Good morning, welcome to the fourth 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 2021 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 Kathryn Schoenrock, Executive Vice President, Corporate Controller and Information Systems.
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 summary of our results and then turn the call over to Mark for additional discussion. Yesterday, we reported record fourth quarter sales of $555 million, an increase of 3% from last year. As a reminder, the fourth quarter of last year included 14 weeks as compared to 13 weeks in 2022. Net earnings in the quarter were $126 million or $0.74 per diluted share, an increase of 7%. Currency translation rates continued to be a challenge in the fourth quarter, decreasing sales by $23 million and net earnings by $12 million or $0.07 per diluted share. The gross margin rate decreased two percentage points in the quarter due to the unfavorable effect of foreign exchange.
During the quarter, our pricing actions more than offset increased costs and had a favorable effect on both the gross margin rate and dollars. At current costs, we expect this favorable price cost dynamic to continue as we move into 2023. Operating expenses decreased $10 million or 7%. Reductions from lower sales and earnings-based expenses and translation rates were partially offset by volume and rate-related increases. Other expenses decreased $15 million in the quarter as last year included a $12 million pension settlement charge that did not repeat. The adjusted tax rate for the quarter was 19% due to the unfavorable effects of foreign earnings taxed at higher rates than the U.S. rate. We anticipate the effective tax rate for 2023 will be between 19%-20%.
Cash provided by operating activities were $377 million for the year, a decrease of $80 million from last year. Contributing factors include increased annual incentive payments and investments in working capital. I'll take a moment now to cover a few items as we look forward to 2023. As we discussed in our materials issued last night, we are initiating a revenue outlook for the full year 2023 of low single-digit growth on an organic constant currency basis. Slide eight of our conference call slides, however, incorrectly stated with growth expected in all segments and regions. A corrected presentation will be uploaded to our website following today's call. We have been and will continue to monitor changes in currency translation rates.
More recently, we have seen improvements in our core rates and at the moment anticipate the full year effect of currency translation would increase sales and earnings by one percentage point in 2023. Unallocated corporate expenses are projected to increase and fall within the range of $31 million-$34 million. This increase is related to stock-based compensation. We expect CapEx to be approximately $200 million, with $130 million for facility expansion projects at our Minnesota, South Dakota, Switzerland and Romania locations. I'll turn the call over to Mark now for further discussion.
Thank you, Kathryn, and good morning, everyone. All of my comments this morning will be on an organic constant currency basis. Sales in the fourth quarter were up mid-single digits, resulting in quarterly and annual records for both revenue and operating earnings. We achieved these records in each quarter of 2022. Contractor was the only segment that did not realize a record in the fourth quarter. However, the segment did reach record annual revenue and ended just shy of $1 billion in total sales. Our consolidated backlog was $355 million at the end of the quarter, which is approximately where it was last year at this time.
Flowing demand in Contractor, along with strong project completion in our powder equipment business, reduced backlogs from what we reported at the end of the third quarter. We also experienced areas of improvement in component availability during the quarter. While some shortages of key items like electronics and castings persist, supply chains have improved from earlier in the year. The pace of incoming orders has slowed compared to a year ago. However, year-over-year comparisons are heavily influenced by the magnitude and timing of our price increases in 2022 versus the fourth quarter of 2021. Many of you will remember that in 2021, we held pricing flat throughout the year after a modest increase in January.
In the fourth quarter of 2021, we announced that we would be implementing a substantial price increase early in 2022, which led to heightened order activity in last year's fourth quarter. We have factored these things into our outlook, which I will cover later. Now turning to some commentary on our segments. The Contractor segment had a mid-single-digit revenue decline in the fourth quarter, driven by less demand in the home center channel, limited Pro Paint product availability in EMEA and Asia Pacific, and the effect of lost sales due to discontinuing our Russia operations earlier this year. The North American Pro Paint business remains strong with revenue growth in the high single digits for the quarter, and out the door sales were equally strong. Component availability improved, but we are still on backorder, especially in our Pro Paint business.
We continue to monitor global construction indicators. However, given the broad nature of our short cycle business, which has multiple product categories, it is difficult for us to accurately predict the ultimate trajectory of revenue. Simply put, there is no silver bullet in terms of expert consensus or leading indicators that guide us to a certain revenue outcome. Our products are used in many things, such as new construction projects for single-family residential, multifamily residential, and commercial construction. Contractors also have repainting and remodeling projects covering these categories. In addition, we support specialty contractors doing things like spray foam insulation, line striping and pavement maintenance, texture spray applications, and high-pressure protective coatings jobs that are often seen in infrastructure applications like bridges, pipelines, and commercial shipping.
Most contractors working in the aforementioned categories report project pipelines that go through much of 2023 and even into 2024 for commercial applications. Experience has shown us that as long as contractors have solid project pipelines, they will continue to buy both spare parts and new equipment. These factors, combined with new products being launched and our channel expansion initiatives, puts Graco in a better position than if we only had to rely on the economy to determine our revenue fate. In the industrial segment, sales were up 17% in the quarter, with positive results in all reportable regions, and they achieved fourth quarter and annual records for both sales and operating earnings. This segment is the most global of our businesses and experienced solid growth in all regions for the quarter and for the year.
Key product categories such as finishing systems and sealant and adhesive equipment were the main drivers of this growth. Profitability continues to be strong, with incremental margins of 55% in the quarter and 61% for the year. Checking with our teams, project activity remained good as we finished the year. The Process segment grew sales 16% for the quarter, resulting again in both quarterly and annual records for both revenue and operating earnings. This is the fifth consecutive quarter that Process has set these records. Increased volume drove profitability improvements as the year went on. Incremental margins were 48% in the fourth quarter and 36% for the full year. Broad-based sales growth in lubrication equipment, process pumps, and semiconductor pumps, heaters, and fittings drove the strong performance.
As we finish 2022, we have large backlogs in semiconductor, decent project activity in lubrication and process pumps, and we are excited about both recent and upcoming product launches in these businesses. Moving on to our outlook. As we enter 2023, we're keeping a close eye on order trends and business tempo. At this time, we remain cautiously optimistic that we can drive another year of growth in both sales and net earnings. As such, we've initiated a low single-digit organic revenue growth outlook on a constant currency basis for the year. Our teams performed extremely well over the last two years, and we are ready to react if conditions differ from our expectations. I am confident that our performance will reflect this in 2023.
Our core strategies of launching new products, investing in our manufacturing capabilities, expanding our global channel, and pursuing strategic acquisitions will facilitate growth not only this year, but also in the future. That concludes our prepared remarks. Operator, we're ready for questions.
Thank you. The question and answer session will begin at this time. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Your question will be taken in the order that it is received. Please stand by for your first question.
Your first question comes from the line of Deane Dray from RBC Capital Markets.
Thank you. Good morning, everyone?.
Morning, Deane.
Hey, can we start with, there was a lot of worry here, regarding one of your pro paint customers being having an earnings miss and lower guide, and everyone goes, "Oh, there's immediate negative read-through to Graco"? You know, the reality is you're not as dependent as what people think, and there's other applications. Just take us through that misperception. You and I have been through this before, but just kind of frame for us the relationship, and the end market exposure, et cetera.
I would say that overall, we haven't really seen any kind of a decline in our Pro Paint business, and I think that's reflective of the fact that contractors are busy. They still got projects. They buy stuff when they feel good about the outlook on different things. Notwithstanding that, we, you know, we do sell into some of the newer construction markets that have, I think, been particularly hit by the increase in interest rates and housing activity overall. Tried to point out in the opening remarks that, you know, this is a pretty broad business when you're looking at our Contractor business.
There's a lot of different applications, a lot of different product categories, and, you know, we aren't, as you said, tied into one specific macro thing that you can really, you know, use to guide what we see on the revenue growth side. When we looked at everything and what we're experiencing right now, you know, we feel okay about CED. As the year progresses, our, you know, visibility will be, you know, much better 'cause we are pretty short cycle, as you know, and, you know, orders come in, we get them out as quickly as we possibly can. It's good for our customers, but it does create some issues for us in terms of just having the, you know, clear visibility on where things are going.
I was at a trade show last week by a large paint organization. It's their annual trade show. It was very well attended. Our booth was extremely busy. They bring in their store managers from around the country. There was a lot of interest in our new products that we're launching. I would say overall that it was a fairly positive takeaway for me, being able to walk the floor and talk with different participants in that industry. Again, we'll see how it plays out, but, you know, things are hanging in there pretty good for now.
That's all good to hear. Just on pricing outlook for 2023, you're going back to, at least you had said, to go back to one price increase or that's the plan. You know, what is the price increase expectation for January? What kind of realization are you expecting? What does that mean for price cost?
Yeah, it really depends on the business unit and the region. But generally speaking, it'll be more of a normal price increase, I would say, in line with what you might have seen in 2018, 2019. And each, you know, segment is implementing that here in the first quarter, and some of the, some of the regions are gonna wait until a bit later on because we did just push through a fairly healthy price increase at the end of the third quarter. In Contractor, I think, you know, given that they have raised their prices already twice, we're gonna, we're gonna hang tight for a while. I think we're in better shape than we were. You actually saw price cost neutral to slightly favorable in Q4.
We're hopeful that the actions that we've taken, you know, will continue to play out that way for the rest of the year.
Great. Thank you.
Yep.
Thank you. One moment for your next question. Our next question comes from the line of Michael Halloran from Baird.
Hey, good morning, everyone. All right. Maybe just then, I think you kind of gave us all the pieces there, Mark, but maybe just talk about where you're expecting growth this year by segment and where you're not and where the pressure points might be. Then, you know, then on a related basis. I'll set it as a second question. We'll start there, and I'll keep them separate.
We didn't really break out, as you can see, what the outlook is by segment or by region, you know, for a lot of different reasons. Probably the biggest one that our visibility isn't that great. I would say generally that we feel really good about product launches and channel expansion initiatives going on in the process segment, as well as that particular group has a lot of backlogs still from orders that we took particularly in the semiconductor part of the business, which should really help them on a full year revenue basis. In that segment, things feel like they're in pretty good shape.
On the industrial side, a lot of the growth that we saw here at the end of the year and really a lot of the growth in 2022 came from both our sealant and adhesive businesses, as well as our powder equipment business. Fortunately, with regard to the latter, they do have backlogs, and they do have some better visibility on orders and how the year might play out versus some of our other short cycle businesses. When you put those two things together, again, I feel like we're in pretty good shape with respect to being able to grow in industrial in 2023 without getting into details on regions and those types of things. As you know, you know, Contractor's sort of the wild card.
As we sit here today, our orders have been okay. The pro side is better than the home center side. As you know, pro side is more profitable for us than the home center side. From that standpoint, if you had to have one that was weaker than the other, you know, having a good, strong pro side of the business should help us on the profitability front. Hopefully that helps. All in all, when you roll it all up, I think we feel pretty comfortable with the low single-digit guide.
No, that makes sense. Maybe talk a little bit about the cadence thing then as you work through the year, some of the comments in the prepared remarks about, you know, a little bit of pre-buy ahead of some of the price increase in the fourth quarter, given kind of the timeframe that tends to imply maybe a little more outflow in the front part of the year, visibility better front half versus back half. Is some of that reflected in guidance, or is there an element of just relatively normal seasonality embedded in that, in that outlook?
Yeah. I think we tried to do the best job that we could to factor all that in to give you the full year guide. There's probably gonna be a little bit of volatility in terms of order rates and those types of things. We certainly saw that in Q4 just, you know, from a comparison standpoint from a year ago. We also raised prices in Q3 of this past year, so you might see a little bit more order volatility around that as well. All in all though, you know, I think that the guide that we gave, this kinda low single digit number for the full year, we feel pretty good about. David, do you have anything to add there?
You know, I think that when we talk about the industrial and process space, I'm generalizing, but the channels really don't stock a lot. Their demand varies all over. Quite frankly, many of them wouldn't know what to order to do a plan ahead in terms of a price adjustment. As Mark touched on, certainly the CED is probably, if we looked at, if we go back to 2019, we've done a little work on this, is certainly the shortest cycle of all of our short cycle businesses. I feel that there, to some degree, what we could be experiencing at this point is a return to normalcy or more normalcy. Better quality supply chains, still some gaps in electronics and chips.
I feel pretty good that what we are seeing is, I'd say getting to a situation, getting closer to a situation where the channel partners order with confidence knowing that we're going to ship promptly.
Got it. It sounds like what you're saying is the seasonal patterns are reasonably normal, but there's gonna be some volatility expected through the year. You know, there's gonna be some variance from that thought process as we move forward.
Could be. Yeah. Could be some order volatility. You know, hopefully the factories are in a better spot where what we actually get out the door is a little bit smoother than the order rate volatility. Of course, we still got big backlogs, right? I mean, a year ago when we were talking with you guys, we were lamenting the fact that we had, you know, $350+ million of backlog, and that's where we're at here today too, so.
Thanks, Mark. Thanks, Dave. Appreciate it.
Yep.
Thank you.
Thank you. One moment for your next question. Your next question comes from the line of Saree Boroditsky from Jefferies.
Hi. Good morning. Gross margins are up a little bit sequentially but still remain under pressure. You know, what do you need to see to get gross margins back above that 50% level?
Hi, Saree. This is Kathy. I think, you know, what we experienced in the quarter, as I said in my comments, we really saw the unfavorable effect of that current foreign currency exchange. I think, you know, with where rates are at right now, we don't expect that headwind to continue into 2023. I mean, obviously rates could change. Given that we did have a favorable price cost dynamic in the fourth quarter, I think we're optimistic about how we enter 2023 and beginning to see some gross margin rate expansion. Of course, you know, that we need volumes to remain the same and costs to remain the same. Those will be the two factors that we continue to monitor here in the first quarter and throughout 2023.
Yeah. I would just add that after really about a half a dozen quarters of serious price cost pressure, really going back to early in Q2 of gosh, I guess we gotta go back quite a ways, maybe at the beginning of even 2022. The progress that we made here in Q4, I think was impressive. I would say it reflects the impact of pricing that we did at the beginning of the year and the by now famous interim price increases that we completed throughout the summer months. Anticipating a question, the lesson is not lost on us.
Mm-hmm.
Yeah. Like if you look at Q4, if currency were neutral, we would have been above 50%. I think that let's hope that it stays neutral, that our price cost gets in better shape, that the actual input costs come down at some point. We may see some of that starting to creep in. Nothing is broken here, so we should get back up to those rates that you were talking about.
Great. Obviously you seem positive on the outlook for industrial next year. Can you just talk about what drove the trends in the quarter and how you think about those markets going into the year?
Yeah, I mean, I would just say that all in all, it was a great year for that team. I would point to the things I said before. I think our adhesive dispensing business, our sealant business is on solid footing across multiple industries, including general industry, aviation, solar. They have automation projects going on both in that business as well as on the paint circulation side. They've got really good channel initiatives for expanding their channel. We've got engineering teams now located in the regions that are doing special projects for customers that lead to a, you know, more of a robust product plan. Overall, I think, we feel like things are in good shape there.
You throw in like e-mobility, battery production, we're trying to build our business in the packaging space and a really good powder equipment business, which has performed extremely well over the last couple of years, and they've got nice backlogs, heading into 2023. All of that really makes us feel pretty positive about what's going on in our industrial segment.
Great. Thanks for taking my questions.
Yep.
Thank you. One moment for your next question. Your next question comes from the line of Matt Summerville from D.A. Davidson.
Good morning. This is Will Jellison on for Matt Summerville today. I wanted to ask you, in addition to the facility expansion plans you've laid out for investing organically in the business, I was curious as to how you're thinking about investing inorganically in the business, and whether or not you have a pipeline that you believe is actionable at the moment, and what kinds of businesses you would be interested in adding to the Graco portfolio as part of that process.
Yeah, it's a good question. Thanks for asking it. I mean, for sure, we're trying to put every penny back into this business that we possibly can. You know, in good times and in bad, we're gonna keep investing in product development, upgrading our facilities, making capital investments that have good returns on investment associated with them. Everybody that follows the company knows that notwithstanding that, we still generate enough cash to be able to look at things like acquisitions. I would say that the teams over the last year have done a pretty good job of working with the corporate team in developing pipelines and looking at various applications, both within their existing markets as well as adjacencies where we think we can drive some value. For us, the value is really on the production side.
We've got great manufacturing on the engineering side. I think we bring some skills there. Of course, channel, sales, marketing, and the infrastructure that we have around the world. I feel really good about where we're at in the journey here. We kind of stepped things up last year. All the business units now have decent pipelines. There's activities going on. We'll see what happens. The market has been a bit frothy, as everyone knows, over the last 18 months or so. With rates coming up and multiples coming down, I think that could create some opportunities for Graco to help add some growth through, you know, good strategic acquisitions.
Yeah. I would just add to Mark's point that the corporate group has spent a lot of time with the operating teams and really has fleshed out attractive segments. From there, attractive what I would call prospect lists with an eye towards reaching out, perhaps building up a relationship, learning about their businesses before there's a day where there's an event. We've been in those situations before when we're in a reactive mode. That's not the greatest. As far as just without getting specific on applications, I would say that things that we like, markets that have characteristics we like, we like niche markets. We like markets that are business to business. We like markets that have large installed base because that puts long-term participants in extremely strong positions.
Of course, we like recurring revenue. There's no doubt about it, markets that will pay a supplier for quality and innovation is important to us because it's central to our value proposition.
That's great. Thank you for taking my question.
Thanks.
Thank you. One moment for your next question. Your next question comes from the line of Joe Ritchie from Goldman Sachs.
Thank you. Good morning, everyone.
Morning.
I just wanna make sure I understand the framework for the low single-digit guidance for 2023. I guess the expectation is, you know, pricing's gonna come in. You know, pretty much low single digits to volumes, maybe flat to down. Is that... Did I understand that correctly?
We didn't really break out price versus volume in our outlook, when you roll it all up, that's where you get the low single-digit guide. We do have a lot of built-in price realization in the, you know, in the outlook, because of course, we raised prices a couple of times last year and those as we kind of roll through 2023 versus 2022, there should be some favorability there. We didn't really, you know, break out volume in the overall outlook.
Okay. maybe just on the pricing comment, as you're exiting 2022, how much of that pricing carries forward into 2023?
Well, again, last year, we started the year, you know, let's call it ground zero. We'd had a big price increase that came through in January and then another one in the September timeframe. At least, you know, for the first nine months or so, you kind of get that double effect of those two price increases. Then as we get to September, you know, we should be on par with where we were at that time a year ago.
Yeah, when you age our backlog.
Okay.
The vast majority of our backlog reflects 22 pricing either in January or the interim adjustment we made at the middle of the year.
Got it. Yep, that makes sense. I guess maybe just focusing on the Contractor segment for a second. You know, this segment, it's really incredible the growth you've seen over the past several years. Yeah, it's almost shocking that it's almost 50% of your revenue base as of the end of last year. I guess you mentioned that the Pro is continuing to stay, you know, pretty healthy, the demand outlook, and there's been a divergence between the Pro and the home center. I guess just in your experience, is that, you know, is that typical that, you know, when you have cycles in that business, that there is divergent trends in what you're seeing on the Pro side versus the home center side?
Would you expect that to start to converge at some point if the demand outlook weakens?
I don't really, I don't really know. I mean, what I would tell you is that at least with regard to the home center over the last couple of years, it's been kind of crazy, right? With all the stimulus money and people working from home and, you know, hanging out at Home Depot, doing projects, that kind of a thing. It probably doesn't really line up with, you know, what we may have seen historically. You know, money was free for a long time, now money's not free anymore. I do believe that the consumer is gonna, you know, retrench a little bit, and that likely would show up on that side of the business.
On the pro side, again, our experience has always been that if they've got jobs and they got a pipeline and they're busy and they can see projects going out, they buy new equipment. You know, typically, if you're a painter and you buy a new sprayer and you're busy, you can pay for that thing like within 1 or 2 jobs. It's a really quick payback. Plus you get all the benefits of having a new tool and a new piece of equipment. It's sort of a confidence thing for them. With all the different, you know, projects and things that they get involved with, at least for now, you know, it appears to be on fairly good footing.
Got it. If I could sneak one last one in on Contractor.
Yep.
How do you think about norm-normalized margins for that business? Cause I remember a time when like the margins were in the low 20s and there was an opportunity for them to, you know, really expand as you mixed up your product, the products that are being sold, higher-priced sprayers. Like how do you guys think about normal margins for the Contractor segment over time?
Yeah. One thing I'd just point out is if you go back historically, it never had the protective coatings or the spray foam in their numbers, and those were, those are in our industrial business. It's a little bit hard to go back and compare. What I will say is we don't really have a target for our teams when it comes to, you know, margin increases and what we're trying to get to. I think that if the volume is there, and we can get a little bit of relief on the, on the price cost equation, which we've really not seen much in Contractor, that their margins, you know, can trend higher.
you know, a couple of years ago, somebody would probably have said, "Well, gosh, your industrial margins are so high, you know, where do you go from here?" If you look at what we did this year, I mean, we went from, you know, 33% operating margins last year to 36% this year, and we were at 37% in the fourth quarter. you know, we don't really put a lid on these things for our people. They get incentivized to, you know, grow the business both on the top line and the bottom line. you know, we find ways to do it.
Super helpful. Thank you.
Yep.
Thank you. To ask a question, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. One moment for our next question. Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets Inc.
Hey, good morning.
Yeah.
I think in the presentation. You said you've changed something in the presentation. I don't know if you clarified what is changing. I think you said you're changing from all growth in all markets and regions. Maybe just some clarification there.
Sure. We are taking out the quote with growth expected in all segments and regions and just leaving it to be, guidance of full year growth in the low single digit range on an organic constant currency basis.
does that imply that there's a geography or segment that you'd expect to be down?
It's just a overall comment. We couldn't really get. Like I said, we can't really fine-tune or micromanage where things are gonna come from, so we wanna make sure that we put that clarification in there. Unfortunately, that little note at the bottom was a carryover from the slide that we had published previously. It just didn't get modified. I wouldn't read too much into it.
Okay. Okay.
It's just a unfortunate clerical error, but we're still really confident in the overall guide of this low single digit for now.
Okay. Perfect. I think you've been mentioning, I think, pretty consistently, in process semiconductor and maybe this quarter. Can you just remind us what your focus is there? Then, you know, that market's been strong, but there's been a lot of CapEx cuts and worries around semi. Wondering if you're seeing any of those cracks. Just maybe even, you know, as we go longer term, how you think the CHIPS Act and some of the longer term growth kind of, you know, plays into that market.
Yeah, we like the business. It's been really strong for us. It's grown, I think, 10 times since we bought it, so there's certainly not much negative to say about it. There is still business happening there. Again, we make these high-purity components and pumps that go into the equipment that's used to actually manufacture chips. If they're putting in a new fab somewhere, you know, they're gonna need this equipment to go inside of the fab that's being built. You've got the, you know, the backlog that was created by all the business that's happened over the last, you know, couple of years. Now, as manufacturers are looking to move locations around the world, that creates opportunities for us to go in and sell them new high-purity equipment.
We bought some other businesses kind of around it that do, you know, things like heating and then some of the baths that are used to actually house the chemicals before they get pumped and put in. All in all, we like the space. We're in a nice niche, and you know, we feel pretty good about it.
I would just add that in terms of the capital investment spend, the big fab investments that you read about, and actually we've been reading about for a couple of years now, the ones in 2021 and 2022, they're gonna play out over the next couple, three years. There's some legs in this space because it's, let's say, longer cycle than the Graco average.
Okay, thanks.
Thank you. One moment for your next question. Your next question comes from the line of Thomas Johnson from Morgan Stanley.
Hi. Thanks. I just wanted to revert back to the Contractor segment here. I know in your comments you had noted limited Pro Paint product availability as a headwind in the EMEA business. It would just be helpful if we could get some incremental color on, you know, exactly how that headwind has impacted the business and maybe, you know, what you've seen in terms of improvement or easing availability there.
Yeah. I think the comment was about EMEA, as you said. You know, in the quarter, we were actually down. If you were to back out the Russia business that we had a year ago and currency, it was actually sort of a flat environment for us in Contractor EMEA. As you noted and we mentioned, part of that, we also believe it would have been a better quarter for us and a better year if we were able to get some of the more higher-end pro units over to Europe, at, you know, in a more timely manner. As you probably know, we've been battling electronic components and different aspects of the things that go into our higher-end sprayers throughout the year.
Our team over in EMEA, you know, believes that if we had better flow of those products, that they would have posted better numbers.
Great. That's very helpful. Just in terms of, you know, what you've seen from improvements in availability, and kind of, I know, you know, not looking for region level outlook, but obviously, you know, is it fair to assume that those headwinds on a year-over-year basis will be easing in 2023 for that business and region?
Yeah. I think we saw a pretty good improvement as we got through the back half of last year. We're still, you know, faced with some component shortages and things like electronics, but I would characterize it overall as we're in a better spot today than we would have been in the past.
Great. Thank you. That's all for me.
Yep. Thanks.
Thank you. One moment for our next question. Our next question comes from the line of Walt Liptak from Seaport Research.
Hey, good morning, guys.
Morning.
Thanks for the clarity about EMEA and the Contractor part of the business. I wonder if you could just talk maybe a little bit more generally about
About demand, you know, we've seen some macro data get a little bit better recently. You know, what's been your experience there on industrial and process?
I would say that if we're talking EMEA on the on the I'll call it macro data side, certainly the economic outlook picture for Germany, which is Europe's largest industrial market, I would say bodes maybe to call it a bright spot's an exaggeration, but is a you know, a favorable attribute. Our people on the ground in Europe indicate that we have had a milder winter than I guess than some people were projecting and which we've had in prior years, and that really helps.
The fact that energy prices have stabilized, and I think that also the work that the Europeans are doing around conservation, some new sources of natural gas, and even extensions of nuclear and coal, probably help people in our space quite a bit. In terms of natural gas prices, we're down about 50% from peak, our people tell us, and electric prices are down about 30%. Those are still at elevated levels, but a pretty dramatic change. I guess lastly, always an important market for Europe, automotives had a couple of tough years there, along with here in North America, but retail auto sales are improving as well.
Okay, great. You know, similarly, China looks like it's beginning to open up. ISM were a little bit better. Can you talk to us about just your exposure there? You know, is it mostly supply chain, or do you benefit from an improving economy?
Yeah, we should benefit in China from an improving economy. Hopefully, now that they're opening things up. I think they're still going through this COVID wave over there. But the people that we talk to, our team basically says things are getting better literally by the week. As they open up more, it should be more activity for us. Big part of that business is industrial. You know, all the factories that we serve, and obviously all the alternative energy stuff that we talked about with, you know, battery, solar, wind energy, all that, all those applications are, you know, are important for Graco along with automotive.
Hopefully, you know, always say this with a grain of salt, but hopefully, once we work our way through COVID in China, that should be some potential upside for the company.
Okay, great. Thank you.
Thank you. If there are no further questions, I will now turn the conference over to Mark Sheahan.
Okay. Thank you, everyone. In closing, I'd like to thank our employees, our suppliers, our distributor partners around the world, for their strong contributions in helping us post another record year at Graco. Yes, it's been a challenging year, but in true Graco fashion, we've been able to overcome the hurdles and deliver significant shareholder and customer value. While there are many things that contribute to our strong performance, it's really our loyal and hardworking employees that make this company great. That concludes today's call. Thanks for participating, and 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.