Graco Inc. (GGG) Q4 2025 Earnings Call Transcript
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Overview
The earnings call reveals strong financial performance with high margins and optimistic guidance. Despite some declines, growth in semiconductor and other segments is promising. The One Graco initiative improves efficiency, and M&A activities are well-integrated. The cautious yet steady outlook, coupled with a strong M&A pipeline, supports a positive sentiment. However, uncertainties in some markets and lack of guidance specifics slightly temper the outlook.
Key Financial Performance
Fourth Quarter Sales $593 million, an increase of 8% year-over-year. Acquisitions contributed 4%, currency translation 2%, and organic sales another 2% to growth.
Reported Net Earnings $133 million, an increase of 22% year-over-year. Adjusted non-GAAP net earnings were $0.77 per diluted share, an increase of 10%. The increase was driven by pricing actions offsetting higher product costs and other factors.
Gross Margin Rate Increased by 80 basis points year-over-year. Targeted interim pricing actions offset higher product costs, lower factory volumes, and incremental tariffs.
Tariffs Impact $4 million in the quarter, resulting in a 70 basis point decline in the gross margin rate. For the full year, tariffs of $14 million had an unfavorable impact of 60 basis points on the gross margin rate.
Operating Expenses Decreased by $1 million or 1% year-over-year. The decline was driven by non-recurring business reorganization costs and litigation costs from the prior year, offset by incremental expenses of acquired operations and higher incentive-based costs.
Contractor Segment Operating Margin Rate 24%, consistent with the same period last year, excluding business reorganization charges and litigation spending.
Expansion Markets Segment Operating Margin 28%, compared to 20% for the same quarter last year. Upfront electric motor license fee revenue of $5 million contributed to the increase.
Adjusted Operating Earnings Increased by $21 million or 15% year-over-year. Adjusted operating earnings as a percentage of sales was 27%, compared to 25% in the same period last year.
Cash Provided by Operations $684 million for the year, an increase of $62 million or 10% year-over-year. Cash provided by operations as a percentage of adjusted net earnings was 153% for the quarter and 137% for the year-to-date.
Inventory $336 million, down $46 million for the full year and down $140 million from its peak at the end of 2022. Inventory is at its lowest level since June 2021.
Significant Cash Uses Share repurchases of 5.1 million shares totaling $423 million, dividends of $183 million, acquisitions of $135 million, and capital expenditures of $46 million. These were offset by share issuances of $37 million.
Contractor Segment Sales Increased by 8% year-over-year. Acquisitions contributed 5%, currency translation 2%, and organic sales 1%. COROB grew 25% in the quarter, contributing significantly to organic growth.
Industrial Segment Sales Increased by 11% year-over-year. Organic growth of 5% was driven by project completions in Powder Finishing systems and growth in the Americas and EMEA, offsetting declines in Asia Pacific.
Expansion Markets Sales Declined by 6% in the quarter but grew for the full year with high single-digit growth in the semiconductor business. Quarterly declines were due to reduced activity in semiconductor, high-pressure valve, and environmental businesses.
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Operating Highlights
New Product Investments: Investments in new products are positively impacting the company's outlook despite flat market conditions for contractor equipment.
Market Expansion through Acquisitions: Acquisitions of COROB, Radia, and Color Service have extended market reach, provided new product lines, and expanded manufacturing footprint. These acquisitions are expected to generate nearly $190 million in full-year revenue.
Regional Growth: Strong organic growth in the Americas and EMEA regions, particularly in the Industrial segment, offset declines in Asia Pacific.
Operational Efficiencies: Gross margin rate increased by 80 basis points due to targeted pricing actions, despite higher product costs and tariffs. Inventory levels reduced significantly, reaching the lowest since June 2021.
Cash Flow Management: Operating cash flow increased by 10% to $684 million, enabling $135 million in acquisitions, $50 million in capital expenditures, and $600 million returned to shareholders.
Strategic Acquisitions: Commitment to generating one-third of long-term revenue growth through disciplined strategic acquisitions.
One Graco Operating Model: Incremental margins in the Industrial segment reflect the benefits of the One Graco operating model, with 76% incremental margins for the quarter and 117% for the full year.
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Risk or Challenges
Tariffs: Tariffs negatively impacted product costs by $4 million in the quarter, leading to a 70 basis point decline in the gross margin rate. For the full year, tariffs of $14 million caused a 60 basis point unfavorable impact on the gross margin rate.
Core Construction Market Conditions: Continued sluggish conditions in core construction markets are impacting growth, although improved performance in specific channels like home centers has mitigated some of the effects.
Foot Traffic in Home Center Channel: Foot traffic in the home center channel remains light, which could affect sales growth despite some sequential improvements.
Affordability Concerns in Contractor Equipment Market: The overall market for contractor equipment is flat, with affordability concerns keeping activity subdued.
Declines in Asia Pacific Region: Sales in the Asia Pacific region, particularly China, have declined, offsetting growth in other regions.
Expansion Markets Segment Decline: The expansion markets segment declined 6% in the quarter, with specific declines in semiconductor, high-pressure valve, and environmental businesses.
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Guidance & Outlook
Revenue Guidance for 2026: Offering 2026 revenue guidance of low single-digit organic growth on a constant currency basis and mid-single-digit growth after factoring in expected incremental sales from the Color Service and Radia acquisitions.
Foreign Currency Impact for 2026: Based on current exchange rates, assuming similar volumes, mix of products and mix of business by currency as in 2025, movement in foreign currencies would have a 1% favorable impact on net sales and net earnings for the full year 2026.
Effective Tax Rate for 2026: The effective tax rate is expected to be 20% to 21%, excluding any impact from excess tax benefits related to stock option exercises and other onetime items.
Capital Expenditures for 2026: Projected capital expenditures are $90 million to $100 million, excluding approximately $50 million for facility expansion projects for the full year.
Corporate Expenses for 2026: Projected unallocated corporate expenses are $40 million to $43 million for the full year.
2027 Calendar Adjustment: 2027 will be a 53-week year with an extra week occurring in the fourth quarter.
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Shareholder Return Plan
Dividends: Significant year-to-date uses of cash include dividends of $183 million.
Share Repurchases: Significant year-to-date uses of cash include share repurchases of 5.1 million shares, totaling $423 million.
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Key Q&A
Q:What is the nature of the upfront licensing fee associated with electric pumps?
A:The upfront licensing fee is related to a pivot in strategy where Graco is now licensing its high torque, quiet compact motor technology to OEMs and motor manufacturers. This revenue stream is expected to be lumpy, and upfront fees are not factored into the full-year organic constant currency outlook. The motors are already used in Graco products and are well-received in the market.
Q:What is the outlook for geographic conditions in 2026?
A:The outlook is cautious with low single-digit growth expected. Order rates have been steady, and there is no anticipation of another downturn. Recent order trends support this outlook.
Q:Were there any signs of pull-forward demand in the fourth quarter, particularly on the contractor side?
A:No significant pull-forward demand was observed. There was a slight pickup in the home center channel, but its sustainability is uncertain. The outlook for residential housing remains flat, while commercial opportunities are viewed positively.
Q:What is the pricing assumption embedded in the low single-digit organic growth for 2026?
A:The pricing assumption is 1% to 1.5% growth, with some price adjustments already implemented in late 2025. Additional adjustments are expected by mid-2026.
Q:What is the status of the One Graco initiative and its impact on sales and margins?
A:The One Graco initiative has led to significant inventory reductions, expense reductions of around $15 million in 2025, and improved operational efficiencies. While the revenue impact in 2025 is hard to quantify, it is expected to provide tailwinds in 2026 and beyond.
Q:How did orders perform into year-end and in January?
A:Orders were in line with the 2026 guide, and there are no concerns about the order rates relative to the guide.
Q:What are the markets or applications for the upfront licensing agreements outside of Graco's exposures?
A:The licensing agreements target motor manufacturers and OEMs for applications in process industries, agriculture, robotics, and other areas requiring compact, high-torque, quiet motors. Specific customer details were not disclosed.
Q:What is the status of Graco's M&A pipeline and recent acquisitions?
A:Graco has a strong M&A pipeline with over 100 names. Recent acquisitions like COROB, Radia, and Color Service have been well-integrated and are expected to contribute positively in 2026. The company remains disciplined in its M&A approach.
Q:What is the outlook for the home center channel?
A:The home center channel saw a meaningful bounce after three years of decline, but the sustainability of this improvement is uncertain. Foot traffic remains light, and the improvement may be due to inventory adjustments.
Q:What are the key growth capital plans for 2026?
A:Growth capital plans include the construction of a new corporate headquarters building, with a planned expenditure of about $50 million in 2026. The sale of the current campus in Northeast Minneapolis will offset some of this cost.
Q:What is the end-market outlook for the industrial business across regions?
A:Positive trends are seen in automotive (EVs and legacy), dealer service, and food and beverage. Mixed or flat trends are observed in Tier 1 automotive and mining. Depressed markets include construction-related industrial markets in North America and protective coatings in the Middle East.
Q:What is the outlook for margins in the industrial and process segments?
A:Margins in the industrial segment are strong, with potential upside from higher volumes. The process segment also has high margins, particularly in semiconductor, high-pressure, and QED businesses.
Q:What is the status of backlog and its impact on 2026?
A:Backlogs are at a decent level, with no concerns. The powder business backlog provides more visibility, and the overall outlook for 2026 is achievable.
Q:What are the potential positives and negatives for 2026?
A:Positives include lower mortgage rates, new product launches, and potential improvements in residential and factory CapEx markets. Negatives could include geopolitical risks and trade uncertainties, but tariffs are not expected to be a headwind.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details about the customers or applications for the upfront licensing agreements, citing confidentiality. Additionally, they did not provide a clear explanation for the bounce in the home center channel, attributing it to inventory adjustments without further elaboration.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Acquisitions currency
Conference Graco
Contractor segment
Expansion market
Instructions remark
Inventory level
Sheahan overview
acquisition capital
acquisition inventory
benefit reorganization
charge share
decline reorganization
end Inventory
exercise tax
fee license
fee margin
incentive Contractor
increase Acquisitions
inventory peak
level Cash
license fee
litigation incentive
margin Expansion
market motor
motor license
peak end
percentage point
percentage sale
period reorganization
player Instructions
point effect
point margin
point percentage
project week
rate period
rate tariff
reorganization charge
sale tax
segment margin
spending Expansion
today Sheahan
website SEC
GGG Transcript
Graco Inc. (GGG) Q4 2025 Earnings Call Transcript
Positive1-27
The earnings call reveals strong financial performance with high margins and optimistic guidance. Despite some declines, growth in semiconductor and other segments is promising. The One Graco initiative improves efficiency, and M&A activities are well-integrated. The cautious yet steady outlook, coupled with a strong M&A pipeline, supports a positive sentiment. However, uncertainties in some markets and lack of guidance specifics slightly temper the outlook.
Graco Inc. (GGG) Q3 2025 Earnings Call Transcript
Unknown10-23
The earnings call presents a mixed picture: steady incoming orders, positive pricing actions, and margin improvements are offset by cautious guidance in certain regions and sectors. The Q&A reveals uncertainties in APAC and the vehicle service market, and management's reluctance to provide detailed guidance further tempers optimism. While there are positive aspects like strong cash flow and successful integrations, the lack of clear forward guidance and sector-specific challenges suggest a neutral sentiment, with no strong catalysts for significant stock price movement in the near term.
Graco Inc. (GGG) Q2 2025 Earnings Call Transcript
Unknown7-24
The earnings call reveals a mixed sentiment. Positive factors include strategic acquisitions, strong M&A pipeline, and shareholder returns through buybacks. However, challenges such as flat first-half performance, potential trade policy impacts, and uncertainties in the DIY market create a balanced outlook. The neutral sentiment is further supported by stable revenue guidance and strategic initiatives like One Graco, which aim to enhance efficiency. Overall, while there are positive developments, uncertainties and potential risks temper the overall outlook, leading to a neutral stock price prediction.
Graco Inc. (GGG) Q1 2025 Earnings Call Transcript
Unknown4-24
The earnings call showed mixed signals: while sales and net earnings increased, gross margins and contractor segment margins declined. The Q&A highlighted uncertainties related to tariffs and vague responses from management on mitigation strategies. The acquisition of Korab is positive, but currency fluctuations and economic uncertainties pose risks. Share repurchases and dividends are positive, but the overall guidance is cautious. Given the mixed financial performance and uncertain outlook, the stock price reaction is likely to be neutral.
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