Q3 2021 Graco Inc Earnings Call

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

Great coach Inc. If you wish to access the replay for this call you may do so by dialing 18558592056 within the United States or Canada.

All in number for international callers is 4045373406 the conference I'd number is 90 518593.

A replay.

<unk> will be available through two P. M. Eastern time Thursday October 28 2021.

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.

By management about their expectations plans and prospects for the future. These.

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 one a of the company.

Company's 2020 annual report on Form 10-K, and in item <unk> of the company's most recent quarterly report on Form 10-Q.

Reports are available on the company's website at Www Dot Graco Dot com and the SEC's website at Www Dot S E C Dot Gov.

Looking statements reflect management's current.

Meats and speak only as of time they are paid.

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 Kathy show on Rock Executive Vice President corporate controller.

Good morning, everyone I'm here this morning, with Mark Sheahan, and David though I will provide a brief.

Overview of our quarterly results before turning the call over to Mark for additional discussion.

Our conference call slides and our third quarter Form 10-Q are on our website and provide additional information that you may find helpful.

Yesterday, Graco reported third quarter sales of $487 million, an increase of 11% from the.

The third quarter of last year.

The effect of currency translation added two percentage points of growth or approximately $6 million in the quarter.

Reported net earnings were $104 million for the third quarter or <unk> 59 per diluted share.

After adjusting for the impact of excess tax benefits from stock option.

Exercises and certain nonrecurring tax adjustments net earnings were $100 million or <unk> 57 per diluted share.

Gross margin was down 110 basis points from the third quarter of last year as the favorable effect from realized pricing increased factory volume and currency translation.

Were not enough to offset the unfavorable gross margin rate impact of higher product costs.

These higher product costs, such as material labor and freight decreased our gross profit by $14 million in the quarter.

With $10 million of this impacting the contractor segment.

At.

<unk> costs and volumes, we estimate that on a dollar basis realized price and increased factory volumes will offset higher product costs for the full year.

However, these costs will continue to be decremental to the gross margin rate.

Supply chain constraints, such as logistics capacity and component availability.

<unk> also had an unfavorable impact on our factory's ability to deliver in the quarter and will likely persist for the remainder of the year.

These challenges were predominantly felt in the contractor segment as this is our highest volume business.

Operating expenses increased 20 million.

Or 19% in the quarter.

Sales and volume based expenses increased 9 million, new product spending increased $2 million and changes in currency translation rates increased operating expense by $1 million in the third quarter.

The adjusted tax rate for the quarter was 18%.

Cash flows from operations are $357 million for the year compared to $263 million last year.

This increase is due to the improvement in earnings partially offset by increases in working capital that reflect the growth in business activity.

Significant uses of cash or dividend payments.

Of 95 million and capital expenditures of $83 million, including 33 million for facility expansion projects.

A few comments as we look forward to the fourth quarter.

Subsequent to the end of the third quarter Graco entered into an agreement in which approximately $63 million of pension obligation.

Obligations were transferred to an insurance company through the purchase of an annuity contract.

Annuity contract purchase will be funded with existing plan assets.

This arrangement is part of the company's effort to reduce the overall size and volatility of its pension plan obligations.

We expect to recognize.

<unk> is a noncash pre tax pension settlement charge of approximately $12 million in other non operating expense in the fourth quarter.

Based on current exchange rates, the full year favorable effect of currency translation is estimated to be 2% on sales and 4% on earnings with the most significant impact.

Having occurred in the first half of the year.

Also for the remainder of 2021, we.

We expect unallocated corporate expense to be approximately $26 million to $28 million.

The decrease from prior estimates is due to lower stock compensation expense for the year.

Our full year adjusted tax rate is expected.

Just to be 18% to 19%.

Capital expenditures are estimated to be $150 million, including $80 million for facility expansion projects.

Finally, 2021 will be a 53 week year with the extra week occurring in the fourth quarter.

I'll turn the call over to Mark now for further segment and regional.

I've got Dan.

Thank you Kathy and good morning, everyone.

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

Sales in the third quarter grew high single digits, driven by the continued recovery in both our industrial and process segments.

Contractor in North America.

<unk> difficult comparisons from last year's record third quarter.

Contractor demand was solid in Europe, and Asia with double digit gains in both regions.

Heading into the fourth quarter business remains robust.

For the first three weeks of October our global orders continued to outpace billings and all.

<unk> had these segments.

Normally we don't talk about backlog since most of our business is book and ship How's.

However, given the current environment, which is rife with component shortages and logistical disruptions backlogs are worth mentioning.

At the end of the third quarter, our consolidated backlog was.

Approximately $280 million, which is $25 million higher than what it was at the end of the second quarter and $121 million higher than our backlog at the end of last year.

Orders are abundant.

However, our biggest challenge is getting the materials and component.

Components, we need and then navigating the logistical challenges inherent in today's environment.

We expect conditions to remain this way for a while and there is nothing unique to what graco is experiencing when it comes to these issues.

One more thing before commenting on our segments.

As anticipated.

Planned pricing actions in 2022 will be enough to fully offset current cost pressures.

Our annual pricing cadence has been appreciated by our channel partners and has tangible commercial value in the marketplace.

Now turning to some commentary on our segments.

I'll start with contractor equipment.

The residential construction and home improvement markets remained strong globally.

On a dollar basis incoming order rates have been relatively stable and overall demand has exceeded our expectations given the surge that we experienced last year.

Contractor backlogs.

<unk> are elevated at $46 million, which is up $6 million from June and up $22 million from the same time last year.

The overall pace of business, including out the door sales is robust.

The industrial segment grew at high teens for the quarter with year to date.

Exceeding previous high set in 2018.

We experienced broad based growth in all major end markets and reportable regions, which is a nice bounce back from what we faced a year ago.

Consistent with our other businesses the biggest challenge in this segment is getting product.

Sales door.

And user demand is very strong and we anticipate this to continue for the balance of the year.

Process segment sales grew 21% for the quarter.

With year to date sales exceeding previous high set in 2019.

Similar to industrial broad based growth.

<unk> continues in all major end markets and reportable regions.

The recovery of both our lubrication and process pump businesses drove sales and earnings growth for the quarter in the segment.

Moving to our outlook.

With demand persisting, we confirm our full year outlook of mid to high teen.

<unk> <unk> revenue growth on a constant currency basis for the full year of 2021.

While we expect continued headwinds from raw material costs logistics component availability in the fourth quarter. We believe we are positioned to deliver a record year.

In closing I'd like to thank all of our employees.

<unk> suppliers and distributor partners, who continue to work hard keeping up with customer demand in this challenging operating environment.

<unk>, we're ready for questions.

Thank you the question and answer session will begin at this time to ask a question you will need to press star.

Org telephone to withdraw your question press the pound key.

To your question will be taken in the order that is received please standby for your first question.

Our first question comes from <unk> <unk> with Jefferies.

Please state your question.

Hi, good morning.

<unk> zero I guess can you just talk about what you saw in contractor through the quarter from a demand perspective, just given the significant drop in August and was there anything outside of the tough Comparables and how should we think about demand going forward given the 8% bookings.

Yes, I think we were.

Favorably pleased with how the order cadence came in throughout the quarter of course, we haven't put up huge numbers last year. So there was a concern that maybe we'd see a drop off but.

You always have some weekly volatility here and there but overall.

Their rates throughout the quarter on a weekly basis, where we're actually pretty consistent.

And like I said in the opening remarks at least so far it's a really short data point, but over the last three weeks in October here, our order rates are actually exceeding our ability to get product out the door. So I think things have.

Remained on pretty solid footing in contractor.

And at this.

Just sticking with contractor there is pretty.

Hey, Steve Chapman Americans with higher costs and expenses.

This is higher cost headwind continue into the fourth quarter, how do we think about margins going into 2022, given the expected increase in pricing that youll be taking.

Yes, so the biggest business we have is contracts.

And a lot of the components and input that we have things that we are getting pressure on steel motors electronics those types of components really go into a lot of our product there. So they they had an outsized proportion of the overall negative impact that we saw in Q3 and I think our expectation.

Track Thats going to continue here in Q4, we haven't really seen any kind of a change in terms of what we're getting from cost pressures and all of those different categories. So I think it's going to be with us here for a while of course, we do implement our pricing in early 2022, and we think that the actions.

Is that in place will be enough.

That.

The pressures that we're currently experiencing here today.

Should we think about overall pricing in place now.

<unk> has been one and half to 2% above what youre seeing from a cost perspective.

Not really going to flag, what the pricing is going to be right.

That because we haven't really gone out and communicated it to our channel partners, yet, but I think they all are expecting that we're going to be.

Pushing more pricing than what we've done historically on an absolute basis and of course, we we hope to realize some of that into our P&L as well like we usually do.

Perfect. Thanks for taking my questions.

Yep.

Our next question comes from Andrew Buscaglia with Sandburg.

Please proceed with your question.

Hey, guys. Thanks for taking my question.

Hey, good morning.

So.

And Mark in your contractor.

Tractor segment obviously.

Margins.

Struggled in the quarter.

I'm trying to get a sense when it comes to pricing I know it sounds like you're going to ask you.

It sounds like you're all set and especially as the rate next year as well but.

At what point do your customers.

At what point do you run into a wall.

Where you can't necessarily raise prices, where you're starting to get some pushback from those customers.

Well I guess theoretically at some point that could happen, but really all we're doing is we're more or less trading dollars with the costs that we're seeing and having those go through into our product cost and I think most people.

In today's environment are experiencing that in virtually everything that they purchase whether it's paint sprayer at home depot or a dishwasher.

I think that the.

Environment is such that people expect it nobody really likes it but it's the way we are we have some things going.

For us that that are helpful. We have a strong brand.

We have the best quality products, we do the best job taking care of the customer when it comes to technical service support warranty all the things that they need to do an effective job with our equipment. So I think from our standpoint, we feel like.

People are positioned well to be able to get our price increases across the across the line.

Can I add something Charles this is David Lowe.

I've been involved in <unk>.

Annual price adjustments at Graco for.

Quite a few years longer than I care to admit and.

I think.

We are really touched on the fact that we're approaching the especially challenging characteristics that we've been seeing in the market. This year.

With a lot of a lot of care and we've done a number of deep dives on product costs.

And really trying.

To balance the points that you are talking about as we understand there is a market and.

There is some price elasticity at some point.

The challenge in CEB relates to both the volumes of stuff they buy which is typically a lot greater than the other divisions.

<unk>.

It also relates to a lot of products that are more commonly used in the industrial marketplace Motors.

<unk> tires carts things like that that there is a broader market. So we're trying to with care with some deeper analysis.

It is.

Make sure that we.

Do a fair job of recapturing some of the costs that are currently penalizing us, but still makes sense to an end user customer that's making a decision at the point of sale.

Okay got it thats helpful.

Alex maybe.

One other one on along the lines of margins.

So contractor I get the dynamics there.

This volume business.

We're surprised.

While industrial and process kind of hung in there so what.

I guess, what gives you confidence you can maintain those margins or what are the dynamics going.

On an industrial where you think.

That.

Strong margin performance continue.

Well they got the same input cost pressures that the other businesses have but they just don't have as much volume and of course, the component mix and other things are a little bit different there.

Well so I.

I think what you've seen what you see in this market right here.

Nothing that we'd be comfortable.

Saying that we kind of expect to continue to be seeing similar things in the future at least in the near term future of.

Of course, the wildcard here is <unk>.

None of US really has a good crystal ball when it comes.

What these input costs are going to do over the next nine to 12 months or something like that but as we sit here today I feel pretty good about where we're at.

Alright, Thank you guys.

Yep.

Thank you. Our next question comes from Ritchie with Goldman Sachs. Please proceed with your question.

Hi, Thanks, good morning, everybody.

So maybe just touching on this whole like price cost equation and for how long the current environment kind of impact your results I guess.

As you kind of think about it I would imagine that this quarter you were negative from a price cost standpoint, probably.

Cause you to be negative in <unk> I guess, how quickly do you think you can put through I guess pricing in the early part of next year such that the equation turns positive for you.

Well I'll make a couple of comments and I'll, let Cathy talk more about the details in terms of how things shook out in the quarter from a price cost standpoint, but my view.

Blake is that.

When it comes to pricing, we like to play the long game.

And we think that our approach of putting prices through on an annual basis really goes over very well in the marketplace with our customers and our distributors. So you can have periods of time, where we're in right now where maybe are not as far.

Do you have as you'd like to be but in the end, we get our pricing and if you're a long term shareholder in a long term investor in Graco things will things will shake out in the long run and again I think it has a lot of benefit in the in the markets that we're in but I'll, let Cathy talk a little bit more about what we actually saw in the quarter when it comes to price cost.

I think when we look at price cost in the quarter. If we look at you know.

What we realized in price along with the favorable volumes that we had mainly across the industrial and process.

Factories.

If that offset on a dollar basis.

In the quarter it was.

Pretty neutral, but it was decremental to our over gross overall gross margin rate in the quarter and that we project.

We'll continue.

Into the fourth quarter.

Okay helpful and I guess since maybe maybe Kathy on contractor.

Sure.

<unk> called out the 600 basis point impact from product cost and channel mix.

Imagine that the negative price cost situation is sitting in that in that number.

When I think about who you are selling into and selling into big box B a.

A little.

It's more difficult customers I guess like is it reasonable to think that you're going to be able to go price cost positive in sometime in 2022 and contractor.

So your comment your question upfront on the decline I think is accurate that a lot of that was.

The pricing cost pressures that we're talking about in <unk> for Q3, when it comes to how we're going to do at the home centers or our Big channel partners in pricing and can we get it to stick and get it realize I would just.

Tell you to look at our history.

And we have been able to do that historically I don't think anything's really changed.

<unk>.

Conversations happen all the time.

We have good partners they understand we give them facts.

And they are generally reasonable in those discussions that we have.

Okay.

Great maybe one one quick question also on.

Does do the demand environment, there's a lot of discussion right now around making sure you have enough inventory on hand.

Maybe maybe over ordering in the near term.

Try to meet demand levels can you maybe just talk about what you guys are doing to make sure you.

<unk> got your inventory levels, where they.

This study to try to keep up with the what seems to be a pretty robust backup backdrop.

Yes, we've been doing everything we can for quite a while we've been very aggressive in buying some of the components that we knew were going to be problematic in some cases, we got ahead of the curve.

But in other cases, where we really didn't see.

The huge increases in demand coming we probably were a little bit behind where we would normally like to be but obviously we've got.

Our balance sheet, that's unlevered and we have a lot of cash to deploy so inventory and purchasing it and making good decisions about what we buy and having enough.

Need to beat has never really been a problem for us.

Our biggest issue really is that when you think about Greg or we've got I don't know 60, or 80000, Skus and among those skus, we got multiple components and parts that make up each one of them and all you need is a little fire on one of those components and all of a sudden everything.

<unk> had slowed down in the and delayed so our teams are working really hard a lot of confidence in our purchasing group at our manufacturing group that they are prioritizing appropriately.

<unk> is pretty tough right now I don't know David if you have anything else you'd like to add yes, I think that.

We are.

Willing.

Everything historically and even in this environment willing to invest a bit aggressively in.

Certain categories of inventory, including the mythical Golden screw that you have to have.

General comment, but especially true in our industrial and process markets that there isn't really a great deal of stocking going on at the channel.

And I would say over any.

Reasonable short to intermediate term wholesale equals retail.

And so we know that.

<unk>.

When a distributor puts an order of any substance.

Especially for units on Graco.

They've made a commitment they need to get products into the market for a real real need on the part of an end user and we think that is.

We think that.

Thats, an important part of our value proposition and I think it's one of the reasons why the partnership that Mark alluded to with the channel partners.

Overall very strong in a blasted over a long time.

Our delivery levels of slipped I would say by historical standards.

Out of them, but.

What our channel tells us formally and informally.

We are doing as well or better than other partners that they work with that round out their line card.

Very helpful. Thank you.

Thank you. Our next question comes from Matt <unk> with D. A Davidson. Please proceed with your question.

Quick question just.

Back to pricing, assuming what youre going to go out with in 'twenty two is going to be.

Materially or meaningfully above trend line would you expect that.

Any sort of pre buy on the part of your customers given the magnitude may be a bit unprecedented at least relative to what you've had to go out with historically and in that question I guess I'm leaning more towards the contractor business as opposed to the other two segments.

Yes. Good question, it's something we've talked about internally.

We've got the radar up we start to know what people order on a normal basis.

We will make sure that we flag it with a distributor if there if they look like they're doing something like that in and of course with our large retail partners I think right now all they really care about is us getting product out the door.

And I don't think they're really playing any games on on pricing.

I don't think that they will either.

They are they're good partners and we have open communication with them.

I'm sure there'll be things that pop up but I think we can handle them.

And then just with respect to the impact from material.

Shortages overall in the third quarter have you been able to frame up how much revenue was may be missed for lack of a better word or slipped into a future period because of the general inability and again. This isn't just a great thing, obviously, but the general and the ability to just get product in the door. So you could actually get it out the door.

Material really hard it's really hard to know I mean, we haven't had anybody cancel orders. So I guess I'd go back to the backlog and just look at it.

$120 million of additional backlog this year over where we were at the beginning of the year and all of that really is.

The vast majority of that is due to the fact that we are having.

Having trouble getting product out the door. So it's a big number.

Got it thanks Mark.

Yes.

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

Thanks, Good morning, everyone.

Hi, Brian.

If we could spend a little more time on the headline risks of today is there any way to quantify the topline hit in the quarter from.

Material shortages logistics challenges et cetera, obviously, most pronounced in contractor, but any detail across segments would be helpful.

Not really sure I understand it other than the backlog commentary you just made it's hard for us to really gauge how much. The top line would have been different if we had a perfect supply environment, where we've got everything in the door and was able to we're able to ship it.

I think we're that good at.

Fine tuning the math at this point.

Safe to say, though that results would have been a lot of different and better had we been able to get everything that we needed and get them out at the time that we need them to.

That's fair and then the backlog commentary does help in Framingham.

As regard to contract.

<unk> is there anything in terms of the macro backdrop at least assuming supply chain issues can be resolved that you see as a major risk to your green light outlook.

And that's irrespective of comps we know they are challenging for the time being I'm just thinking about underlying trends.

I think it's pretty good I mean, we talk with the group.

He'll early we just had a.

With them.

A weeks ago, where we went through some of the external data.

The markets that we serve the residential the commercial.

Syed is commercials firming up a little bit residential is still pretty hot.

Remodeling activity is good housing.

Housing starts are good so I don't see any real.

Negatives in the future.

Dorm clouds on the horizon I would say from our our viewpoint order rates are good.

The levels of inventory at our Big Channel partners are not where they want them to be.

<unk>, probably a favorable thing.

We'd like to see.

Their own inventory levels higher than where they are today. So I don't anticipate any major detrimental inventory actions here between now and the end of the year or into the first part of next year. So I think we're pretty bullish on contractor.

If I could add I've been impressed with the strength of the contractor business in the regions outside of North America.

They exhibited.

Good growth in.

The quarter end.

Good performance year to date and as Mark alluded.

<unk> been talking with the managers in those regions.

I think that the general view is that.

Sort of notwithstanding the headlines and the challenges around the world.

People see demand for these products and are feeling good that it's.

It's going to follow.

Through.

In the current business cycle for the time to come.

Okay, well good to hear.

Mark or David.

Perhaps you can provide a quick update on the M&A environment great deal funnel.

And confidence level excuse.

Excuse me for being able to deploy some of your.

Dry powder over the coming quarters.

Yes.

I would say that the current environment is pretty similar to what we talked about last time, it's still kind of challenging from a valuation standpoint, I think the low interest rate environment is really driving that and I don't really see a whole lot of movement. There here in the near term.

But nonetheless, we are.

To having good strategic acquisitions as part of our growth.

File I've been spending a fair amount of time with my team on the topic.

I think that we all recognize that we have some opportunities there that we would like to pursue and have M&A be a little bit more active component.

Committed overall growth, we're looking at doing some things structurally to maybe help fortify that a bit.

We'll see we'll see how it plays out David if you've got any other comments I think that we are.

We're certainly committed.

And with that said.

We're mindful.

<unk> on <unk>.

And our amount of what the current environment is like.

We have it in my prior job I participated in a couple of.

Our projects in the process space that.

Were transactions that subsequently subsequently got done and one by a large public company.

<unk>.

The multiples remain daunting.

The.

Desire for growth the desire to build a business in some of these interesting in niche markets is appealing to graco, but not at any price and I believe that.

Mark and the entire management team will continue to insist that we take a yes, we want to we want to grow and we want to be strategic in how we think about the business, but having a good ROI.

Good having a good ROI profile is going to be central to.

Projects that we take across the finish line.

That's helpful color. Thanks again guys.

Yes.

Thank you. Our next question comes from Jeff <unk> with Keybanc capital. Please state your question.

Hey, guys just wanted to go on Matts question, a little bit differently.

On price so how have you seen your competitors handle price this year.

In terms of did they go once like you or are they going multiple times.

If they kind of acted differently is that drive any kind of share shift or behavior change.

Yes, that's something I really pay a lot of attention.

Of course, anecdotally I'll have some people semi notes once in a while thats onto those raised their price this amount.

So I am aware of it I think it's happened in our end markets with some of our competitors, where they have raised prices mid year.

Our approach has been really consistent we believe in it so what others are doing really doesn't impact.

My thought on it a whole lot again I'd like to play the long game on this one and I like to put them in and then I wanted to stick.

The concern is that if you start doing mid years or surcharges or things like that then it makes the conversation a little bit harder in terms of having the.

Prices did you have.

Permanent.

Are sticky in nature so.

That's where my head's at.

Okay, and then just just a contractor I mean, I guess the thought was stay.

Stay at home was a big thing last year.

Any kind of.

Feedback on on that waning and as things kind of reopen and then just just around kind of all.

Supply in and negative commentary there is that kind of impacting.

Order patterns or anything.

No we haven't seen it in our data. So we tried to be transparent and give you give you the actual numbers in terms of what we're seeing in the business. So when I look at order rates and.

Across multiple regions and across the two big product categories that we have again, they've been they've been pretty consistent which is.

As I said in my opening remarks is actually.

A positive development for us because we were we weren't concern.

<unk> that.

There is this risk about.

Working from home.

Being working on home and then having that.

<unk> have an impact on our results here, but we just haven't seen it so things things appear to be in really good shape.

Okay. Thanks, a lot.

Yes.

Thank you. Our next question comes from Dray with RBC capital markets. Please state your question.

Thank you and good morning, everyone.

Alright, good morning, Hey, just start with a comment on pricing not a question is I.

I think if you just have to replay any second half 2018 conference.

When the biggest issue we were dealing with was a Chinese tariffs.

And just the exact same questions and the same answers about waiting for the annual price increases and we've seen it come through time again, so yeah applaud you for your consist.

Call. It we've seen it prove out over that over the longer period itself.

<unk>.

The call on that but now I've got some questions.

Alright so.

In it.

And I really appreciate all the specifics on price cost and supply chain.

And so I was a little curious maybe you get some more color on labor because when you roll the clock back a couple of quarters you all benefited from having your campus manufacturing has shifted workers over to contractor <unk>.

And that kind of filled the gap.

But you've cited labor and labor costs is this is this different.

Your friend from your Labor Flexibilities, just as you're having trouble finding workers and and having to pay them more and in some color there would be helpful.

I think the labor market for us has been pretty good.

We're able to get people that we need.

We're good shop, we would take care of our people people like working.

Working here, we've been able to flex some of this.

Increase in demand that we've seen by bringing some temporary folks in.

Like that approach because it's almost like a try before you buy to a certain extent if we like somebody we usually.

Make him a permanent employee within a reasonably short period of time.

We will keep.

Yeah.

The wages and benefits and all of that stuff as we always do.

We do a lot of detailed work around this we benchmark a lot of our local peers and competitors in all of the markets that we participate in whether that's here in Minnesota or in South Dakota, or Ohio or Pennsylvania.

Our U S and then of course across the globe and our philosophy is that we want to be competitive.

When we look at the full package, which includes not only like hourly wages by benefits and those types of things so.

I am.

We're keeping an eye on the labor market, obviously, theres a lot of headline stuff, but at least for graco.

Here I.

I think that given that we're a good company and we take care of people it hasnt really been a problem.

Yes, I would add that in terms of the in house labor situation. It has been.

I'd call it a relatively neutral.

<unk> been positive situation for the reasons that we've alluded to.

Maybe in part because in the markets that we're in they're not necessarily.

Big famous manufacturing markets as a diversified.

Population base and.

We do have we do have.

But he really good long term pipeline of bringing people into the company.

In frontline manufacturing operations and.

It is a try before you buy and very frequently those people become.

Permanent employees with the compensation and benefits that we offer.

I have heard talking with some of our sourcing people.

That.

When they talk about some of the key components that we're running down.

It is fair to say that some of our vendors I think are suffering from some degree of labor stress.

Along with probably getting.

A inputs that theyre looking for so it probably pay it plays some role in the overall dynamic, but I would be thinking at the moment more about our vendors that I would be about our in house capabilities.

Good to hear.

Pivot over to industrial and.

In process and if you think back a couple of quarters ago. When there were questions. What happens when work from home begins to slack and really haven't seen that but at least the tough comps are here. The expectation was that industrial and process would start to recover meaningfully and it looks like that's happening now so.

Ill highlight for us which are the key end markets.

<unk> regions and both segments are really beginning to move the needle there.

Yes, so on the industrial side I mean, we have seen a really nice rebound in pretty much all of the product categories. There so things like our liquid finishing business.

Our powder coating business, our sealant and adhesive equipment business at our protective coatings equipment businesses have all been have all been really good for us this year and that has played out both here in North America and really across the three.

The regions on the process side.

Similar story.

Characterize.

Good solid demand and growth across all the major product categories sold process pumps, our environmental business, our semiconductor business continues to do.

Very well and our lubrication business has actually rebounded quite nicely this year.

<unk> as well so.

It's kind of across the board, it's across multiple geographies and <unk>.

As we thought would happen last year these things come back and they come back pretty quickly and they usually run for a while once they do so that's been good.

Yes.

The thing I would add to that is that the geographic.

Strength of both businesses.

Has impressed me.

Sure.

Europe has been.

Europe has recovered nicely, which was good to see after a slow 2020 and Asia has been has been very dramatic.

And the process space over the last couple of quarters and.

You can't extrapolate.

No.

Endlessly into the future, but the team there is feeling good about the current environment.

Got it and just last one.

And I appreciate all the color on the back.

And the significance of the backlog.

Expect at this point to be building backlog in the fourth quarter.

Well as I said that for the first three weeks of October we are our bookings are actually exceeded our billing. So I don't know how long that's going to play out but that's the state of the Union right now.

How are you doing any of these have completed products and aligning them up in the hallways or is that.

Just waiting for the Golden screw as David said.

We do some of that I was up in <unk>, not that long ago, and they were a bunch of sprayers on their floor waiting for wheels to come in but for the most part we try to not bunched.

Backlog laying around and we're pretty good about getting stuff put together when we actually get get the products we need in here got it I appreciate all the color. Thanks.

Thank you. Our next question comes from Michael <unk> with Baird. Please state your question.

Hey, good morning.

So.

<unk>.

Two ones here one.

Sure.

A little bit of a follow up on that question, you're kind of already answered. This for the contractor piece, but are there any cracks that youre seeing in the process of industrial side. Obviously your orders are really good ubiquitously geographic commentary.

But any areas of concern at this point.

None that.

Our meaningful I mean, I guess that I think it's kind of across the board across all the categories and across other regions. So I don't want to look at the world with rose colored glasses, but right now things look pretty good.

And then just to put a bow on the.

Although the price cost headwinds commentary et cetera.

Is the implication here that when you get to next year all else equal.

That youre going to see more normalized incremental margins through the portfolio or are there other headwinds out there.

You think can maybe soften what those incremental margins look like.

I don't think there are any other headwinds.

Other than this the cost issues that we're dealing with and again, we don't have a good crystal ball to know where things are going to wind up but based on the math that we've done the homework we've done the analysis by.

Segment by business unit that we think our pricing actions are going to be able to take care of it for us.

Great.

That makes sense I appreciate it that's all I got thanks.

Thank you as a reminder, tactical at this time. Please press Star then one our next question comes from Walter Liptak with Seaport. Your line is open.

Hi, Thanks, Good morning, I've got a follow up.

Wanted to ask first about you mentioned the lube.

Business starting to pick up again, it's been a couple of years I Wonder if.

If theres a recapitalization cycle yet.

Or is there a visibility on any large programs from some of the service providers.

No I'd characterize.

So the general pickup in demand nothing special there in terms of big customers.

Okay.

Okay and then.

When you guys were talking about contractor.

I think there were some prior questions about.

You know they were kind of getting to the DIY versus.

I was just.

The pro market.

And it was so strong over the last year.

Do we know yet.

If it was the propane or the DIY or a combination of it.

<unk>.

As you look at your different channels can you see.

Differences between.

The box stores versus the propane or channel.

In terms of like what we saw in Q3, I think North America was down you saw that I think that the declines were kind of similar in both of those those categories from a percentage standpoint.

Okay.

Any fair enough.

Since the contractor has been really good coming out of.

The bottom of the pandemic.

Or should we expect that maybe there's going to be more volatility in terms of like unit volume growth over the next year are those comps tough enough where.

Or is there something that could pick up internationally that could.

Could keep that business growing.

We like it we think the macros are really solid none of us really knows whats going to happen, but for now when I, just think about demographics and all the other things that we mentioned with housing starts.

Absolutely.

Alright, its level of activity there I think we're in a good spot.

Okay fair enough. Thank you.

Yep.

Thank you as there are no further questions I will now turn the call over to Mark Sheahan.

Okay, well. Thank you very much again for your participation today.

Absolutely we will look forward to chatting with you down.

Down the road.

Thank you.

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

Okay.

[music].

<unk>.

[music].

Yes.

Yes.

[music].

Yeah.

[music].

[music].

Good morning, and welcome to the third quarter Conference call for Graco, Inc. If you wish to access the replay for this call you may do so by dialing 18558592056 within the United States or Canada.

Hello number for international callers is 4045373406 the conference I'd number is 90 51859.

The replay will be available through two P. M. Eastern time Thursday October 28 2021.

Michael has additional information available in a Powerpoint slide presentation, which is available.

As part of the webcast player at.

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.

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 one a of the company's 2020 annual report on Form 10-K and in item <unk> of the company's most recent quarterly report on Form 10-Q.

These reports are available on the call.

Website at Www Dot Graco dot com and the SEC's website at Www Dot SEC Dot Gov forward looking statements reflect management's current views and speak only as of 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.

So on rock executive Vice President corporate controller.

Good morning, everyone I'm here this morning, with Mark Sheahan and David Lowe.

I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion.

Our conference call slides on our third quarter Form 10-Q or on our web site and provided.

Well information that you may find helpful.

Yesterday, Graco reported third quarter sales of $487 million, an increase of 11% from the third quarter of last year.

The effect of currency translation added two percentage points of growth or approximately $6 million in the quarter.

Reported.

<unk> net earnings were $104 million for the third quarter or <unk> 59 per diluted share.

After adjusting for the impact of excess tax benefits from stock option exercises and certain nonrecurring tax adjustments net earnings were $100 million or <unk> 57 per diluted share.

Gross margin.

<unk> was down 110 basis points from the third quarter of last year as the favorable effect from realized pricing increased factory volume and currency translation were not enough to offset the unfavorable gross margin rate impact of higher product costs.

These higher product costs such as material.

And freight decreased our gross profit by $14 million in the quarter.

With $10 million of this impacting the contractor segment.

At current costs and volumes, we estimate that on a dollar basis realized price and increased factory volumes will offset higher product costs for the full year.

Labour. However, these costs will continue to be decremental to the gross margin rate.

Supply chain constraints, such as logistics capacity and component availability also had an unfavorable impact on our factory's ability to deliver in the quarter and will likely persist for the remainder of the year.

These.

Andres we're predominantly felt in the contractor segment as this is our highest volume business.

Operating expenses increased $20 million or 19% in the quarter.

Sales and volume based expenses increased 9 million, new product spending increased $2 million and changes.

And currency translation rates increased operating expense by $1 million in the third quarter.

The adjusted tax rate for the quarter was 18%.

Cash flows from operations are $357 million for the year compared to $263 million last year.

This.

Kris was due to the improvement in earnings partially offset by increases in working capital that reflect the growth in business activity.

Significant uses of cash or dividend payments of 95 million and capital expenditures of $83 million, including $33 million for facility expansion projects.

A few comments as we look forward to the fourth quarter.

Subsequent to the end of the third quarter Graco entered into an agreement in which approximately $63 million of pension obligations were transferred to an insurance company through the purchase of an annuity contract.

The annuity contract purchase will be funded with exists.

Listing plan assets.

This arrangement is part of the company's effort to reduce the overall size and volatility of its pension plan obligations.

We expect to recognize a noncash pre tax pension settlement charge of approximately $12 million in other non operating expense in the fourth quarter.

Based.

Based on current exchange rates, the full year favorable effect of currency translation is estimated to be 2% on sales and 4% on earnings with the most significant impact having occurred in the first half of the year.

Also for the remainder of 2021.

We expect unallocated corporate expense to be.

Approximately $26 million to $28 million.

The decrease from prior estimates is due to lower stock compensation expense for the year.

Our full year adjusted tax rate is expected to be 18% to 19%.

Capital expenditures are estimated to be 150 million, including 80 million for facility.

Expansion projects.

Finally, 2021 will be a 53 week year with the extra week occurring in the fourth quarter.

I'll turn the call over to Mark now for further segment and regional discussion. Thank.

Thank you Kathy and good morning, everyone.

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

Sales in the third quarter grew high single digits, driven by the continued recovery in both our industrial and process segments.

Contractor North America had difficult comparisons from last year's record third quarter.

Contractor demand was solid in Europe, and Asia with double digit gains in both regions.

<unk>.

Heading into the fourth quarter business remains robust.

For the first three weeks of October our global orders continued to outpace billings and all three segments.

Normally we don't talk about backlog since most of our business is book and ship.

However, given the current environment.

Strife with component shortages and logistical disruptions.

Clogs are worth mentioning at.

At the end of the third quarter, our consolidated backlog was approximately $280 million, which is $25 million higher than what it was at the end of the second quarter and 121.

$1 million higher than our backlog at the end of last year.

Orders are abundant.

However, our biggest challenge is getting the materials and components, we need and then navigating the logistical challenges inherent in today's environment.

We expect conditions to remain this way for a while.

And there is nothing unique to what graco is experiencing when it comes to these issues.

One more thing before commenting on our segments.

It's anticipated that our planned pricing actions in 2022 will be enough to fully offset current cost pressures.

Our annual pricing cadence has been appreciate.

<unk> by our channel partners and has tangible commercial value in the marketplace.

Now turning to some commentary on our segments.

Chart with contractor equipment.

The residential construction and home improvement markets remained strong globally.

On a dollar basis incoming.

Order rates have been relatively stable and overall demand has exceeded our expectations given the surge that we experienced last year.

Contractor backlogs are elevated at $46 million, which is up $6 million from June and up $22 million from the same time last year.

The.

Pace of business, including out the door sales is robust.

The industrial segment grew at high teens for the quarter with year to date sales exceeding previous high set in 2018.

We experienced broad based growth in all major end markets and reportable regions.

The overall, which is a nice bounce back from what we faced a year ago.

Consistent with our other businesses the biggest challenge in this segment is getting product out the door.

And user demand is very strong and we anticipate this to continue for the balance of the year.

Process segment sales grew.

21% for the quarter.

With year to date sales exceeding previous high set in 2019.

Similar to industrial broad based growth continues in all major end markets and reportable regions.

The recovery of both our lubrication and process pump businesses drove sales and earnings.

For the quarter in the segment.

Moving to our outlook.

With demand persisting, we confirm our full year outlook of mid to high teen <unk>.

Organic revenue growth on a constant currency basis for the full year of 2021.

While we expect continued headwinds from raw material costs.

Growth logistics component availability in the fourth quarter. We believe we are positioned to deliver a record year.

In closing I'd like to thank all of our employees suppliers and distributor partners, who continue to work hard keeping up with customer demand in this challenging operating environment.

Shannon we're.

We're ready for questions.

Yes.

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

Your question will be taken in the order that is received please standby for your first question.

Our first question.

Comes from Saree <unk> with Jefferies.

Please state your question.

Hi, good morning.

<unk> I guess can you just talk about what you saw in contractor through the quarter from a demand perspective, just given the significant drop in August and was there anything outside of.

Comparable and how should we think about demand going forward given the 8% increase in bookings.

Yes, I think we were.

Favorably pleased with how the order cadence came in throughout the quarter of course, we had to put up huge numbers last year. So there was a concern that maybe we'd see a drop off but you always.

Some weekly volatility here and there, but overall order rates throughout the quarter on a weekly basis, where we're actually pretty consistent and like I said in the opening remarks at least so far it's a really short data point, but over the last three weeks in October here, our order rates are actually exceeding our.

Always have ability to get product out the door. So I think things have Rick.

We remained on pretty solid footing in contractor.

And then sticking with contractor there is pretty.

Pretty steep drop in Nevada with higher costs and expenses is just higher cost headwind continue into the fourth quarter, how do we think about margins going into 2000.

<unk>.

Given the expected increase in pricing that you'll be taking.

Yes, so the biggest business, we have as contractor and a lot of the components and input that we have things that we are getting pressure on steel motors electronics those types of components really go into a lot of our product there.

When I told they they had an outsized proportion of the overall negative impact that we saw in Q3.

Our expectation is that's going to continue here in Q4, we haven't really seen any kind of a change in terms of what we're getting from cost pressures and all of those different categories.

So I think it's going to be with us here for a while of course, we do implement our pricing in early 2022, and we think that the actions that we've got in place will be enough to offset.

The pressures that we're currently experiencing here today.

And should we think about overall pricing in 2022 has been one five.

So above what youre seeing from a cost perspective.

Not really going to flag, what the pricing is going to be right now because we haven't really gone out and communicated it to our channel partners, yet, but I think they all are expecting that we're going to be.

Pushing more pricing than what we've done historically.

On an absolute basis and of course, we we hope to realize some of that into our P&L as well like we use like we usually do.

Perfect. Thanks for taking my questions.

Yep.

Our next question comes from Andrew Buscaglia with Bamberg.

Please proceed with your question.

Hey, guys. Thanks for taking my question.

Hey, good morning.

So in.

And Mark in your contractor segment obviously.

Margins.

Struggled in the quarter.

Trying to get a sense.

When it comes to pricing I know it sounds like you're going to have you.

It sounds like you're all set and.

<unk> is the rate next year as well, but.

At what point do your customers.

At what point do you run into a wall, where you can't necessarily raise prices, where you're starting to get some pushback from those customers.

Well I guess theoretically at some point that could happen, but really.

Especially what we're doing is we're more or less trading dollars with the costs that we're seeing and having those go through into our product cost and I think most people in today's environment are experiencing that in virtually everything that they purchase.

It's a paint sprayer at home depot or a dishwasher.

I think that.

<unk> is such that people expected nobody really likes it but it's the way. We are we have some things going for us that that are helpful. We have a strong brand.

We have the best quality products, we do the best job taking care of the customer when it comes to technical service support warranty.

All the things that they need to do an effective job with our equipment. So I think from our standpoint, we feel like we are <unk>.

Positioned well to be able to get our price increases across the across the line can I add something.

This is David Lowe.

I've been involved in.

And while price adjustments at Graco for.

Quite a few years longer than I care to admit and.

I think mark really touched on the fact that we're approaching the especially challenging characteristics that we've been seeing in the market. This year.

With a lot of a.

And care and we've done a number of deep dives on product costs.

And really trying to balance the points that you are talking about as we understand there is a market.

And there is some price elasticity at some point.

The challenge.

<unk> <unk> relates to both the volumes of stuff they buy which is typically a lot greater than the other divisions.

It also relates to a lot of products that are more commonly used in the industrial marketplace motors sensors tires carts.

<unk> things like that that there is a broader market. So we're trying to with care with some deeper analysis.

Sure that we.

Do a fair job of recapturing some of the costs that are currently penalizing us, but still makes sense to an end user customer.

<unk>, that's making a decision at the point of sale.

Okay got it thats helpful.

Maybe one other one on along the lines of margins.

So contractor I get the dynamics there, it's your highest volume business.

Surprised how well industrial.

Real and process kind of hung in there so what.

I guess, what gives you confidence you can maintain those margins or what are the dynamics going on in industrial where you think.

That.

Strong margin performance can continue.

Well they got the same input cost pressures that the other businesses have but.

Don't have as much volume and of course, the component mix and other things are a little bit different there is.

As well, so I think what you've seen and what you see in this market right here is something that we'd be comfortable.

Thing that we kind of expect to continue to be seeing similar things in.

But <unk> at least in the near term future.

The wildcard here is.

None of US really has a good crystal ball when it comes to what these input costs are going to do over the next nine to 12 months or something like that but as we sit here today I feel pretty good about where we're at.

Alright, Thank you guys.

In the past.

Thank you. Our next question comes from <unk> with Goldman Sachs. Please proceed with your question.

Hi, Thanks, good morning, everybody.

Alright.

So maybe just touching on the this whole like price cost equation and for how long the current environment kind of impact.

Impacts your results I guess as you can.

Think about it I would imagine that this quarter you were negative from a price cost standpoint, probably continue to be negative in <unk> I guess, how quickly do you think you can put through I guess pricing in the early part of next year such that the equation turns positive for you.

Well I'll.

Couple of comments and I'll, let Cathy talk more about the details in terms of how things shook out in the quarter from a price cost standpoint, but my view of it is that.

When it comes to pricing, we like to play the long game.

And we think that our approach of putting prices through on an annual basis really goes over very well in the marketplace with.

I'll make customers and our distributors. So you can have periods of time, where we're in right now where maybe you're not as far ahead as you'd like to be but in the end, we get our pricing and if you're a long term shareholder in a long term investor in Graco things will things will shake out in the long run and again I think.

It has a lot of benefit in the in the markets that we're in but I'll, let Cathy talk a little bit about more about what we actually saw in the quarter. When it comes to price costs, Yes, I think when we look at price cost in the quarter. If we look at.

What we realized in price along with a favorable volumes that we had mainly across the industrial and process.

Process.

Factories.

It did offset on a dollar basis.

In the quarter it was pretty neutral, but it was decremental to our over gross overall gross margin rate in the quarter and that we project.

We'll continue.

<unk>.

Quarter.

Okay helpful and I guess, just maybe maybe Kathy on contractor.

You guys called out the 600 basis point impact from product cost and channel mix I would imagine that the negative price cost situation is sitting in.

In that in that number.

When I think about who you're selling into and selling into big box B.

A little bit more difficult customers I guess like is it reasonable to think that you're going to be able to go price cost positive.

Sometime in 2022 and contractor.

The fourth so your comment your question upfront on the decline I think is accurate that a lot of that was due to the pricing cost pressures that we're talking about in <unk> for Q3, when it comes to how we're going to do at the home centers or our Big channel partners in pricing and can we get it to stick and get it realize I.

I'd just tell you to look at our history.

And we have been able to do that historically I don't think anything's really changed.

Conversations happen all the time.

We have good partners they understand we give them facts.

And they are generally reasonable in those discussions that we have.

Okay.

Great maybe 111 quick.

And also on the demand environment, there's a lot of discussion right now around making sure you have enough inventory on hand.

Maybe maybe over ordering in the near term.

Try to meet demand levels can you maybe just.

Talk about what you guys are doing to make sure you've got your inventory levels, where they need to be to try to keep up with the.

What seems to be a pretty robust backlog.

Backdrop, yes.

We've been doing everything we can for quite a while we've been very aggressive in buying some of the components that we knew were going to be problematic in some cases.

Ahead of the curve, but.

But in other cases, where we really didn't see.

The huge increases in demand coming we probably were a little bit behind where we would normally like to be but obviously we've got.

Our balance sheet that's <unk>.

Unlevered and we have a lot of cash to deploy so inventory.

Cases, we can purchasing it and making good decisions about what we buy and having enough on hand has never really been a problem for us.

Our biggest issue really is that when you think about Greg or we've got I don't know 60, or 80000, Skus and among those skus, we got multiple <unk>.

Ponant in parts that make up each one.

Tori and all you need is like a little fire on one of those components and all of a sudden everything gets slowed down and delayed so our teams are working really hard.

A lot of confidence in our purchasing group and our manufacturing group that they are prioritizing appropriately.

But it is pretty tough right now I don't know David if you have anything else you'd like.

Yes, I think that.

We are.

Willing historically and even in this environment willing to.

Invest a bit aggressively in.

Certain categories of inventory, including the the mythical Golden screw that you have to have.

To add to ship the unit complete is I would say this is a general comment, but especially true in our industrial and process markets that there isn't really a great deal of stocking going on at the channel.

And I would say over.

Any.

A reasonable short.

To intermediate term wholesale equals retail and so we know that when a distributor puts an order of any substance.

Especially for units on Graco.

They've made a commitment they need to get products into the market for a real real need on the part.

Part of an end user and we think that's a.

We think that that's an important part of our value proposition.

And I think it's one of the reasons why the partnership that Mark alluded to with the channel partners overall very strong in a blasted over a long time.

Our delivery levels have slipped I would say by historical standards, we're not proud of them but.

What our channel tells us formally and informally.

We are doing as well or better than other partners that they work with that round out their line card.

Very helpful. Thank you.

Thank you. Our next question comes from Matt <unk> with D. A Davidson. Please proceed with your question.

Thanks.

Question just.

Back to pricing, assuming what youre going to go out with in 'twenty two is going to be.

Materially.

Or meaningfully above trend line would you expect that to drive any sort of pre buy on the part of your customers given the magnitude may be a bit unprecedented at least relative to what you've had to go out with historically and in that question I guess I'm leaning more towards the contractor business as opposed to the other two segments.

Yes, it's a good question, it's something we've talked about internally Matt.

We've got the radar up we sort of know what people order on a normal basis.

We will make sure that we flag it with a distributor if there if they look like they're doing something like that in and of course with our large retail partners I.

They really care about is us getting product out the door.

I don't think they're really playing any games on on pricing.

I don't think that they will either.

I think that there they are good partners and we have open communication with them.

Sure there will be things that pop up but I think we can handle them.

And.

Great and then just with respect to the impact from material shortages overall in the third quarter have you been able to frame up how much revenue was may be missed for lack of a better word or slipped into a future period because of the general inability and again. This isn't just a <unk> thing, obviously, but the general inability to get product.

And then the door, so you could actually get it out the door.

Really hard it's really hard to know I mean, we haven't had anybody cancel orders. So I guess I'd go back to the backlog and just look at we built $120 million of additional backlog this year over where we were at the beginning of the year.

All of that really is.

The vast majority of that is due to the fact that we are having trouble getting product out the door. So it's a big number.

Got it thanks Mark.

Yes.

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

Thanks, Good morning.

Hi, Brian.

If we could spend a little more time on the headline risks of today is there any way to quantify the topline hit in the quarter from.

Material shortages logistics challenges et cetera, obviously, most pronounced in contractor, but any detail across segments would be helpful.

Not really sure I understand it other than the backlog commentary you just made a it's hard for us to really gauge how much. The top line would have been different if we had the perfect supply environment, where we've got everything in the door and was able to we're able to ship it.

I think we're.

That good at.

Fine tuning the math at this point.

Safe to say, though that results would have been a lot of different and better had we been able to get everything that we needed and get them out at the time that we need them to.

That's fair and then the backlog commentary does help in Framingham.

With regard to contractor is there anything in terms of the macro backdrop at least assuming supply chain issues can be resolved that you see as a major risk to your greenlight outlook.

Outlook and that's irrespective of comps we know they are challenging for the time being I'm just thinking about underlying trends.

I think it's pretty good.

We talk with the group regularly we just had.

A meeting with them.

A couple of weeks ago, where we went through some of the external data.

The markets that we serve the residential the commercial.

Syed.

Commercial's firming up a little bit residential is still pretty hot.

Remodeling.

Modeling activity is good housing starts are good so.

I don't see any real <unk>.

Negatives in the future.

Dorm clouds on the horizon I would say from our our viewpoint order rates are good.

The levels of inventory at our big channel partners or not.

Where they want them to be which is probably a favorable thing.

They still would like to see.

Their own inventory levels higher than where they are today. So I don't anticipate any major detrimental inventory actions here between now and the end of the year or into the first part of next year. So I think we're pretty bullish on our.

Yes.

I could add I've been impressed with the strength of the contractor business in the regions outside of North America.

They exhibited.

Good growth in the quarter and.

Good performance year to date.

Contract and as Mark alluded in talking with the managers in those regions.

I think that the general view is that.

Sort of notwithstanding the headlines and the challenges around the world.

People see demand for these products and are feeling good that the.

It's going to follow through.

In the current business cycle for the time to come.

Okay, well, good to hear and Mark or David.

Perhaps you can provide a quick update on the M&A environment great deal funnel.

And confidence level in being.

The deploy some of your dry powder over the coming quarters.

Yes, so I would say that the current environment is pretty similar to what we talked about last time, it's still kind of challenging from a valuation standpoint, I think the low interest rate environment is really driving that and I don't really see a whole lot of movement. There here in the near term.

But nonetheless.

Unless we are committed to having good strategic acquisitions as part of our growth.

Profile.

<unk> been spending a fair amount of time with my team on the topic.

I think that we all recognize that we have some opportunities there that we would like to pursue and have M&A be a little bit more.

Active component in our overall growth, we're looking at doing some things structurally to maybe help fortify that a bit and we will.

We'll see we'll see how it plays out David if you've got any other comments I think that.

We are we're certainly committed.

And with that said.

We're mindful.

Building on Mark's comment of what the current environment is like.

We have in my in my prior job I participated in a couple of.

Our projects in the process space that.

Were transactions that subsequently subsequently got done and one by a large.

Large public company and.

The multiples remain daunting.

The.

The desire for growth the desire to build a business in some of these interesting in niche markets is appealing to graco, but not at any price and <unk>.

Believe that.

Mark and the entire management team, we will continue to insist that we take a yes, we want to we want to grow and we want to be strategic in how we think about the business, but having a good ROI.

Hi.

Having a good ROI profile was going to be.

Two projects that we take across the finish line.

That's helpful color. Thanks again guys.

Yeah.

Yeah.

Our next question comes from Jesse <unk> with Keybanc capital. Please state your question.

Hey, guys just wanted to go on Matt's question.

A little bit differently on price.

Have you seen your competitors handle price this year.

Terms of did they go once like you or are they going multiple times.

If they kind of acted differently is that drive any kind of share shift or behavior change.

Yes, that's something I really.

Central pay a lot of attention to of course anecdotally I will have some people semi notes Watson allow thats onto those raised their price this amount.

So I am aware of it I think it's happened in our end markets with some of our competitors, where they have raised prices mid year.

Our approach has been really consistent we believe in it so what others are doing really.

It doesn't impact my thought on it a whole lot again I'd like to play the long game on this one and I'd like to put them in and then I wanted to stick and the concern is that if you start doing mid years or surcharges or things like that then.

It makes the conversation a little bit harder in terms of having the.

The pricing that you have.

The permanent are sticky in nature so.

That's where my head's at.

Okay, and then just just a contractor I mean, I guess the thought was <unk>.

Stay at home was a big thing last year.

He kind of feed.

Feedback on on that waning and as things kind of reopen and then just.

Just around kind of all of the paint supply and negative commentary there is that kind of impacting.

Order patterns or anything.

We haven't seen it in our data. So we tried to be transparent and give you give you the actual numbers in terms of what we're seeing in the business. So when I look at order.

<unk>.

Across multiple regions and across the two big product categories that we have again, they've been they've been pretty consistent which.

As I said in my opening remarks is actually.

A positive development for us because we were.

We were concerned that.

There is this risk about.

Working from home.

<unk> working on home and then having that.

Have an impact on our results here, but we just haven't seen it so.

Things appear to be in really good shape.

Okay. Thanks, a lot.

Yes.

Thank you. Our next question comes from Dray with RBC capital markets. Please state your question.

Thank you and good morning, everyone.

Alright, good morning.

To start with a comment on pricing not a question is.

I think if you just have to replay any second half 2018.

<unk> conference calls when the biggest issue we were dealing with was Chinese tariffs.

And just the exact same questions and the same answers about waiting for the annual price increases we've.

We've seen it come through the time again.

I applaud.

Consistency and we've seen that prove out over that over the longer period. So that's.

That's the call on that but now I've got some questions.

Alright, alright so.

In and I really appreciate all the specifics on price cost and supply.

Chain, but I was a little curious maybe you get some more color on labor because when you roll the clock back a couple of quarters you all benefited from having your campus manufacturing has shifted workers over the contractor and that kind of fill the gap.

But you've cited labor and labor costs is this.

You forget this different from your labor flexibility.

Trouble, finding workers and having to pay them more and some color there would be helpful.

Yes, I think the labor market for us has been pretty good.

We're able to get people that we need we're.

We're good shop, we we take care of our people.

People like working here, we've been able to flex some of this.

Increase in demand that we've seen by bringing some temporary folks in wheels.

That approach because it's almost like a try before you buy to a certain extent if we like somebody we usually.

Make him a permanent employee within a reasonably short period of time.

We will.

We'll keep our eye on.

Wages and benefits and all of that stuff as we always do we.

We do a lot of detailed work around this we benchmark a lot of our local peers and competitors in all of the markets that we participate in whether that's here in Minnesota or in South Dakota, or Ohio or Pennsylvania.

And yet here in the U S. And then of course across the globe and our philosophy is that we want to be competitive.

When we look at the full package, which includes not only like hourly wages benefits and those types of things so.

I am.

We're keeping an eye on the labor market. Obviously, there is a lot of headline stuff, but at least.

Paco.

I think that given that we're a good company and we take care of people it hasn't really been a problem.

I would add that in terms of the in house labor situation. It has been.

I'd call it a relatively.

For grid neutral or even positive situation for the reasons that we've alluded to.

Maybe in part because in the markets that we're in they're not necessarily.

Big famous manufacturing markets, it's a diversified.

Population base and.

We do have.

We do have a really good long term pipeline of bringing people into the company.

In frontline manufacturing operations and.

It is a try before you buy and very frequently those people become.

Permanent employees with compensation and benefits.

It's that we offer I have heard talking with some of our sourcing people.

Debt.

When you talk about some of the key components that we're running down.

It is fair to say that some of our vendors I think are suffering from some degree of labor stress.

Along with probably.

Really getting raw inputs that theyre looking for so it probably pay it plays some role in the overall dynamic, but I would be thinking at the moment more about our vendors that I would be about our in house capabilities.

That's good to hear.

Let's pivot over to <unk>.

Industrial and process and if you think back a couple of quarters ago. When there were questions what happens when work from home begins to slack.

Really haven't seen that but at least the tough comps are here the expectation was that industrial and process.

Would start to recover meaningfully and it looks like that's happening.

Now so just highlight for us which are the key end markets.

<unk> regions and both segments are really beginning to move the needle there.

So on the industrial side I mean, we have seen a really nice rebound in pretty much all the product categories. There so things like our liquid.

Quid, finishing business, our powder coating business, our sealant and adhesive equipment business at our protective coatings equipment businesses have all been have all been really good for us this year and that has played out both here in North America and really across the <unk>.

The regions on the process side.

<unk>.

Similar story I would characterize.

Good solid demand and growth across all the major product categories sold process pumps, our environmental business, our semiconductor business continues to do.

Very well and our lubrication business has actually rebounded quite nicely.

Isaly this year as well so.

It's kind of across the board, it's across multiple geographies and.

As we thought would happen last year these things come back and they come back pretty quickly and they usually run for a while once they do so that's been good.

Yes, the only thing I would add to that is the <unk>.

Graphic.

The strength of both businesses.

Has impressed me.

Europe has been Europe has recovered nicely.

Was good to see.

After a slow 2020 and Asia has been has been very.

Three dramatic, especially in the process space.

Last couple of quarters and.

You can't extrapolate.

Endlessly into the future, but the team there is feeling good about the current environment.

Got it and just last one.

And I appreciate.

All the color on the backlog and the significance of the backlog.

<unk> at this point to be building backlog in the fourth quarter.

Well as I said that for the first three weeks of October we are our bookings are actually exceeded our billings. So I don't know how long that's going to play out, but that's the state of the Union.

And right now are you doing any of these have completed products and lining them up in the hallways or is that.

Waiting for the Golden screw as David said, we.

We do some of that I was up in <unk> not that long ago, and there were a bunch of sprayers on their floor waiting for wheels to come in but for the most part we try to.

I have a bunch of stuff laying around and we're pretty good about getting stuff put together when we actually get get the products we need in here got it I appreciate all the color. Thanks.

Thank you. Our next question comes from Michael <unk> with Baird. Please state your question.

Hey, good morning.

So.

Tonight two ones here one.

A little bit of a follow up on that question, you're kind of already answered. This for the contractor piece, but are there any cracks that youre seeing in the process and industrial side. Obviously your orders are really good ubiquitous geographic commentary.

But any areas of concern at this point.

That are meaningful I mean, I guess that I think it's kind of across the board across all the categories and across other regions. So I don't want to look at the world with rose colored glasses, but right now things look pretty good.

Good and then just to put a bow on the all.

The price cost headwinds commentary et cetera.

True.

Is the implication here that when you get to next year all else equal.

Youre going to see more normalized incremental margins through the through the portfolio or are there other headwinds out there.

You think can maybe soften what those incremental margins look like.

I don't think there are any other.

None other than the.

The cost issues that we're dealing with and again, we don't have a good crystal ball to know where things are going to wind up but.

Based on the math that we've done the homework we've done the analysis by.

Segment by business unit that we think our pricing actions are going to be able to take care of it for us.

Other headwind that makes sense I appreciate it until I got thanks.

Thanks, Mike.

Thank you as a reminder, tactical at this time. Please press Star then one our next question comes from Walter Liptak with Seaport. Your line is open.

Hi, Thanks, good morning.

Good morning will follow up.

Okay. So wanted to ask first about you mentioned the lube.

Business starting to pick up again, it's been a couple of years I Wonder if.

If theres a recapitalization cycle yet.

Or is there a visibility on any large programs from some of the service providers.

No I would.

There's just a general pickup in demand nothing special there in terms of big customers.

Okay.

Okay and then.

When you guys were talking about contractor.

I think there were some prior questions about.

There were kind of getting to the DIY.

Character versus the pro market.

And it was so strong over the last year.

Do we know yet.

If it was the propane or the DIY or a combination of it.

Sure.

As you look at your different channels.

Any differences between.

The box stores versus the propane or channel.

In terms of like what we saw in Q3, I think North America was down you saw that I think that the declines were kind of similar in both of those those categories from a percentage standpoint.

Alright fair enough.

Since the contractor has been really good coming out of the bottom of the pandemic.

Should we expect that maybe there's going to be more volatility in terms of.

Volume growth over the next year are those comps tough enough.

Okay.

Or is there something that could pick up internationally that could.

Could keep that business growing.

We like it we think the macros are really solid none of us really knows whats going to happen, but for now when I think about demographics and all the other things that we mentioned with housing starts.

We're absolute level of activity there I think we're in a good spot.

Okay fair enough. Thank you.

Yep.

Thank you as there are no further questions I will now turn the call over to Mark Sheahan.

Okay, well. Thank you very much again for your participation.

Today, and we'll look forward to chatting with you down.

Down the road.

Thank you.

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