Brad Hewitt

Brad Hewitt from Wolfe Research asked about the backlog trends during the quarter, specifically inquiring about backlog conversion in the Gema business. He also sought insights into the expected phasing of organic growth throughout 2026, particularly whether Q1 would see the lowest growth and if Q2/Q3 could achieve mid-single digit growth due to easier comparisons.

Answer

President and CEO Mark Sheahan confirmed strong Q4 manufacturing performance and decent backlog levels entering 2026, noting the lumpy nature of the powder business backlog due to long project cycles. CFO David Lowe indicated that typical seasonality is expected for 2026, with stronger Q2 and Q3, and Q4 project completion for industrial, aligning with historical patterns.

Brad Hewitt asked about how backlog trended in the quarter, specifically noting the expected backlog conversion in the Gema business, and requested additional color. He also inquired about the phasing of organic growth throughout 2026, asking if the lowest growth is expected in Q1 and if mid-single-digit growth could be seen in Q2 and Q3 due to easier comps.

Answer

President and CEO Mark Sheahan highlighted strong manufacturing performance in Q4, partly attributed to One Graco, resulting in decent backlog levels entering 2026 and efficient product delivery. He noted that the powder business backlog can be lumpy due to long project durations (six months or more) but provides visibility, and this is factored into the organic outlook. CFO David Lowe stated that Graco's typical seasonality is expected to hold for 2026, implying stronger Q2 and Q3, especially with good contractor business, and project completion realization in Q4 for industrial.

Brad Hewitt asked about the incremental margins for the Contractor segment going forward, how much volume recovery is needed to reach 29-30% margins (excluding Corab), and for more color on the growth perspective of the White Knight business this year, including any potential changes to its growth algorithm due to proposed sectoral tariffs on semiconductors.

Answer

CEO Mark Sheahan stated that not a lot of volume is needed for the Contractor segment to return to 29-30% margins, as pricing will help offset tariffs, and even small volume increases will drive factory efficiencies. Regarding White Knight, he confirmed it has seen a comeback after a two-year investment lull, though not yet back to peak levels, and the macro outlook for semiconductor investment remains favorable despite potential tariff impacts. He did not provide specific revenue figures for White Knight.

Brad Hewitt asked about future incremental margins for the contractor segment, specifically the volume recovery needed to reach a 29%-30% margin zone (excluding Corab). He also sought color on the White Knight business's growth this year and potential changes to its medium-term growth algorithm due to proposed sectoral tariffs on semiconductors.

Answer

CEO Mark Sheahan stated that minimal volume recovery is needed for contractor margins to return to 29%-30%, as pricing will offset tariffs and volume brings factory efficiencies. He confirmed White Knight has recovered after a two-year downturn, acknowledging its cyclical nature, but is not yet at peak levels. He noted favorable macro trends and expected Graco to gain market share, without commenting on specific revenue or tariff impacts.

Brad Hewitt of Wolfe Research LLC asked how Graco's contractor segment outlook aligns with paint volume forecasts from channel partners and questioned the change in guidance regarding the previously mentioned revenue headwind from China.

Answer

President and CEO Mark Sheahan stated their outlook is global and broader than just paint, with easier H2 comps supporting their forecast. CFO David Lowe agreed the market is 'choppy.' VP & Controller Christopher Knutson explained the China headwind was removed from the outlook due to a market recovery, particularly in powder coating, though it remains a disclosed risk factor.

Brad Hewitt of Wolfe Research asked how Graco's contractor volume expectations align with a key customer's negative outlook on paint volumes and inquired about the status of the previously mentioned revenue headwind from China.

Answer

CEO Mark Sheahan noted Graco's forecast is global and covers a broader product range than just paint, including spray foam and protective coatings, and benefits from easier comps in the second half. VP & Controller Christopher Knutson clarified that while China exposure remains a risk factor in the 10-Q, it is no longer considered a headwind in the active outlook due to a market recovery, particularly in powder coating.

Brad Hewitt asked for quantification of the sequential backlog trend and any additional comments on backlog trends by business. He also inquired if normal seasonality for revenue and EBITDA split should be assumed for 2026, and if organic growth would be similar in the first half versus the second half.

Answer

CFO Daniel Hopgood explained that while backlog is down sequentially, this is a normal seasonal trend as Q1 is typically the lowest quarter due to holidays and year-end shipments. He emphasized that the year-over-year starting point for backlog is more important. He confirmed that the company is planning for normal seasonality in 2026, with Q1 being the lowest and sequential improvement throughout the year.

Brad Hewitt from Wolfe Research asked for clarification on the sequential trend of backlog, beyond the year-over-year increase, and requested additional comments on sequential backlog trends by business segment. He also inquired if normal seasonality for revenue and EBITDA split is expected for 2026, and if organic growth should be similar in the first half versus the second half.

Answer

Daniel Hopgood, Executive Vice President and CFO, explained that backlog is down sequentially, which is normal due to Q1 being seasonally the lowest quarter. He confirmed expectations for normal seasonality in 2026, with Q1 typically being the lowest and sequential improvement throughout the year, noting a nominal impact from Chinese New Year shifting to Q2.

Brad Hewitt of Wolfe Research LLC asked about the implied organic sales deceleration in the Q4 outlook and questioned if the Advanced Technology Solutions (ATS) segment's margin is at a normalized run-rate in the 24-25% range.

Answer

EVP & CFO Daniel Hopgood explained the Q4 year-over-year comparison is tougher for some systems businesses, which mutes the growth rate, but noted the guidance implies a modest sequential sales increase from Q3. President & CEO Sundaram Nagarajan stated that a 24-25% EBITDA margin for ATS seems reasonable at current revenue levels but cautioned that the segment requires significant ongoing R&D investment, which is a key factor in its cost structure.

Brad Hewitt inquired about the $500 million share repurchase program over the next 12 months, asking if it represents a minimum threshold, the expected cadence of deployment, and why an Accelerated Share Repurchase (ASR) was not chosen. He also questioned the Q4 outlook's implied incremental margins, which appear lower than typical.

Answer

CFO Nathan Winters confirmed the $500 million commitment spread over the next four quarters, emphasizing a dynamic approach to leverage stock volatility for consistent returns. He stated that executing through the open market provides more benefit and management flexibility compared to an ASR. Regarding Q4 incremental margins, Nathan Winters noted that a typically higher mix of large deals in Q4 can lead to some mix dynamic, but there are no unusual factors limiting drop-through or indicating conservatism beyond normal expectations.

Brad Hewitt asked about the $500 million share buyback planned over the next four quarters, specifically if it represents a minimum threshold, the expected cadence of deployment, and why an open market approach is preferred over an Accelerated Share Repurchase (ASR). He also questioned the Q4 outlook's implied incremental margins of approximately 25%, which are lower than the typical 30%+, asking if this embeds conservatism or if there are factors limiting drop-through.

Answer

CFO Nathan Winters stated the $500 million buyback is a commitment, expected to be spread over the next four quarters, with a dynamic approach to capitalize on stock volatility for consistent returns. He noted that an open market approach allows for better management of return and timing compared to an upfront ASR. Regarding Q4 incremental margins, Mr. Winters explained that a typically higher mix of large deals in Q4 can lead to a slight mix dynamic, but there's nothing unusual in the timing or margin profile to specifically call out as limiting drop-through or embedding conservatism.

Brad Hewitt asked about capital allocation priorities following the Elo acquisition, given the pro forma leverage of around two turns. He also inquired about Elo's historical organic growth profile from 2019-2024 and whether the expected revenue synergies are incremental to its 5-7% growth algorithm.

Answer

CEO Bill Burns affirmed that the near-term focus will be on integrating Elo, but the overall capital allocation strategy remains unchanged, balancing organic growth, strategic M&A, and shareholder returns. CFO Nathan Winters stated Elo's historical growth profile is very similar to Zebra's. He noted the $25 million in synergies includes cost savings and go-to-market benefits that could help achieve the higher end of the 5-7% growth target.

Brad Hewitt of Wolfe Research, LLC asked for details on the Q3 guidance for organic growth and margins by segment, and what factors would prompt an acceleration of investments in the data center market.

Answer

CFO Mark Carano outlined the second-half outlook, projecting mid-teens growth for HVAC (two-thirds organic) with margin expansion, and ~10% organic growth for D&M with some margin compression from tariffs and investments. President & CEO Gene Lowe responded that the company is already 'feeling even more bullish' on data centers and is fully supporting growth, not throttling back investments.

Brad Hewitt asked for help understanding the building blocks for year-over-year accretion from the Svanohoi and Kesaria acquisitions into 2026. He also inquired about order activity trends in the short-cycle Industrial Process business through Q2 and into July.

Answer

CFO Emmanuel Caprais stated that both acquisitions are outperforming plans and guided that investors should expect around 100 basis points of margin improvement annually from acquisitions on average. CEO Luca Savi described Q2 short-cycle IP orders as the second-highest ever, with no unusual trend changes, noting that a slightly softer July is a typical seasonal pattern.