Graco Inc Q2 FY2024 Earnings Call

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 2023 Annual Report on Form 10-K and in Item 1A of the company's most recent Quarterly Reports 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 second quarter sales of $553 million, a decrease of 1% from the same quarter last year. Reported net earnings decreased 1% to $133 million, or $0.77 per diluted share. Excluding the impact of excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $132 million, or $0.77 per diluted share, an increase of 3%. The effect of currency translation had no significant impact on sales or net earnings for the quarter. The gross margin rate increased 230 basis points in the quarter. Realized pricing and lower product costs were more than enough to offset sales volume declines from the Industrial and Process segments. We had favorable factory volume in Contractor as we built inventory ahead of the new product introductions. Total operating expenses increased $5 million, or 4% in the quarter, mainly due to $3 million associated with the relocation to a new distribution center and $2 million related to product development spending, growth initiatives, and other corporate items. Gross margin rate improvement, primarily in Contractor, was able to offset lower sales volumes and increased expenses in the Industrial and Process segments during the quarter, resulting in operating margin rate of 29%, an improvement of 1 percentage point from the same period last year. Contractor operating margin rate increased 4 percentage points to 31% compared to the second quarter last year. Interest and other decreased $1 million during the quarter, driven primarily by lower interest expense as our long-term debt was repaid in 2023. 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 $258 million for the year, a decrease of $24 million from last year, driven mostly by timing of inventory purchases related to new product launches and lower net earnings. Cash provided by operations as a percent of reported net earnings was 101% for the year. Significant year-to-date uses of cash include repurchases of 224,000 shares for $18 million, dividends of $86 million, and capital expenditures of $73 million, of which $47 million related to facility expansion projects. These cash uses were offset by share issuances of $42 million. A few comments as we look forward to the second half 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 or 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 10. I'll now turn the call over to Mark for further segment and regional commentary.

Thank you, Chris. Good morning, everyone. All my comments this morning will be on an organic, constant currency basis. Sales in the second quarter were below expectations. Contractor performed well, but weakness in Process and Industrial more than offset that growth. Contractor had record sales in the quarter on strong demand globally for new products. Asia Pacific continued to experience deteriorating demand in the quarter with noted declines across many key product categories, including semiconductor, sealants and adhesives, and Industrial lubrication. Incoming order rates in Asia Pacific for both the Industrial and Process segments were down double digits and we expect that current conditions will remain for the balance of the year. Despite lower sales, our profitability remains strong, our factories performed well and we're seeing good price realization which led to an improved gross margin rate in the second quarter. Company-wide operating margins were also higher as our teams have done a good job managing their spending during what is shaping up to be a challenging revenue environment. Consolidated operating profit margin was up nicely in the quarter and all segments were at or greater than 29%. Our consolidated backlog has now returned to pre-COVID levels, except for the powder coating business, which remains slightly elevated. Now turning to some commentary on our segments. Contractor sales rebounded nicely in the second quarter, growing by 6% when compared to last year. Year to date, sales in Contractor are now flat, erasing the deficit that we saw in the first quarter. Our new products are being well received by customers everywhere, but North America was particularly strong with 9% sales growth in the quarter. Asia Pacific was another bright spot and the container market started to improve after minimal activity last year. The positive momentum created by our new products is encouraging. With additional products launching in the second half of the year, we remain cautiously optimistic that Contractor will post growth for the full year. Operating margins in Contractor remained strong at 31% for the quarter and 30% for the year. Improved operating performance and lower input costs drove the increase, despite higher new product development spending. The Industrial segment declined 4% during the quarter. Overall, we're seeing less project activity in many geographies and we believe that there is excess manufacturing capacity in parts of Asia Pacific. Growth in North America came primarily from backlog reduction and pricing, which was not enough to offset weak results in Asia Pacific, particularly China. There's also a slowing of activity in end markets which have been strong over the past couple of years, such as solar and battery. In EMEA, activity has slowed with some projects either being delayed or shifted to future quarters. We expect the operating environment in both EMEA and Asia Pacific to remain tough for the remainder of the year. Despite volume declines, operating margins for the quarter improved sequentially and were flat with last year, reflecting favorable price and cost dynamics. Moving on to the Process segment. Sales were down 9% compared to the same quarter last year, with declines in all regions. Vehicle services and environmental equipment sales were positive for the quarter, but they were not enough to offset the broad-based weakness in our Industrial lubrication, Process transfer equipment, and semiconductor businesses. We expect softness to continue in both EMEA and Asia Pacific, particularly in the semiconductor and mining markets for the rest of the year. Moving on to the outlook. Our first half results were below expectations in our Industrial and Process segments. The strengthened Contractor will not be enough to offset this, so we are lowering our full year 2024 guidance to a low single-digit revenue decline on an organic, constant currency basis. While overall economic conditions are challenging, we continue to invest in our growth strategies and will manage the business for the long term.

And our first question comes from Deane Dray from RBC Capital Markets. Please go ahead with your question.

Thank you. Good morning, everyone.

Good morning, Deane.

Good morning, Deane.

Mark, we typically start with key end markets and geographies, and I think most of your prepared remarks address those. But if you just kind of step back and say, what are the biggest needle movers and changes since last quarter in geography and the end markets? Which ones bubble up to the top? It sounds like China deteriorated the most. But just if you could frame for us that for starters, that would be helpful?

Yes. I think for sure we saw less business activity in the Industrial and the Process segments, and I would characterize it as really across multiple industries, kind of, a general slowdown. I called out a couple of ones that have been particularly hot for us the last couple of years being semiconductor and battery. But that's just related to some project activity that didn't repeat. And long term I still think those are really good markets for Graco. So I would characterize as a general decline. Asia Pacific was weak, but, as you know, China is a big chunk of it for us, and China in particular has been weaker than what we had hoped it would be. When I look at the incoming order rates and the levels of activity in Asia Pacific, they've been pretty consistent in terms of absolute levels when compared to last year, but not when compared to last year, but based on what we've seen year to date. But when compared to last year, it is lower than what we had, which was orders were much higher in particular in some of those industries I mentioned. So, Europe's hung in there okay. They started to see a little bit of softness in here in Q2, but pretty confident in the team there and what they're accomplishing. They still got good project activity that they're looking at, and we'll just see how the rest of the year plays out.

That's really helpful. Please continue, David.

If I could just add a little bit of granularity, Deane, for you. If we look at the markets that have a positive tilt toward them, think North America. I guess, Mark touched on several of them. I would call out some of the markets we talked about last quarter, e-mobility, defense, aerospace, packaging; some of the markets that disappoint, wind, window and door, wood products generally, appliance, even a little bit of ag. And of course, Mark touched on semiconductor and mining.

Got it. That's helpful. And can we put the spotlight on the new product introductions this quarter? I've heard descriptions of some of them, especially at the entry level for spray paint finishing and the big box sounds exciting. But can you size for us the contribution? And is there an impact on a channel fill? And then you also suggested there was more coming in the second half. Could you just kind of size for us the expectation there too? Thanks.

Yes. I think, it's hard for us to give you actual dollars, but we're seeing really good growth in the new products that we launched. So some of them include our new Xtreme Torque sprayers, which have the Graco design motor and Graco manufactured motor included in them. They're quieter and they have better performance than our old models that use more, I'll call it, an off-the-shelf type of a motor. We have a Cordless Connect product that's doing well in the Home Centers. It's a product where you can connect it to a cordless drill or an impact driver and you turn it into a paint sprayer. That really resonates with the DIY customer. And so, I would say, sales there have been great as well. And then I will mention our QuickShot product, which we launched last year, has remained extremely strong. And you'll probably remember that that's a solenoid actuated gun versus a mechanically actuated gun. Customers really like it. It's lightweight, portable, and it's really good for small jobs. So, yes, for sure, the combination of those products have really helped contribute to the growth we saw here in the quarter, particularly in North America. We do have some products coming out on the back half of the year that we're excited about. Not getting into a lot of the details on what those are. I think they are needle movers as well. And that really kind of bled into the outlook that we've got, which I would call looking for growth in CED. And I think it'll be tougher for the other businesses this year.

That's good. Can you tell me if there is a channel fill impact on these new product introductions?

Yes, I would say that there is strong sell-through for all these products. They are not sitting on inventory; instead, they are placing orders every week.

Great. Thank you.

Yes.

Thank you. One moment for our next question. And our next question comes from the line of Mike Halloran from Baird. Your line is open.

Hi, good morning, everyone.

Hi, Mike.

To follow up on Deane's question, the previous guidance included some positive orders towards the end of the first quarter, with an expectation for that trend to continue, indicating some improvement in underlying demand. However, I would like to understand how much of the guidance reduction is due to the fact that we did not see improvements as anticipated versus an actual decline. I'm more interested in qualitative insights rather than quantitative data. Any clarification on this would be appreciated.

Yes. I think, it's more of the latter. I think that we may have gotten ourselves a little bit excited at what we saw toward the end of the quarter in Q1. Of course, I always tell people, hey, it's 13 weeks, so you don't want to throw in the towel after 13 weeks. And based on what we saw, we felt like our low single-digit growth guide was appropriate, but we really didn't see that sustain itself and materialize into more growth in really in those two segments that I talked about and got to the point where we felt like a change in our full year guide was appropriate.

So is it fair to say then that trends are just kind of choppy week to week or month to month, or wherever you think about it, but the net trends that you saw through the front half of the year, maybe even through July, just really haven't changed all that much trajectory wise, if you add it all up? Or do you think that there's been something different relative to what I just said?

Yes. Other than Contractor, which obviously they did change a little bit to the favorable side on the second quarter. I would say with regard to the Industrial businesses, yes, I think it's kind of a sluggish environment. Yes. There's business out there, there's projects that are happening. But at the level of activity and the level of capital investment that we're seeing in factories around the world has been, yes, markedly less than what we saw a year ago, and that's what's showing up in our numbers.

Thanks. Regarding general margin questions, how should we approach the margin trajectory across the segments for the second half of the year? Can we take the front half run rate for margins and apply it to the mixed variance in the second half, considering any pressures or tailwinds?

I'd call it pretty stable, but I'll let Chris give some insight on that.

I would say the same. There's really been not a lot of one-time items outside of what we called out in the relocation of the distribution center. That won't recur. When you're thinking about the margin side, it's all volume dependent. So if we see volume where we're at today, we should be okay. But if we see any further decline, that's when you can start seeing some impact on both the operating and the gross margin lines.

Yes, I would like to add that I'm pleased you inquired about margins. The factory performance has been very strong. Mark mentioned the robust spending, and I also want to highlight the commercial organization. The price realization has been significant and consistent across all businesses and regions, and we believe it is very sustainable.

Great. Really appreciate the color. Thank you.

Thanks, Mike.

Thank you. One moment for our next question. Our next question comes from the line of Saree Boroditsky from Jefferies. Your line is open.

Hi. Thanks for taking the questions. So just building off your last commentary, you talked about the level of factory investment being lower globally. What do you need to see to improve demand there? Like, what should we be watching for sales to inflect positively?

I believe the situation is more related to broader economic conditions rather than being specific to Graco products. We are closely monitoring the market trends and engaging with our sales team, who interact with end users daily. It appears that currently, many end markets show signs of stagnation or decline, with hopes for improvement in 2025. Capacity utilization in factories is generally low, as many have increased their capacity in response to past supply chain challenges, but are now catching up with those investments. While there is some activity, significant new opportunities are currently limited. The high-interest rate environment may also be leading companies to consider other options for their cash, which could reduce investment levels. We have also observed some project delays. Projects are not being abandoned, but timelines are being extended, such as a powder system project that has been postponed for a few months, contributing to these delays. Overall, we are operating in a generally slow and sluggish environment. However, I am pleased to report that despite these top-line challenges, the company is performing well operationally. We are prepared to respond to an increase in orders and have implemented effective strategies to take advantage of any improvements when they occur.

Are there any particular industries that you're seeing push out projects?

Well, I think in some of the powder applications that we've seen, maybe some of the construction area where we do work with vertical lines, putting powder onto vertical lines, automotive would be another one, where they're in the battery production area, where people are maybe taking a step back and reevaluating their longer-term capital plans and putting a slowdown on that. And then solar energy would be another one that I would say has been pushed out a bit.

And then lastly, you mentioned parking cash. So maybe we could talk through how you're thinking about the optimal balance sheet for Graco, no debt to pay down really. So, how are you thinking about continuing to build cash? Thank you.

Yes. We would definitely like to deploy cash, but we're pretty smart about it. We've gone through a significant capacity expansion here at the company. It puts us in great shape for at least the next 10 years, I think, in terms of our ability to absorb organic growth within the businesses. And with respect to the cash that we have on the balance sheet, our top priority would be to find good strategic acquisitions to acquire companies that we think we can add some value to, and they can drive our growth higher than what we've done historically, which has really been primarily organic, kind of, back over the last five years or so. Of course, we can also look to share repurchases. We did some of that here in Q2. We're not out of the business of doing that long-term strategic buys. I think that's another use of our cash.

Good to hear. Thank you so much for the questions.

Yup.

Thank you. One moment for our next question. Our next question comes from the line of Bryan Blair from Oppenheimer. Your line is open.

Thank you. Good morning, everyone.

Hi, Bryan.

Good morning, Bryan.

We just had a nice segue there to discussing your M&A pipeline. We tend to ask every quarter, and I think it's appropriate, given Graco's market position balance sheet, enhanced focus in that area for the last couple of years, but I guess particularly relevant now, where we have seen an inflection in deal activity of late. There seems to be a lot of confidence in actionability for Industrial assets going forward. Curious if that applies to your team as well, whether there's meaningful momentum in your deal pipeline and any shift quarter-by-quarter that you would call it?

Yes. I call it a couple of things. I mean, obviously, I brought in Inge Grasdal a couple of years ago to help our teams build out the pipelines. I think, I may have mentioned before, but I'll mention it again, that a couple of years ago I could have asked people for names and who's on their target list, and they would have given me a list. But there really wasn't a whole lot of work done vetting the list, understanding the strategic fit, knowing the size of the company, and having a strategy for what we would do if we acquire them. Plus, there wasn't a whole lot of connections that were taking place between our people and those companies. And mostly because we've been more focused on organic growth. So, we're going through that process of creating what I'll call a fairly well thought, well vetted pipeline. We have more than 100 companies in that pipeline today. We're having active discussions with the ones that are real prospects. And I would say that you're right. It feels to us like the market has gotten a little bit better than what it was, even six months ago. Valuations are still high for good businesses, but they are closer to the range today that we would be interested. And without telling you specifically about what we're doing, I do feel like my confidence level and our ability to actually execute our M&A strategy has gone up substantially over the last two years, and I am hopeful that we will see some activity here as we work through the balance of this year and into 2025.

Yes, I want to emphasize Mark's comments regarding the larger target list we have now compared to before. There are ongoing discussions with principals, bankers, and business owners who could be of interest to us. From my discussions with Inge, there is available merchandise. Some properties are being withheld due to expectations from a few years back, and some private equity owners may have to sell these properties at lower multiples or hold on for a few more years to increase their value. To clarify Mark's points, Inge has estimated that multiples have moderated by about one and a half to two turns over the past year or year and a half. While there is some variation in the transactions within niche industrial markets, we expect that the low to mid-teen range for multiples is closer to the norm than it was two or three years ago.

That's extremely helpful color, and encouraging to hear. Looking at your Asia Pac demands Mosaic, the solid red Industrial and Process, that's pretty easily explained maybe in new capital spending or lack thereof. Contractor stepping up to more of a neutral outlook is encouraging given the overall backdrop. Mark, did you say that it's largely driven by the container market? Did I hear that correctly?

Yes. That's correct. Yes. Shipping containers. Yup.

Okay. Is that the primary factor or other call outs there?

Yes. That's, I think, the primary driver of what we see in China. Contractor, of course, for Asia Contractor. Another significant market is Australia, and they were off to a slow start in the first quarter. We've seen a little bit of a pickup here as we've gotten through the first half of the year and we're hopeful that that team can deliver for us in the back half of the year.

Okay. Understood. Thanks, again.

Yup.

Thank you. One moment for our next question. Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hi, good morning, everyone.

Hi, Jeff.

So regarding the Contractor segment, you appear to be more optimistic about growth for the year. It seems that the residential and commercial markets are still somewhat inconsistent, and possibly commercial conditions are deteriorating. Can you discuss the current sentiment from customers and the level of activity? I understand their activity levels have been strong, but are you noticing any signs of weakness, or is this simply the result of new product momentum that is instilling that confidence?

Yes. I think it's new product momentum that really gives us the confidence. You guys all know what's going on in the market, maybe even more than we do. But housing starts are. They're not as good as you'd like them to be at like 1.37 million, which is down from last year. Single-family starts are projected to go up, though, and that's good for painters. Remodeling spend is down a little bit. Interest rates are still high, so affordability is an issue for a lot of people that are looking to either move out of their existing home or they got a low interest rate. Or new buyers who are trying to get into the market. Commercial construction appears to be hanging in there pretty well. And then outside of the Americas, if you look at Europe, construction trends are down as well as in AP with places like China that are also down. So, all in all, it's kind of a mixed bag. You could probably paint a picture if we didn't have new products that we would be in a flat to decline like we are sort of projecting for the overall Graco business. But with the pipeline of products that these talented people and Contractor have come out with and launched this year, it gives us confidence, and then seeing the results gives us confidence that we think that we can pull some growth in CED this year.

Yes. I would just add that in the protective coating space, where we serve markets like oil and gas in locations such as the Middle East, we are seeing those markets remain active and quite solid, particularly with current energy prices. This additional factor boosts my confidence.

Okay. And then just semiconductor, maybe just level set us on when you start to hit easy comps and if you're starting to see any pickup in the pipeline or discussions of kind of that cycle turning back up?

Yes. I would start off by saying that the decline this year was not expected by us. We, obviously, see the forecast and that's a highly cyclical end market. And it didn't matter what you picked up. Everyone was calling for a pretty substantial decline in semiconductor. And obviously as we worked down our backlogs from all the orders we got in 2022 and 2023, we started to see that in our incoming order rates as well. Just from a pure comparison standpoint, I will say that last year's orders were not great. The performance was good because we were working on backlog, but the order rates last year compared to this year so far, we're actually up a little bit. So, I think, we're starting to see some green shoots in semiconductor. Everyone's calling for growth in 2025 with all the new fab construction and expansion that's happening there. So I'm hopeful that we've seen the bottom and that we'll start to be able to grow from here.

Great. Thanks, Mark.

Yup.

Thank you. One moment for our next question. Our next question comes from the line of Joe Ritchie from Goldman Sachs. Your line is open.

Hi, good morning, guys.

Good morning.

I understand you discussed margins moving forward. With the ongoing new product introductions in Contractor for the second half of the year and no growth expected for the year, do you anticipate that Contractor margins can be maintained at around 31% or more at least into the second half? Any insights on that would be appreciated.

Yes, I believe Chris articulated this well. It largely depends on the volume, mix, and the specific products sold. As of now, if the volumes remain consistent and the mix is similar, we should be in a good position, and we can expect the Contractor segment to maintain a strong performance. Typically, when we launch new products, the margin rates tend to be higher. Sometimes, these launches involve refreshing existing products where we've cut costs or introducing new technologies that allow us to price them more competitively based on the value they provide to customers. Overall, I'm optimistic about how this business is performing halfway through the year, and I hope we can sustain this momentum for the remainder of the year.

Got it. Okay. That's helpful. And then just a quick follow-up question on Industrial. I know we've talked a little bit about semiconductors, and you have mentioned batteries to some degree. Can you clarify again how much of your business sells into the auto and electric vehicle market? You can include batteries as well, specifically for the Industrial segment?

Well, we look at it on a total company basis. And for the total company, when you think about it, on a full year for 2023, automotive, which included EV, was about 9% of our total sales.

Okay, great. And most of that, if not all of it, sits in the Industrial segment, correct?

Correct. There probably is a little bit from the Process side, but the bulk of that comes from Industrial.

Okay. Perfect. Thank you.

Thank you. One moment for our next question. Our next question will come from the line of Ross Sparenblek from William Blair. Your line is open.

Hi, guys. Maybe just starting with Contractor. I don't get the sense that all these new products hit on April 1st. So, can you just kind of give us a sense of the timing there? Has it moved the quarter? I know you also had another announcement yesterday, so it feels like it's an ongoing process. I'm just trying to get a sense of how we should inform the market outgrowth expectation in the second half?

Yes, for the most part, the products I mentioned were launched early in Q2. The XT and Cordless Connect were significant launches, and QuickShot was introduced last year. As we progress through Q3 and Q4, we have another set of products coming out, including our new Fusion Air Gun for the spray foam industry, which was recently launched. We also have new plural component machines being introduced for the high-performance coatings and foam market that are launching now.

Okay. And then maybe just on the QUANTM pumps. I know you guys are in customer trials, but any updates there? And maybe expectations on broader commercialization?

Yes. I think long term there's definitely still a trend toward electrification, and our team is really working to identify where the big opportunities are. And then we're putting dedication onto those customers and those applications where we think it's going to resonate the most. What I'll tell you is that the opportunities for it are there. It is particularly attractive to industries where they're running their pumps more on a continuous basis and they're consuming a lot of air as opposed to some of the industries where they're not doing that. The ROI really comes from energy savings. And to the extent that somebody is producing something in a factory where their pumps are running continuously, QUANTM is still a great opportunity for them.

Yes. An example of the high-volume players that Mark mentioned includes the chemical industry in general and specifically paint manufacturers.

Okay. I mean, so just given that ROI, is there a case where you could see customer investment for the energy savings despite the overall uncertain macro?

Yes, I mean -

- CapEx versus incremental.

It kind of depends on the company. I can tell you if it were here at Graco, where we like, ROI, do it whether times are good or times are bad. But, of course, some companies, they tighten the purse strings and they put projects off, and they wait until they see things are picking up a little bit before they make the investments. But the ROI is nice, it's compelling, and it fits in with what a lot of companies are trying to do, which is really reduce their footprint for usage of energy, and this is one way that they can do that.

All right. Thank you, gentlemen.

Yup.

Thank you. One moment for our next question. Our next question comes from the line of Matt Summerville from D.A. Davidson. Your line is open.

Thanks. Just a couple of quick follow ups on Contractor. Mark, last quarter, I remember you made some pretty bullish comments around the fact that this is probably the most or one of the most significant Contractor launch cycles that you've observed with all the time you've been at Graco. Given that comment and, kind of, what you're seeing from a sell in, sell through standpoint, does this cycle you're seeing this year then create an uncharacteristically difficult comp for next year? I guess, I'm trying to understand how to, kind of, think about that aspect going forward?

Yes, I stand by my previous statement. These products are outstanding, and I'm really pleased we have them. Without them, the results in CED would likely look very different. While I can't speculate on the specific numbers, I don't believe we would see the same level of growth as we did in Q2. Looking ahead to next year, we hope the market improves and we find ourselves in a better position regarding the overall housing market. Ideally, interest rates will decrease a bit, and we'll see an increase in new construction. These macro factors would be favorable for us, and we're optimistic about seeing this trend in 2025. I am highly confident in the appeal of our products. The fact that people are buying them even in a tough market speaks volumes about their expectations and the value they receive from Graco. If we conduct business in a good market, which we anticipate for next year, the outcome should be fantastic.

Got it. And then just another follow up to Contractor. Can you maybe just delineate a little bit what you're seeing outside of new product demand, specifically within the Home Center channel, and contrast that with the Pro Paint channel and how that should inform mix going forward?

Yes. I think in the Home Center channel, we haven't seen like robustness in terms of the overall growth, but it is growing. So, we're happy. We're happy with that. I don't really have good today data for you on foot traffic, but it's probably not as good as it was a couple of years ago. But our products are resonating pretty well in the Home Center. The Pro side has been good. The Pro channel in North America in particular, you saw a nice pickup in Q2. And we think Contractors are busy. They've got work. They got projects. They're willing to invest in new equipment that makes them more efficient, which really lines up with what we're trying to do.

Yes, I would add that the Home Center business did grow during the quarter, although results varied among different Home Center partners. Some partners reported decent foot traffic, but it hasn't reached the levels of previous years. As you consider future projections, the mix is important. Additionally, the Contractor team has spent a lot of time over the past year working to enhance the profit profile for Home Centers, and we are starting to see positive momentum in that area as well. It's clear that units like Pro Paint, high-performance coatings, and foam products offer better margins than Home Center items due to the added value. Nonetheless, the Home Center remains a solid business for us.

Thank you, guys. Appreciate it.

Thanks, Matt.

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

Hi. Good morning, guys.

Good morning.

There has been a slowdown in the Industrial and Process sectors, which we haven't observed in some time. It seems that conditions are becoming a bit weaker, leading us to adjust our guidance. At what point should we begin considering costs in these areas? What strategies can we implement to protect our margins? Is it still too early to make these assessments, or can you provide insights on how margins are expected to evolve throughout the year?

Well, these are pretty profitable businesses to begin with. There's not a lot of low hanging fruit to go clean up. And we try to take a longer term view of the markets and we realize there's going to be good times and bads, but through a cycle is really what we're trying to manage to. So, right now, I'm very happy with the overall performance of the company, as I said. And, of course, if things fell off a cliff and you had to do some different things, we'd evaluate that. But I really don't see that happening.

Can you share any updates on the distribution channel and the feedback from your distributors?

Yes. I think, like I said earlier, I just feel like it's a sluggish macro environment. It isn't any real meaningful changes in terms of the dynamics that customers are looking at when they're making purchase decisions. They're still looking for Process improvements in their factories returns on investments, which include lower usage of the materials that they're applying. Anything that we can do to drive those savings for them or those are still factors that they look at. But the macro is just different than what it was. There's been a ton of investment that's happened over the last couple of years. Like I said, I think they're playing catch up a little bit. There is a period of time where it's softer across multiple end markets and companies in a great spot to weather the storm. We're still investing in new products. We're still looking to expand our channel. We're looking at some new market opportunities. And, all in all, it's not a robust economic environment like I've been in in the past, but it's not all doom and gloom either.

Yes. So they're not sounding any alarms or anything like that either, it sounds like?

No.

Yes. All right. Thank you.

Thank you. I'm showing no further questions in the queue. I will now turn the conference over to Mark Sheahan.

Okay. Well, that concludes today's phone call. I appreciate all the participation, and look forward to speaking with you again. Have a good day.

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