Q3 2020 Graco Inc Earnings Call

October 22, 2020

[music].

Good morning, and welcome to the third quarter conference call for Graco.

If you wish to access the replay for this call you may be so by dialing 18558592 056 within the United States or Canada the dial.

The Ballon number for international callers is 4045373 406.

The conference I'd number is 80 34616 <unk>.

A replay will be available through one P.M. Eastern time Wednesday October 28 2020.

Great Cool has additional information available in a Powerpoint slide presentation, which is available as part of the webcast player.

At the request with 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 factors, including those identified in item. One eight other companies 2019 annual report on form 10-K, and an item when any of the Companys. Most recent quarterly report on form 10-Q.

These reports are available on the company's website at Www Dot Graco dotcom.

End of <unk> website at Www <unk> as you see back to us.

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'll now turn the conference over to Kathy showing rock executive Vice President corporate controller.

Good morning, I'm here today, with Pat Mchale, and Mark She had our conference call flights have been posted on our website and provide additional information that may be helpful.

Sales totaled 439 million for the third quarter, an increase of 10% from the third quarter last year, and an increase of 9% consistent currency translation rate.

Acquisitions added one percentage point of growth in the quarter.

Net earnings totaled 114 million for the quarter or 66 cents per diluted share.

After adjusting for the impact of excess tax benefit.

On stock option exercises and other non recurring tax items net earnings totaled $102 million or 59 cents per diluted share.

The sale of the company UK Banff valve business Alco was finalized in July of 2020.

Impairment charges totaled 300000 in the quarter and 35.2 million year to date.

No additional impairment charges are expected from the sale.

Our gross margin rate was up slightly compared to the third quarter last year improved factory volumes.

Lower material cost a favorable impact of currency and realized pricing more than offset the unfavorable effect of product and channel mix.

Sales in the contractor segment increased wealth sales in the industrial and process segments declined.

Given the growth in certain products and the contractor segment, particularly products for the home Center channel factory capacity of strained.

We manage the increasing demand levels by investing in additional production lines moving employees from other factories, increasing contract labor and working overtime.

We are making progress towards meeting current demand levels and continue to monitor the situation closely.

Operating expenses in the quarter were comparable to the third quarter last year as reductions in volume and earnings based expenses offset higher product development costs.

The reported tax rate was 6% for the quarter down seven percentage points from last year on an adjusted basis the rate in the quarter was 16% as compared to 20% in the first half of 2020.

The decrease in the rate from the first half is due to the impact of lower foreign earnings and earnings in countries with lower tax rates than the U.S. rate.

Excluding the effect from excess tax benefits related to stock option exercises.

And other onetime items, our tax rate is expected to be 18% to 19% for both the fourth quarter and the full year.

Cash flow from operations totaled 263 million year to date as compared to 299 million last year, primarily due to lower operating earnings and increases in working capital.

Capital expenditures totaled 46 million year to date as we continue to invest in manufacturing capabilities as well as the expansion of several locations.

The full year 2020 capital expenditures are expected to be approximately 85 million.

Including approximately 50 million for facility expansion projects.

A few final comments looking forward to the rest of the year.

On page 11 of our slide deck, we know what our six week booking average due October 16th by segment.

I would point out that there is an inherent volatility in order rates reflect it in such a short period of time.

Nonetheless, we thought it would be helpful to provide current order rate data. So you can see what we are experiencing heading into the fourth quarter.

Similar to the last two quarters, our industrial and process businesses are still experiencing declines from a year ago, although less severe than they were in Q2, while our contractor business remains strong.

As the U.S. dollar continues to weaken the effect of currency translation will continue to be favorable.

At current rates the impact would have been negligible on sales and earnings for the full year and have a full have a favorable impact to the fourth quarter of approximately 2% on sales and 3% on earnings assuming the same mix of business of the prior year.

I will turn the call over to Pat now for further comments.

Thank you Gary good morning, everyone.

All my comments this morning will be on an organic constant currency basis.

Despite the unusual operating environment, we achieved record quarterly sales driven by the strength of the North American construction market in a gradually improving Asia Pacific region.

The contractor segment single handedly accounted for the company's sales growth for the quarter I wanted.

I want to thank our employees who've been working tirelessly to meet this unprecedented demand special thanks to the management shop floor and temporary employees, who have been working incredibly long hours along with all the employees from other grego factories, who relocated to the contractor factory to assist its been Gregg or Jim work on full display.

Contractor grew in all regions during the quarter as customers have responded favorably to our new product offerings residential construction activity has been solid and the home improvement market has been robust.

The industrial segment declined low single digits for the quarter, although improved from Q do business activity remains muted across most of our major end markets access to industrial facilities is limited factory demand in many industries remains well below last year and appetite for capital spending is constrained.

Some specific areas showing signs of life, such as spray foam electronics and battery aren't large enough to offset declines elsewhere.

Asia Pacific improved during the quarter, although is up against an easier comp from last year as you'll recall that industrial demand softened in the second half of 2019.

Where are you spending on travel some discretionary expense management, good factory performance and solid price realization.

Modeled it in improved industrial operating earnings for the quarter, despite the lower sales.

The process segment declined low teens for the quarter and for the year the man.

Demand in this segment varies significantly by end market with growth in our semiconductor and environmental businesses more than offset by declines in our diaphragm pump and lubrication businesses.

Well, it's difficult to predict near term economic conditions, we expect things to remain challenging for the short term.

As we've done throughout 2020 and through prior downturns, we intend to continue to fully execute against our strategies. We're full steam ahead on our new product development initiatives continue to make solid ROI capital investments in our factories are adding channel globally and are focused on finding profitable growth opportunities in attractive niche markets.

Whether organically or by acquisition.

Kept our workforce intact Ral is good and we expect to do well as economic conditions improve opera.

Operator, we're ready for questions.

Thank you good question and answer session will begin at this time to ask a question. Please press Star then one on your telephone to withdraw your question press the pound key to question.

The question will be taken in the order that is perceived please standby for your first question.

My first question comes from Deane Dray with RBC capital markets. Please state your question.

Thank you good morning, everyone for R&D and morning, Hey, just to start off with an observation that a great goes concentration of manufacturing purposefully in Minnesota as opposed to spread all over the globe like many of your manufacturing counterparts really gives you the option and the flexibility.

This quarter as you explained that you shifted employees around so I really like seeing that but here's the question. What's your take on the monthly the cadence of monthly slowing or is this your segment volatility or their comps issues because we've been seeing.

Hey, Hey, steady brought within industrials monthly improvement, but there's a bit of slowing in and your numbers here and well to get some context.

So I wouldn't read too much into it you know as we've talked about in the past, we have Ah variability even quarter to quarter in our industrial business as we got a fair number of projects that can influence the timing of.

Timing of sales and the timing of incoming orders I think it's more just reflective of the fact that you should be thinking that the industrial activity is still challenging and that going into the fourth quarter were not seeing the kind of a strong rebound in industrial Oh like we're seeing like we saw in our contractor business here in Q2.

That's helpful. Just on that point, what's your expectation of this contractor strength I mean, we're really obscene. This work from home work on home Mega trend, but just can you address the <unk> the sustainability.

Of this and then that the 2021 outlook in terms of new product introductions, how you're still gonna do your pricing increase typically you would get done on the first quarter, but some color there would be helpful. Thanks.

Yeah in terms of our own internal initiatives I think it's going to be business as usual in terms of pricing and cost control investments in our factories new product launches I'm. You know, we haven't went and got anything that's going to be an impact.

Be an impact on us in 2021, it's full speed ahead, so I don't see internally or any real changes there the external environment for contractor looks okay going into 2021, I'm, obviously were putting up really huge numbers right now and there's probably some influence on Oh pent up demand from that slowdown that we saw in that kind of April may time.

Frame, but it's hard to ascertain what the magnitude of that is and I think we feel pretty good about that external data points that we're seeing in terms of the construction market going into 2021, so hopefully that business is going to hang in there and I keep hearing us.

That's real helpful. Congrats to everyone.

Thanks.

Our next question comes from the line of Mike Halloran with Robert W. Baird and company. Please state your question.

Hi, Good morning, everyone why am I. So yeah. So couple of things here, one capex side, obviously, you guys did a pretty well timed in retrospect build out of the contractor.

Facilities, you know whats the plan from here you guys are running pretty full speed to hear you're doing a lot of maneuvering just to make sure you can meet that demand.

Is there incremental capex that needs to happen or is this we can float around for a while to get a better understanding with the core demand looks like throughout all the three segments.

So you know Capex is and I've done here on I'll call. It a a decentralized basis. So anybody that comes in with a good idea. That's gotten ROI is gonna get capex. So if we just say look machines and other factory investments are going to be more or less business as usual, perhaps a bit muted in some areas because demand is.

Slower and we just talk about bricks and mortar Oh, we do have a couple of projects that are teed up those are reflected in the capex spending outlook that Kathy gave for you, but given the size of the company and our expectations that we continue to grow I think adding some bricks and more on a fairly regular basis here and there around the world is going to be part of the program.

<unk>.

[noise]. So a clarification then from an earlier question the deal the industrial the industrial cadence through the quarter well I was assuming there's going be some pent up demand in the early part of the quarter that probably wash through later in the quarter is there is there a feeling internally there that you reach.

Some level of stability at about I mean, you still choppy month to month, but at least kind of within a band and then secondarily. How are you guys thinking about mix in the industrial segment on a forward basis.

And it feels to me like were not likely to return to the kind of numbers that we saw in Q2. However.

Ah you know, there's still a lot of people working from home and I think there's going to be less capital spending on the industrial side until all the engineers get back to work and things get back to normal. So I think our view is while we've probably seen the lows mom, it's not back yet and I think it's kind of undetermined when it is going to come back, especially given the fact that.

It the cobot increases in Europe are resulting in some more work from home kinda orders that are being implemented here. The last few weeks and in some of the geographies and that's maybe likely to continue here for a while.

And then the next question.

I don't see any major changes in the mix or Mike you know I think last year in Q4, we did have some project business that shift.

That we probably won't see again in Q4 of this year and so that that could have a obvious and impact on the on the top line as well as our profitability but.

But overall I think pads right.

What we're seeing in terms of incoming order rates and mix has been fairly consistent there.

For the last.

A few months.

Great well appreciate it very good execution guys. Thanks.

Our next question comes from Jeff Hammond with Keybanc. Please state your question.

Hey, good morning, good morning, Jeff.

Stuff just on contractor, maybe just speak on what you're hearing anecdotally I'm about the commercial contractor I know, there's a lot of concerns about kind of the nonres cycle and it seems like a lot of you know a lot of the drivers. This the stay at home and residential so.

Yeah, it's going to be interesting to see how this all plays out you know my view on it is is that the office space is probably going to be a pretty pretty dampen, particularly in the big cities going forward. However, a warehousing and other sorts of ER segments are looking really strong there's also.

Some talk about potential for conversion of some of the office buildings in somebody's Metro's into more housing units. So you know there's a dislocation happening here I think part of it is all going to depend on if there's a vaccine and how good is it and when is it I think that picture could look different if there was a.

Good vaccine early in the beginning of next year I think it could look different if there is uh huh.

Half baked vaccine. It's available later next year. So I think it's everybody's going to have to kind of watch and we're going to have to figure this out as we go.

Okay, and then can you just speak to what you're seeing in Asia. I know you know you were kind of seeing a a big slow slow down and and challenges around you know some of the trade tariffs and you know it seems like you're starting to see growth. There I don't know if it's just easy comps or if you're starting to see you know somewhere.

The man uptick.

Yeah, Jeff I'd say, it's definitely improved from what we were saying earlier in the year, you're right. We had a really fairly easy comparison in Q3 versus what we did last year. We were down you know close to 30% in Q3 last year. So it wasn't easier comp in the growth rates that we're seeing.

We're not seeing a hockey stick a bounce back here were really kind of seeing some underlying growth and improvement and we're hopeful that that will play out here for the rest of the year and put us in a a decent spot as we get into next year of course, all dependent upon whether future lockdowns happened that type of thing.

Okay. Thanks, a lot.

Our next question comes from Matt Summerville D.A. Davidson. Please state your question.

Oh, sorry, so just one for me here, maybe just a little bit more end market color on the industrial business. You mentioned a couple of the brighter spots. So I'm curious as to what end markets are still may be among the hardest hit what might be showing signs of an inflection and then maybe a little more specificity around what mark.

Did are driving that improvement, but Jeff was referencing with respect to Asia. Thank you Yeah, I'll make a couple of comments and I'll, let mark chime in I mean, obviously aerospace is a nice market for Greg goal and that's pretty much on its back automotive has been challenged and I think the rebound in automotive is going to depend on some other factors. So we're going to have to watch.

I can see how.

I'll quickly the automotive market to around the world can recover.

And oil and gas, while it's not directly in our industrial space definitely influences a lot of other industries and oil and gas is challenged right. Now. So those are some big ones that are certainly are negative when I kind of step back and look at the big picture on the general industrial side. It really seems like most of the market.

What's that are for us that are true in plan, if it's a factory and it's running it's not easy to get into they don't want visitors a lot of their technical staff may be working from home and I think some of that really needs to to clean up before we start testing new highs again, I'll, let mark chime in with any other end market comments he wants to make.

Yeah, I agree, 100%, but until we can get back into the the plants its going to be tough sledding for our industrial group and our process group, especially in the diaphragm pump side of that business. The markets that we called out we called out spray foam, obviously, that's more of a contractor based market.

So we are seeing some growth there we also called out a battery and some of that activity is happening in the Asia Pacific region were getting involved in some projects in and around that space. I think we mentioned that you know the growth that we're seeing though isn't isn't quite enough to offset some.

The declines that were experiencing and other parts of the business Asia overall as I said before is better but again, it's it's little growth, it's not rapid growth and hopefully that continues here for us throughout the rest of the year.

And then maybe just one quick follow up maybe speak to Actionability with respect to your M&A pipeline and if you've seen any change in valuations multiples et cetera in the last few months.

Yeah, I'll, just say that we need a couple of things to happen on the M&A side for.

For US one is that we have to find high quality businesses and right now I don't think we're really seeing a whole lot of that we've seen a few that are more fixer uppers and maybe a couple that are benefiting from the pandemic, which may not be sustainable so.

And then secondly, we are very disappointed we need to see pricing that rewards our shareholders and with this depressed interest rate environment that we have and you know low taxes and things like that it's really driven valuations up into his own a refined it pretty difficult to generate the kinds of returns that we like to see.

For example, when we invest in our factories, we feel very confident that we're going to get good rates of return on those investments or if we invest in our.

Product development projects, we also feel like we're gonna get good rates of return on those projects and we still believe that our investors are of the mindset that they want us to deploy capital smartly and I don't really see that changing going forward here. So, let's let's hope that maybe.

Those dynamics move in our favor, but for right now it's pretty tough.

Got it thank you guys.

Our next question comes from sleep or the tea with Jefferies. Please state your question.

Good morning, congratulations on the quarter Bryan good morning out there.

Fixed leak average booking my for process down, 30% I believe that.

Hi, slightly positive results and I told her she used to provide some color on the end markets geographies that are driving this improvement do you think this is sustainable.

Yeah, you know again, it's a little bit like our industrial business. It can a six week run rate is I would say an indicator, but it's certainly not a predictor in any fashion and what we've seen is we've seen some of the end markets are for.

For example are a white Knight semiconductor business has been doing well, we've got our environmental business has been showing some growth and we see opportunities on the sanitary side.

Production is still strong there.

The real industrial oil and gas side classic process business, along with our lubrication equipment, which focuses heavily on things like mining and oil and gas in a car dealerships Oh, that's pretty depressed. So it's a little tough to sort out not as I mentioned, it's a mixed bag and we do have growing businesses and.

There and then we have some that are in some really challenging environments. So we'd like to see an overall improvement in the in the economy so that.

The girls stories that we have are washed out by the negatives.

Thank you and then just back on contract you're obviously, let you make any chance. It could you touch on how we should think about the comp for next year. You know would you expect sales to decline in the back half of 21, excluding the extra week well.

Well, we never expect sales to decline to go on the last guy that you're gonna get sitting here in October saying that I'd expect in a sales decline in the last half of next year. We've got a active group up there, they're very strong and product development. We've got a strong channel and we have growth opportunities outside North America.

And going into 2021 looks pretty decent for us. So I'm, hoping that were going to put up a another w. in the column for a contractor for next year.

Great. Thank you so much.

Our next question comes from Brian Blair with Oppenheimer. Please state your question.

Thanks, Good morning, everyone morning, right.

No Pat you mentioned for a while that the team has banked on a return to more normalized 1.5 million housing starts are obviously year.

Ah, Yes, obviously years of some of the lower build rates I'm, just curious how the pandemic and its impact on suburban sprawl affects your views were Robby.

Well, obviously approaching that level now and the end demand seems to be quite robust.

Yeah, I don't really believe that that in the short term here the pandemic as a influenced or the.

Auction market to the extent that it's changed People's.

The amount of paint sprayers people are buying I think really it's that's more of a question what happens over the course of the next 234 years.

And does this suppose an exodus to the suburbs really materialize and then they have to get land and they have got to get all that kind of stuff approved and roads and then the contractors had to start building. So I think that's more of a forward gas or bad that people are gonna make and again I'm still in a wait and see mode.

Because I think that if things are resolved quickly the world might go back to normal faster than people think and if they drag on some of these changes that we have could.

Potentially go on ER and become permanent changes to society. So so I don't know, we're not going to right.

We're not going to change our strategy right now for either way, we're launching new products and what's going to happen with that whole part.

Part of the World is I think a big question Mark.

Okay I appreciate the color.

And Mark given the surgeon contractor demand how close is the amount of business to requiring meaningful brick and motor Capex I mentioned the team's thankful for the recent expansion that youve been blessed.

Well, we're in great shape and contractor that factory is up and running and we're glad that we made the investment last year gave us the space that we needed and in hindsight were probably a little bit Lucky that we did when we did it to be honest with you, but we feel really good about capacity up there right now.

Okay excellent and one kind of clarification point with LCOE out of the portfolio. What's your remaining exposure to the oil and gas at least on a direct basis I think it was only four or 5% of sales previously it's pretty.

Yeah, it's pretty small I mean, we got a little bit of exposure in our industrial business, where we're putting protective coatings on pipelines and we get involved in offshore oil rigs and those types of things and then we also have and internal initiatives going on here.

Initiatives going on here, we have developed a line of products.

Our you know designed to go into that that market do it's pretty small and then we had acquired a business a while back called high pressure equipment in Erie, Pennsylvania, and they also sell some high pressure valves into oil and gas, but our exposure is pretty pretty miniscule now at this point.

Yeah, I would say that when oil and gas is busy a lots of other businesses get busy and there's a pretty nice trickle down effect, but then that's indirect and it's it's hard to measure but over the years definitely we we benefit from a strong mining and oil and gas market.

Okay understood. Thanks again.

Our next question comes from Walter Liptak with Seaport. Please state your question.

Hi, Thanks, Good morning, guys Martin and good morning.

What did you ask about the [noise] the quickly market and you know some of the miles driven it's come back so I kind of thought maybe.

Maybe you might start to see some moves quickly spending you know what are you hearing from those customers is there a project funnel, we're replacing them.

Or any new store openings.

Yeah, so that the I'll say the project list is looking a little bit better as we look forward. It's I think we're not going to be getting worse from this point on but there's still I think I had this hesitancy to make capex investments in that space right now and until I actually see the orders coming in the door I'm not going to get overly excited by a alone.

A bit better I would say quote list, but.

If you want to look at it from an optimistic standpoint, our our quoting looks a little bit stronger than it has and so maybe we'll see some recovery there.

Okay, great and on the industrial and if I'm not mistaken with industrial.

You guys, so quite a bit to kind of distribution wraps and engineering rep groups.

And is that where the issue is with where they're having trouble getting out and working with engineers and it gets down to the factory floor can you know even an industrial there should be a nice ROI, you know, replacing equipment that the new products.

It would you guys be able to get in or is that the the rep groups was there something that you can do to get there were groups you know back out into those plants to push to get back in yeah. So we generally in industrial we sell not direct we do have some segments that we sell direct but we don't really use rep groups, our industrial their own.

On salespeople and then they manage your territory and they set up in a managed the distribution channel and then we make a lot of joint sales calls with our distributor partners. So we do have some opportunity to try to influence to make sure that our distributors are getting out there and pounding the pavement and doing the job and trying to get in where they can get in but you know frankly, our factories aren't any different.

Factories here our factory employees are not interested in having anybody come in and lets the absolutely need to be here I'm, having somebody command and that having an exposure event and then having 15 people out because they got there on quarantine would be really negative up, particularly when you think about our factories that are busy and so our customers.

There's really aren't any different and so the opportunity to come in and sell them, a new product or upgraded product Dora something that's got an ROI is really dampened in an environment, where we can't make proactive calls not when they need us they call us and we get in and our distributors do make milk runs and there's certainly there are some customers that are allow.

Joining us in the door as you can see by the fact that our industrial business isn't terrible, but it's really not a great environment. We have been spending a fair amount of time trying to find other ways to effectively reach our industrial.

Customers are using social media using the internet using email campaigns using the web to try to make sure that you know to the extent that we can we get our message on a cost savings projects and quality improvements that they could consider in front of them, but it it isn't a great environment, then I'm, we can't totally fix it we can influence we.

Can't fix it.

Okay got it thanks, and then just a follow up on the Capex I just want to make sure I understand that so it sounds like about 35 million of Oh maintenance, Capex 50 million incremental and that's going into the machine and bricks and mortars right right yeah.

Yeah, that's I mean, it's about right. We're looking to finish the year around 85 million and total Capex and we do have some.

Projects brick and mortar here in the back half of 2020 that will be will be funny that will be a big chunk of the increase from what you've seen here year to date.

Okay, all right and what are you thinking about for Capex next year.

I don't know that we're at a spot yet where I feel good about giving you a number but we'll definitely fine tune that and get something out here by.

Time, we report after after Q4.

Okay, Alright, great. Thank you yep.

Once again, ladies gentlemen, if you wish to ask a question at this time. Please press Star then why don't you touched on telephone.

Our next question comes from Joe Ritchie with Goldman Sachs. Please state your question.

Thank you good morning, everybody or good morning.

Hey, Pat maybe just kind of following up on that point regarding access to sites on the industrial side did that change at all throughout the quarter. You know, we've obviously had a had a little bit more of a surge here with with cobot cases, I'm just wondering if if as things got worse.

That that impacted your sales at all intra quarter.

Ah you know so the surge that we've seen here like let's say the last three or four weeks I can't say that I've seen a change I did we did see definitely a positive change coming out of Q2 for a while there nothing was happening.

And so that really reverse itself over the course of the summer and now some things are happening I haven't seen it regress backwards at this point or however, you know there's news stories everyday and we've got a states and countries that are taken further actions. So I guess its a.

TBD.

Got it Okay. Now that's that's that's helpful and I think maybe just following back up on on contractor you know it is interesting and I know you guys could talk a little bit about your capacity being strained and how how strong things were this quarter, but but yeah, notably look your incremental margin for really.

The strong and so you're able to offset yeah, what I would imagine was higher cost this quarter I guess I don't how should we be thinking about that going forward from a from a margin perspective, you know what was or was there potentially some negative.

Negative headlines because of the increased cost this quarter and then and secondly are we through really kind of like the capacity issues on contractor and I know that a good issue to have.

Well I'll take a shot and then I'll, let mark weigh in as well first on the contractor side, we are still busy and we're still trying to dig out the team up there is still working really hard. So we've still got some work to do where we're sitting here today in October we're definitely not I'm out of the woods yet in terms of you know.

You know the Graco model as is high incremental margins and high decremental margins and when we get volume in a factory or a business unit generally we perform and when we don't get volume then generally it's challenging and we're not out there cutting headcount because.

Because we're going to have a bad quarter, a bad year, so our costs tend to be more fixed.

One of the Squirrely things of course that we're dealing with here in 2020 is the fact that with a wide variation in business unit performance and what the big drop in Q2 or the variable expenses around travel around incentive programs and around distributor rebates are fluctuating wildly compared.

Well what would happen in a normal year and of course in some cases that helps us on the expense side of course when business comes back on those are going to come back to so yeah, we got a little bit of a bumpy patch that we're going to have to work through here on the variable expense side, but the basic model of Graco awareness you. If we get revenue we make me.

Funny and we make good money, that's intact and really none of our.

None of our dynamics around that have changed.

Yeah, I would just say that I agree with that and obviously in Q3 here we had.

We had a huge ramp up in revenue and we still have a lot of our sales people that are working from home and not able to get into different areas and we are traveling we are going to trade shows we're not spending as much money airfares way down so the margin rates that you see in the contractor in Q3 are really good they're strong in a more.

Normalized environment, where we're trying to grow the business within.

Within our organic growth target, which is somewhere in that 5% to 7% range. You got people on the road you got doing trade shows demos, yeah, we're spending more money to try to support that type of a girl. So I wouldn't be surprised to see spending tick up as we get back into a normal environment, but you know we should still be able to drive.

Decent profitability in that business.

Got it appreciate the color. Thank you all yep.

Our next question comes from Andrew Buscaglia with Banbury. Please state your question.

Hey, guys and sticking with the contractor side.

So.

Your margins are really high exiting 2020, how much of it really is a function of that I mean do you have to believe that the do it yourself homeowner demand continues for you to maintain those level of margins like I wonder how much of it is a product pricing thing versus just costs too.

Well I think the demand has been has been grade right and of course were.

We don't have great visibility on how long, it's going to last I think Pat talked about that but the macros are still pretty good in the space. I mean housing starts are decent permits are up and that million and a half range interest rates are you know the best I've ever seen in history or the inventory of homes.

As as low you got 72 million millennials that are hitting the market looking for housing. So we feel good about where we're positioned there and I think the market itself is going to remain pretty healthy for us on the on the margin side you know of course, if we start to experience pressure.

Sure on the top line that that could squeeze the margins a little bit. So we're hopeful that it runs for a while and we continue to drive top line growth in that business and and I think that we have a decent chance of doing that.

Yeah Okay.

And you know comparing the industrial in the process segment.

Sort of the cycles interesting.

And that the sub segments.

Okay are they all have somewhat different driver. So you are looking out.

Yeah.

Within process, you have some pretty interesting more like sort of cyclical juice with some of the shorter cycle areas, but in any got less oil exposure now, but do you see do you see industrial or process at the ER segment, that's going to ramp harder if we do see some momentum in some of these industrial indices.

Hitters.

I'd be surprised if they didn't both goal that would be my view I'd be it would be surprising if one came back strong and the other one didnt. So I've just given the fact that we sell across so many different end markets really out of both of those segments. You know we make products that can be used in many different applications in many different industries.

I think when things get good again, they're both going to be good.

And what and you commented on oil before about indirect oil exposure would you say equally.

Helps or hurts bull equally or is one more little bit tied to.

That you know indirect boy that's <unk>, that's hard for me to gas I mean, if you just off the top of my head I would say probably heard them equally both maybe it hurt process a little bit more.

Okay.

Thanks, guys.

Our next question comes from Brett County, It's good that we fund please state your question.

Hi, guys. Good morning, Thanks for taking my question good morning.

I just wanted to do that's what you're hearing from some of your channel partners and end users on the Santa spray line you rolled out earlier this year and whether that product is now available in old year geography.

Yeah. So we have that available in most geographies now Oh, there's probably a still a few overseas locations that are still waiting to get us some product shipped on but generally speaking that's available around the world that's been a successful product for us.

Outperformance standpoint, it's been good.

I really haven't had any kind of Ah, it's quality surprises or.

Performance surprises what the products. So we're happy with it it'd be nice if it's a long term new product opportunity for Ragle Ah, but I guess that that also is a question mark I it could be or it could fizzle out if we get a good vaccine and people stop.

Sanitizing and cleaning so we're gonna ride that horse, while we can see how far it goes.

Great. Thanks, so much.

Thank you as there are no further questions I will now turn the conference over to Pat Mchale.

All right. Thank you everyone for your time. This morning, and are we going to get back to work and then we'll talk to you in a few months.

This concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.

[music].

Good morning, and welcome to the third quarter Conference call for Graco, Inc. If you wish.

If you wish to access the replay for this call you may be filled by dialing 18558592, 056 within the United States or Canada.

The dial in number for international callers, it's for the all 45373 406.

The conference I'd number is 8334616 a week.

A replay will be available for one P.M. eastern time by State October 28 2020.

Michael 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 factors, including those identified in item. One eight other companies 2019, and all reports on form 10-K, and I don't want any of the Companys. Most recent quarterly report on form 10-Q.

These reports are available on the company's website at Www Dot Graco Dot com and the SBC website at Www <unk> S. You see back up.

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 will feature events.

I'll now turn the conference over to Kathy showing rock executive Vice President corporate controller.

Good morning, I'm here today, with Pat Mchale, and Mark She had our conference call slides have been posted on our website and provide additional information that may be helpful.

Sales totaled 439 million for the third quarter, an increase of 10% from the third quarter last year, and an increase of 9% at constant currency translation right.

Acquisitions added one percentage point of growth in the quarter.

Net earnings totaled 114 million for the quarter or 66 cents per diluted share.

After adjusting for the impact of excess tax benefit.

From stock option exercises and other non recurring tax item that earnings totaled 102 million or 59 cents per diluted share.

The sale of the company you keep it bounces off the OCO was finalized in July of 2020.

Impairment charges totaled 300000 in the quarter and 35.2 million year to date.

No additional impairment charges are expected from the sale.

Our gross margin rate was up slightly compared to the third quarter last year.

Improved factory volumes lower.

Lower material cost a favorable impact of currency and realized pricing more than offset the unfavorable effect of product and channel mix.

Sales in the contractor segment increased wealth sales in the industrial and process segments declined.

Given the growth in certain products and the contractor segment, particularly products for the home Center channel factory capacity constraint.

We manage the increasing demand levels by investing in additional production lines moving employees from other factories and.

Increasing contract labor and working overtime, we are made.