GRACO INC (GGG)·Q4 2023 Earnings Summary

Executive Summary

• Record Q4 and full-year sales and operating earnings driven by price realization and lower product costs; consolidated operating margin reached 30% in Q4 with gross margin up ~370 bps, offsetting higher OpEx and lower factory volumes .
• Adjusted EPS was $0.80 vs $0.73 prior year; reported EPS $0.64 was depressed by a non-cash $42M pension settlement loss; adjusted net earnings rose 10% YoY to $137M .
• Segment highlights: Process grew 4% in Q4 with record margins; Contractor improved on new products and favorable mix despite home center softness; Industrial mixed with strength in Americas and softness in powder systems in EMEA/APAC .
• 2024 guide: organic low single-digit revenue growth; tax rate 19.5–20.5%, unallocated corporate expense $41–44M, capex $120M ($60M for expansions); multiyear capacity expansions to be largely complete by year-end .
• Stock reaction catalysts: continuing gross margin expansion, pricing normalization, strong Process/Industrial margins, and elevated cash generation versus temporary non-operating pension charge .

What Went Well and What Went Wrong

• What Went Well

  • “Record fourth quarter and annual sales and operating earnings with sales growth in all segments” supported by realized pricing and lower product costs; operating margin rose to 30% .
  • Process segment achieved broad-based growth and record operating profit margins; Q4 incremental margins 89% and full-year 83% .
  • Contractor benefited from new product introductions and favorable mix (larger pro units); operating margin reached 29% for Q4 and FY .

• What Went Wrong

  • Asia Pacific softness: Industrial powder finishing system sales declined; China remained weak across contractor and powder businesses .
  • Reported EPS impacted by a non-cash $42M pension settlement loss in other expense; adjusted metrics exclude this item .
  • Operating expenses rose 8% YoY in Q4, including higher sales and earnings-based expenses and rate/volume-related increases .

Financial Results

Consolidated Revenue and EPS

Profitability (Quarterly comparison)

Segment Breakdown (Q4 2023)

KPIs and Operating Metrics

Non-GAAP adjustments in Q4 exclude: pension settlement loss ($42.1M pre-tax), contingent consideration (FY impact), impairment (FY), excess tax benefits and certain tax provision adjustments; adjusted EPS $0.80 vs reported $0.64 .

Guidance Changes

Dividend policy not updated in Q4 materials; FY 2023 cash dividends paid totaled $158M .

Earnings Call Themes & Trends

Management Commentary

• “Graco reported record fourth quarter and annual sales and operating earnings with sales growth in all segments for the quarter.” — Mark Sheahan, President & CEO .
• “Pricing actions… drove sales growth and gross margin expansion during the quarter and for the year… consolidated backlog was $280 million… slightly elevated in our semiconductor and powder coatings businesses.” — Prepared remarks .
• “We are initiating full-year 2024 revenue guidance of low single-digits on an organic, constant currency basis.” — Outlook .
• “We expect capital expenditures to be approximately $120 million… By the end of this year, we will have completed expansion projects for nearly all of our operations.” — CFO .

Q&A Highlights

• Pricing normalization and cost tailwinds: Management returning to typical annual increases, with early signs of input cost favorability and potential 2024 gross margin expansion .
• China/APAC softness: Persistent weakness in contractor and powder businesses; APAC Industrial mixed with construction-related powder demand soft .
• Process/semiconductor: Near-term semi orders soft in Americas; expectation for mid-2024 recovery; continued strength in vehicle services and pumps .
• Capex roll-off: 2024 likely last year of elevated growth capex; maintenance capex expected ~$50–60M thereafter .
• M&A and balance sheet: Pipeline strong; preference for strategic, margin-improvable targets; opportunistic buybacks remain an option given cash position .

Estimates Context

• S&P Global consensus estimates for Q4 2023 Primary EPS Consensus Mean and Revenue Consensus Mean were unavailable due to SPGI request limits at time of retrieval. As a result, comparisons to Wall Street consensus could not be provided and should be checked prior to trading decisions [GetEstimates error].
• Given the magnitude of gross margin expansion, adjusted EPS ($0.80) likely exceeded typical expectations excluding the pension charge; however, confirm with current S&P Global data before concluding estimate beats/misses .

Key Takeaways for Investors

• Margin quality is strong: price realization and lower input costs drove ~370 bps gross margin expansion; operating margin hit 30%, positioning for further upside if volume accelerates .
• Segment mix favorable: Process and Industrial margins at elevated levels; Contractor improving via new products and pro mix despite home center softness .
• One-time pension charge masked underlying EPS strength; adjusted EPS momentum remains intact heading into 2024 .
• Backlog normalization reduces execution risk; remaining elevation in semi/powder offers optionality if macro improves .
• 2024 guide conservative at low single-digit organic growth; upside skew if volumes beat and cost tailwinds persist .
• Capex cycle rolling off post-2024, boosting FCF potential; $0.5B cash provides flexibility for M&A or opportunistic buybacks .
• Watch China/APAC powder systems and semiconductor order trajectory as key swing factors for Industrial/Process performance .