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 clearer. 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 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 system sales were strong with increased quoting activity and improved performance in the Americas and Asia Pacific regions. This increase was not enough 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 had 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. Sheahan, and we're ready for questions.

Our first question comes from Deane Dray with RBC Capital Markets.

Can you provide details about the price increase announcement? This seems less significant compared to the first intra-year price increase in 2022, but it appears justified due to tariff pressures. How does this price increase differ from the previous one? Could you quantify it and discuss the implementation? Is this purely a price change, or will there be any surcharges? Any additional information would be appreciated.

Yes. Great. Thanks for the question. I think when we spoke last, we said we want 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 was 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 aimed at the geographies and the areas where we're seeing the most input cost pain. And also, I'd characterize them as 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.

For David, free cash flow was a notable highlight of the quarter regarding conversion. Were there any one-time factors involved, or how do you explain the strong 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 contribute to greater efficiency, 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 onetime. 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.

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 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, we have been proactive on the sourcing side, identifying key needs. Over the past couple of years, we've significantly increased our raw material inventory as part of that effort. Now, we are comfortable reducing it to more normalized levels because we have greater confidence in our supply chain.

Our next question comes from Mike Halloran with Baird.

Hi, This is Pez 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 fitting into the portfolio with a little more color, please?

Yes, Pez, 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, the Gema Group, they really did a nice job of looking at some opportunities that aren't necessarily powder paint, but the technologies that they understand, and they really surfaced 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 in 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 Service's leadership team to make sure that we capitalize on any integration possibilities, opportunities to help them with operations, production, and 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.

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 the 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 appreciated. 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 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 we 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, both groups participated in the price increase at different levels, both Contractor and industrial and expansion markets. 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 second part of your question addresses the long-term outlook. Clarity on tax rates, favorable investment conditions, and related manufacturing aspects will be beneficial for Graco over time. Re-shoring and on-shoring are advantageous for our business. Regarding the first part of your question, we could discuss it in depth, but to summarize, our pipelines are healthy and quotations are active. Some end users are more willing to commit despite the uncertainty that Mark mentioned. Overall, there are positive trends in some markets, while others are a bit weaker. The automotive OEM market, particularly in the EV sector, has seen a boost in battery-related activities, and these tend to involve larger orders, making our business somewhat variable. The automotive component supplier market is also strong, especially in Asia Pacific. Our vehicle service and dealer lubrication sectors have performed well. Mark highlighted the strength in powder equipment, which is reflected in the architectural profile market, agricultural equipment, and other automotive components. We observe active markets with customers making decisions. However, in regions where we see slower performance, North America's solar market is quite weak. The transportation sector, particularly among truck OEMs, has significantly slowed down. Mining, affecting our lubrication product line, has also seen a decline due to large customers supplying major mines. The aerospace sector is experiencing a downturn. Additionally, as we discussed earlier regarding Contractors, markets such as window and door and wood products are facing softness.

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. So 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 this 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.

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, I’ll address that. You make a valid point that with our operational cash flow, our business model allows for both investments in the business and new technology. We believe that’s how to succeed in the niche B2B markets we operate in. We value our operations and invest heavily in advanced automation and machine tools. Throughout my 30 years here, we have never compromised on that aspect of our business model. Regarding mergers and acquisitions, we've learned a lot over the past year. We began a structured process three years ago, which took time to ramp up, but in the last nine months, we've committed over $300 million to various deals. We also have the capital to pursue more opportunities and have transactions lined up that we are enthusiastic about. Our stock repurchase strategy has been opportunistic, and we've successfully invested over $360 million. The level of future buybacks will depend on what we observe in the market. We prefer to buy when the market is less optimistic about companies in cyclical sectors, and we have taken action during such opportunities in previous years.

Our next question comes from Brad Hewitt of Wolfe Research.

So one of your significant customers in Contractor is pointing to an outlook for a low single-digit decline in paint store 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 a return to positive organic growth in Contractor in the second half of the year?

To provide a thorough response to your question, I need to take a closer look at various aspects of our business, given that I don't have all the details right now. We approached our analysis from a global perspective and considered different product categories, including Pro paint, DIY products, spray foam line, and protective coatings equipment, all of which operate globally. We've assessed order rates, end-user activity, and market conditions to forecast for the rest of the year, particularly since the latter half of last year was not strong, which might give us an easier comparison than the company you mentioned. Forecasting future performance is challenging due to the short-cycle nature of our industry. However, the markets are generally stable, with sustained activity. Painters continue to purchase equipment, as it requires regular replacements. While the level of activity is decent, it's not at a significantly high level. Regarding signs of improvement, we expect that as affordability improves, more project activity will arise, with individuals moving into new homes and generating remodeling projects. Pinpointing when this will occur is difficult for us, but overall, I remain confident in the guidance we are providing.

Yes. I would like to add that the channel partner mentioned a few times described their business environment as inconsistent, and I think that aligns with our perspective. They effectively highlighted key markets, particularly pointing out a slowdown in their consumer DIY sector, as well as the auto refinish and wood products markets. We share their view on the areas experiencing a slowdown, but we also see strengths in certain pockets, like the protective coatings and equipment markets. It's challenging to consolidate data across the various markets we serve, especially as we've experienced in the first six months of the year, where we've been close to the lower end of our expectations. I concur with everything that has been stated regarding the current order rates and our initiatives for the second half of the year. Hopefully, improvements in trade-related uncertainties will assist us in meeting our projected outlook.

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 have that reorganization realignment, you have pricing coming through. So I guess what's the incremental margin for you guys looking at even just like it sounds like 1% to 2% volume growth is the bogey here into the back half?

I think when we consider our incremental margins, if we can achieve growth across all of our groups, it usually varies, with the industrial group showing the highest increments. Therefore, if we see more growth there, we can expect a slight improvement. Typically, we average around the mid- to low 30s for incremental margin.

I wanted to get more details on your comment regarding home centers and how it affects your DIY segment. How do you anticipate that will develop? I assume that's something that won't change quickly.

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 of 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 and 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.

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.