetting lower net earnings. Cash provided by operations as a percent of adjusted net earnings was 105%. Significant year-to-date uses of cash include dividends of $43 million and capital expenditures of $37 million, including $30 million of facility expansion projects. These cash uses were offset by share issuances of $41 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 2023, movement in foreign currencies would have no impact on net sales, and a 1 percentage point unfavorable impact on net earnings for the full year. Finally, our full year estimates for unallocated corporate expense and capital expenditures remain unchanged and can be found in the conference call slide deck on Page 9. I'll now turn the call over to Mark for further segment and regional commentary.

Thank you, Chris. Good morning, everyone. All of my comments this morning will be on an organic constant currency basis. We began the year softer than expected with revenue declines across all segments, driven by weakness in semiconductor, process transfer equipment, liquid finishing, and sealant and adhesive systems sales. Contractor North America also started the year slow, but as the quarter progressed, our incoming order rates improved. Despite these challenges, both our lubrication and powder equipment finishing systems grew during the quarter. And regionally, EMEA Contractor improved with robust sales in spray foam and protective coatings, along with an improved Pro paint channel. Volume declines put some pressure on margins in the quarter, but we were happy with the resilience in our gross margin rate, reflecting positive price/cost relationships, while maintaining operating margins for each segment at or greater than 29%. At the end of the quarter, our consolidated backlog was $285 million, which is $5 million higher than at the beginning of the year, but was $65 million below the first quarter of last year. The increase resulted from the improving incoming order trends we saw at the end of the quarter, which have extended into April. Now turning to some commentary about our segments. The Contractor segment was down 6% against a strong first quarter comp last year. EMEA was a bright spot with strong Pro paint, spray foam and protective coatings markets. North America was heavily impacted by the timing of this year's new product releases, which will primarily be in the second quarter. Feedback from the channel has been positive, and we're excited to start shipping orders of these products as they're fully released. Incoming order rates steadily improved as the quarter progressed, which gives us optimism that we can rebound from the soft start and see some growth. Backlog was up $10 million compared to the end of last year. Operating margins held up at 29% despite the lower sales volumes. The Industrial segment declined 5% during the quarter. We continue to have weakness in the Asia Pacific construction markets and had a slow start globally in the liquid finishing and sealant and adhesive systems businesses. Powder coatings systems sales were strong, but were not enough to offset these declines. The battery, alternative energy, packaging and e-mobility markets remain positive, and we have generally seen good coating activity in our key end markets. Operating margins were impacted by the overall decrease in sales volume, revenue mix and higher product development spending. Moving to the Process segment. Sales were down 10% compared to the same quarter last year. This segment is coming off of 3 years of strong results with broad-based growth across all product categories. During this period, operating earnings grew from 21% in the first quarter of 2020 to 29% this quarter despite the softer sales volume. We continue to see growth in the quarter for the lubrication business, but that was more than offset by a decline in both semiconductor and process transfer equipment sales. Our semiconductor backlog is decent as we did see order rates improve as we exited the quarter and into the first few weeks of April. We are experiencing shipping delays of products headed into China due to enhanced license requirements. While order rates have improved, we do expect continued headwinds in semiconductor products for the remainder of the year. Moving to our outlook. January and February bookings were lower than the same period last year. However, bookings for March and the first 3 weeks of April are up nicely, resulting in flat year-to-date orders. This supports our outlook despite the 7% revenue decline in the quarter. In addition, our new products, especially in Contractor, are exciting and should provide incremental sales when compared to 2023. Our teams are fully engaged and remain focused on delivering another year of growth in sales and earnings. We are reaffirming our full year revenue guidance of low single-digit growth on an organic constant currency basis. That concludes the prepared remarks. I'll turn it over for questions.

Our teams are fully engaged and remain focused on delivering another year of growth in sales and earnings. We are reaffirming our full year revenue guidance of low single-digit growth on an organic constant currency basis. That concludes the prepared remarks. I'll turn it over for questions.

I appreciate the prepared remarks. You mentioned the improvement in quarterly progression throughout the quarter and by month. Could you provide more details on that? You connected that to your confidence in reaffirming the guidance. Can you walk us through the context of that progression? How much do you expect the new products to contribute in the second quarter? Perhaps David has some comments on this as well. Despite the revenue decline, it's encouraging to see that gross margin actually increased, so could you provide some context on that?

Yes, I'll begin and David can add on the margin, or Chris as well. We started the year slowly, with lower bookings in January and February. However, we experienced a slight increase in March, leading to positive results for that month. So far in early April, we are seeing a strong upward trend. Even though our revenue is down 7%, our orders in-house through the end of last week are on par with last year. The products in CED are generating excitement. After being here for 29 years, I can't recall a time when we were this enthusiastic about upcoming releases, except perhaps during the Home Center launch in the early 2000s. We are encouraged by customer feedback in several areas. Last year, we introduced QuickShot, a solenoid and electronically activated gun, which significantly differs from the traditional mechanically activated guns commonly used in the airless equipment industry. QuickShot generated tens of millions of dollars in revenue last year. We are now expanding this technology across our entire airless line, ensuring compatibility with all competing airless equipment. Contractors will be able to experience the performance of QuickShot regardless of the airless equipment they use, though we certainly hope they choose Graco. We have also launched a new line of electric motors in CED, which are quieter and deliver better performance than previous models. These motors are exclusively designed and manufactured by Graco for airless painting, and no one else in the world offers them. The feedback has been very positive. Additionally, we have some exciting new products in the flooring sector, where traditionally, people would mix materials in buckets and then apply them to the floor. We now have units that operate on the fly with variable ratios, and our channel partners have responded positively to these innovations. I feel optimistic about the momentum we expect to see from our new products. The economy can be unpredictable, but even if the homebuilding and contractor markets are somewhat sluggish, these products will remain valuable for many years. Now, David, please share your insights on the gross margins.

Thank you for the chance to discuss the gross margin. I noticed some similarities in the results; we are in a softer environment than we anticipated at the start of the year, yet gross and operating margins by segment have held up reasonably well. Price realization has been important across our business units, and the segments have effectively managed pricing. More importantly, both pricing and cost dynamics were favorable for this quarter across the segments. It's been a long time since I could confidently make that statement. Profitability across those units did remain strong, and I am optimistic that we will continue to see respectable pricing realization. We monitor our input costs closely, and while they are still high, in several cases they have decreased from their peak.

That's helpful. I realize my first question had multiple parts, so I'll make my follow-up very specific. Which end markets were the biggest swing factors, both positive and negative? It seems like semiconductors were one of the negatives. What would you highlight?

Well, I think for the quarter, and really for the year, we anticipated a pullback in semiconductor, which kind of tracks the industry. You might remember, over the last couple of years, we had a bunch of orders or a lot of backlog. And we've worked off a lot of that. I think we still have some backlog, but it's not where it was before. The pundits are all predicting that it's going to pick up in the latter half of the year, I guess we'll see. But that one really wasn't unexpected. I would say that the weakness in the process transfer pumps and some of our industrial equipment markets, at least to start the year, were below what we had expected them to be. And as we kind of wrapped up the quarter into April, it does look like we're starting to see a little bit of green shoots there in both of those camps.

I would like to mention a few other segments that have shown some respectable momentum. In North America, some of our sales team has noted activity and upcoming projects in the defense and solar sectors. Additionally, our team in Europe and the Middle East has reported good project activity, particularly in the protective coating area. Moreover, the underlying stability in oil prices likely supports demand in that market.

Our next question comes from Mike Halloran with Baird.

So, following up on this topic regarding orders and market commentary, I understand the order strength you mentioned earlier, Mark, that has picked up through March and April. Is that optimism showing in customer conversations, channel feedback, and so on? What I'm getting at is that there seems to be a somewhat inconsistent backdrop with various moving pieces across different markets. It’s possible that we could see fluctuating demand trends from month to month. I'm curious if you believe that might be a factor and if there's anything in the channel to indicate that. Alternatively, is there a genuine connection between what people are reporting, where the order rates are coming from, and the current inventory levels?

It's hard for us to really know exactly what's going on because we're in so many different markets around the world and a lot of different niches. But if I were to characterize what we saw happening throughout the quarter, it's really as simple as it started off very slow and we started to see a pickup. There are some areas within the segments that are stronger than others, and I think we tried to highlight, I would say, that the Contractor business, in particular, feels like it's on much firmer footing than it was when we started off the year. Asia is still pretty weak, in particular. China, as there's just not as much capital flowing into there. The construction markets have been tough. We are starting to see a little bit of a pickup there in the container industry where they're starting to build containers again, but that's not going to be enough to really change the game there. And of course, China is like the big thing for our business. China catches the cold, everyone gets sick. So all in all, I'm probably more optimistic than pessimistic at this point, but we'll see because we're not the greatest at forecasting these short-cycle businesses.

No, that makes sense. And then 2 more here. One, just the timing of some of these product launches, are these gradual through the year or do a lot of them start hitting in the second quarter?

Most of them will launch here in Q2. For sure, by the end of Q2, is what our target plans are at this point.

That makes sense. And so does that essentially mean that front half, a little slower growth, even accounting for the 2Q is probably lower growth than the rest of the year is the thought process?

In the second quarter, we expect to see an increase in new product activity. Over the first three weeks, our order rates suggest we could experience solid business growth in Q2. It's performing better than it was a couple of months ago.

Yes. And I would add that the area that we are talking about primarily on the new products is the Contractor channel. And of course, you've heard us say before that that's without a doubt, our most developed, most sophisticated channel. The products have been presented to their buying and marketing organizations. And when those products are, in fact, launched, we'll be able to ship because they will want them in their product lineup for the spring and summer projects.

So just sticking with Contractor, I believe one of your major customers noted that spare equipment was actually up mid-single digits in the quarter. So could you just help us understand the difference there versus the decline you saw?

Yes. I think we don't really know what the quick answer is. However, I believe that towards the end of last year, there was an increase in inventory related to our equipment. There seems to be a discrepancy between their sales and the orders we received. As we approached the end of the quarter, I think that situation began to improve for us.

And so I guess just following up on that, inventory levels there, I guess, are normal at this point?

Yes.

And then I know the decrementals in your business can be high when volume is lower, but Industrial margins declined probably more than we would have expected. So just any thoughts on what drove this? And how do we think about this trend for the remainder of the year?

Yes. Part of it was mix. I think we noted that our powder equipment business was actually up and our legacy Industrial businesses were down. And there is a difference in the margin rates of those 2 groups, those 2 categories. And then, obviously, in addition to that, we had different product mixes going on in different areas. And within our legacy businesses, there was a little bit of a ramp-up in product development spending here in the first quarter because they're also going to be launching products here in Q2. And so from last year's first quarter, there was a little bit of a spike on the spending side.

And I'll just add one more. I appreciate all the color on some of the new products. You mentioned these new products adding to sales starting in the second quarter. But could you just help size that opportunity, maybe looking at historical performance when you put in a new product, especially in Contractor, like what does that lead to from an outperformance perspective?

We don't disclose specific figures regarding the additional revenue from our new products, but we are generally pleased with our investments, as they contribute to our business growth. We have internal projections to evaluate the viability of our projects and potential revenues. However, the actual performance can only be assessed once the products are launched. I can say that, from my long-term experience here, the upcoming range of new products in CED is quite promising and should have a significant impact if other factors remain steady.

So maybe just following up on that discussion about new products. I'm curious when you expect these products to be available on the shelves in major retail channels, are you considering any stocking effects? Or do you believe that market demand for the product will be strong?

I mean for sure, once we launch a product, if it's a good product, they're going to want to have it in stock. So there's going to be a stocking effect that happens just naturally, particularly with respect to the CED products. But I also believe that these are some pretty smart people that run these businesses, and so they're not going to overstock. They're going to stock what they think the demand is going to be. So we might see a little bit of a bump, but then the sell-through for these products should be strong enough where I wouldn't expect to see a big pullback, let's say, later in the year because they did a big ramp up, if that helps.

Yes, I agree with that, and I would just add that in the past 18 months to 2 years, some large box stores ordered a bit more than necessary due to concerns about deliveries and supply chain issues, but that's not the situation we are discussing here. That effect should not be present now.

We do have one really interesting product going into the Home Center that I can talk about because we have released it. It's called Cordless Connect, where you can take a cordless drill and put an attachment onto it and turn it into a paint sprayer. And we think that the Home Center is going to love it. So that one was released recently. It's called Cordless Connect. You guys can look at it on our website, if you'd like. But that could be a nice product for the Home Center.

I'll definitely take that one out, two for one. Mark, with these new products that you're introducing, I would imagine that the pricing is pretty good as well. Does this change how you guys are thinking about pricing across the portfolio this year?

Typically, when we launch a new product, especially if it's an upgrade of an existing product, we have redesigned it to reduce costs or to be more efficient. I wouldn't say there's any significant price increase on these products, but the overall margin rates are consistent with what you would expect across the CED businesses.

Just back to the new products for a second, Mark. Do you view this more as a refresh of existing product lines or as an opportunity to add brand-new tools to a contractor's tool belt? Additionally, are you gaining shelf space or are you taking away from existing shelf space?

Yes, it's a good question. I would say it's a mixed bag. So like the Cordless Connect product that I just talked about, you're adding something to someone's tool belt that they didn't have before. Bringing that QuickShot technology, which you can again find on our website and having that be able to be used by all the airless sprayers in the world, that's also another tool that you would add that a contractor doesn't currently have access to today. The XT, which is our new airless electric motor that Graco has designed and is built specifically for airless sprayers, that's an upgrade. That's taking an existing product and just making it better by putting that technology into it. On the HPCS side of the equation, the flooring units, some of our protective coating units, contractors are doing that work today, but we're bringing them a better tool to get the job done, giving them variable ratio capability, giving them the ability to get away from having to do some hand mixing, making them more productive and making them more efficient. Really everything that that group does in CED when they launch a product is to bring more tools and a better experience to their customers when it comes to the materials that they got to apply.

Then as a follow-up, maybe can you sort of touch on whether or not you're seeing much in the way of anything from a momentum standpoint when it comes to your M&A funnel pipeline? Has actionability changed? I mean, obviously, you're sitting here with $600 million in cash and practically no debt. So how should we kind of be thinking about capital deployment from here?

Yes, I feel pretty good about our pipeline. I brought in an M&A guy a couple of years ago, and we've been working the pipeline hard. The teams have been very thoughtful in the names that are on our list. And we have been active in communicating our intentions with some of the more substantial targets that we have. The proof is always getting the things done. But I do feel, at least internally, in terms of what Graco is doing, I feel really good about our prospects. The market, David, Chris might have a better view of this, but from what I've read and what I've heard, the market for deals is a little bit more favorable now than what it has been at least over the last 6 to 12 months.

Yes, I would like to mention that my impression, after discussions with our internal team and some knowledgeable individuals externally, is that there is an uptick in marketing activity, ranging from teasers to blue books, and there is a lot of speculation in the air. While you all think about this more than I do, it's reasonable to consider that many private equity portfolios are at a point in their cycle where they might bring some of their assets to market, which could present an opportunity for us in the long term. Additionally, I want to highlight the efforts of our team, which Mark referenced, in increasing outreach and building direct relationships with companies. This has been a crucial focus for our group. While auctions have their benefits, exclusive discussions can often lead to intriguing possibilities. Ultimately, the outcome matters more than intentions, and I believe what we are doing represents a positive series of steps forward.

Our next question comes from Jeff Hammond with KeyBanc.

I think the contractor is likely the best option when it comes to introducing new products and timing. Are you noticing any larger orders or systems that may have been delayed from the first quarter to the second quarter that could explain the weaker performance in the first quarter and possibly indicate a stronger second quarter?

Nothing specific comes to mind. If you look at the overall backlog our company had at the beginning of the year and where it ended at the close of the quarter, it increased slightly, primarily due to orders that were received towards the end of the quarter. No one is really deferring any orders or systems, at least to my knowledge.

Okay. You mentioned low single digits, but considering the slow start, is there any bias there? When you look at the regions, do you think North America and EMEA are on track, while Asia appears weaker? Is there any change in that perspective given the slow start?

Well, I would just go back to kind of what I said before. For sure, our ability to forecast is handicapped a lot by the fact that we're a very short-cycle business. And any one region in a 13-week period could look really good, and then the next one, they may not look quite so good. The way I look at it, we're 13 laps into a 52-lap race, and we haven't changed the tires yet on the car. So I think that there's plenty of year left here. All business units, all regions are pushing hard toward growth, and we'll do our best to make that happen.

I would like to add that if you examine the outlook chart, you'll get a sense of where we feel optimistic about opportunities in the industrial segment and in the Americas, as well as some potential in the contractor area for the reasons Mark mentioned. This gives a sense of how we have balanced the outlook for Asia Pacific, where there are definitely concerns overall. However, there are also some positive aspects. The size of China and the developments we've observed in construction, industrial, and process markets give us a bit more caution in that region compared to others around the world.

We have equalized the colors in Asia Pacific, but there are definitely concerns across the board. While there are some bright spots, the size of China and the issues we’ve observed in construction, industrial, and process markets make us a bit more cautious in that region compared to other parts of the world.

Thanks for the color on the monthly cadence. And just a follow-up on that. I think we kind of knew going into the quarter that things could be a little bit weaker and the comp would be a little bit tougher. But is there something like a postmortem that you looked at and said, okay, China was weaker or industrial was weaker in the U.S.? And if you did that, what was it and why?

Well, I would kind of say what I think we said earlier, which is essentially that we started out slower than we thought we would, particularly in some of the industrial product categories and also some of the pumping equipment that goes into factories that we call process transfer equipment. These are like diaphragm pumps that have a lot of different applications. And that wasn't just limited to the Asia Pacific region. That was, I would say, our expectation would have been higher for those product categories in all of the regions than what we actually experienced. And if you have an idea of what the cause of that is, send me a note, because it just seemed like it was a general slowdown compared to what we thought we would have to start off the year. The good news, of course, is that things seem to get more on firm footing here. And as we kind of work through the quarter, things look a little bit better to us.

Okay. Yes. That's great. And in Europe, the Europe numbers looked pretty good, considering everything in Europe. And so I wonder, was that related to the powder business? I think that amount out there is pretty strong? Or are you seeing a different trend in Europe? I think you made some comments earlier as well.

We experienced some growth in Europe from the Contractor side of the business. Additionally, we noted positive performance in the protective coatings sector, particularly with the foam product. The sell-through to the professional paint channel was quite strong, which represents some of the more encouraging aspects of our report. However, on the Industrial side, we view the market as somewhat weak. In Europe, the powder equipment market constitutes a larger portion of the Industrial segment compared to the other two regions, and it was relatively flat during the period. Moreover, in the Process sector, we started slowly. The channel orders we anticipated at the beginning of the year did not materialize as expected.

Okay. Great. Thanks for the color on that. And then maybe a last one for me. With the discussion of the new products, which I think is great, is there a new product spend that drops off in the second quarter or in the second half once you get these new products launched?

Not in a meaningful manner.

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

All right. Well, thank you very much for participating today. That concludes the call, and have a good rest of your day.

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