Q3 2023 Graco Inc Earnings Call

October 26, 2023

Okay.

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 visiting the company's website at Www Dot great co dotcom.

Greg who has additional information available in the 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 purpose 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 2022 annual report on Form 10-K, and the item one a of the company's most recent quarterly report on Form 10-Q.

Reports are available on the company's website at Www Dot great co dot com and the Sec's website at Www Dot FCC doctors.

Forward looking statements reflect management's current views and speak only as of the time. They are made the company undertakes no obligation to update these statements in light of new information or future events.

I will now turn the conference over to Chris can Etsy exec.

Executive Vice President corporate controller.

Good morning, everyone and thank you for joining our call I'm here today with Mark Sheahan, and David Loeb ill provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion yes.

Yesterday, <unk> reported third quarter sales of $540 million, a decrease of 1% from the third quarter of last year.

The effect of currency translation increased sales by one percentage point or approximately $5 million.

Just on current exchange rates currency translation should have no effect on full year net sales and an unfavorable impact of approximately one percentage point on net earnings for the full year.

Reported net earnings increased 15% to $133 million for the quarter diluted net earnings per share was <unk> 77.

An increase of 15% over last year during the quarter, we recognized a noncash goodwill impairment charge of $8 million.

And a $9 million gain from the reduction in the fair value of contingent consideration related to the reorganization of our business acquired in 2020.

Both of these items were included in unallocated operating expense, excluding the impairment charge contingent consideration adjustment and tax benefits from stock option exercises adjusted net earnings per share was <unk> 76.

The gross margin rate increased 490 basis points in the quarter strong price realization and lower product costs were more than enough to offset lower factory volumes, while material costs have somewhat moderated compared to what we experienced last year lower factory volumes and increased operational spending continued to be.

Headwinds for the quarter and year to date.

Total operating expenses increased $3 million or.

Four 3% in the quarter, primarily from volume and rate related increases of $1 million and incremental share based compensation of $2 million.

Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of four percentage points.

Contractor operating margins increased five percentage points to 30% and process operating margins increased seven percentage points to 31% compared to the third quarter of last year at current volumes. We believe these operating margin rates are sustainable for the remainder of the year.

Non operating expenses decreased $2 million as a result of increased interest income on cash held the.

The adjusted effective tax rate was 19% for the quarter, which is consistent with our expected full year tax rate of approximately 19% to 20% on an as adjusted basis.

Operator: 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 visiting the company's website at www.graco.com. Graco has additional information available in the PowerPoint slide presentation, which is available as part of the webcast player.

Cash provided by operations totaled $491 million for the year to date.

An increase of $219 million from last year.

Mostly driven by higher net earnings and a reduction in inventory purchases.

Cash provided by operations as a percentage of net earnings is 124% for the year.

Operator: 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 purpose of a safe harbor provisions of the Private Security's litigation reform act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in the item 1A of the company's 2022 annual report on form 10K and in the item 1A of the company's most recent quarterly report on form 10Q.

Through the end of the quarter, we repurchased 427000 shares for $31 million.

We have continued to repurchase shares in the first weeks of October and as of market close yesterday, we have repurchased one 3 million shares for $93 million year to date.

During the quarter, we repaid $75 million in private placement notes plus a prepayment fee of $700000.

This represented the final series of the private placement that we entered into in 2012.

We also made year to date dividend payments of $119 million and capital expenditures of $146 million with $89 million related to facility expansion projects.

Operator: These reports are available on the company's website at www.graco.com and the SEC's website at www.suc.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update the statements in light of new information or future events.

Finally, our full year estimates for unallocated corporate expense and capital expenditures can be found in the conference call slide deck on page 10.

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

Thank you Chris good morning, everybody.

Christopher Knutson: I will now turn the conference over to Chris Knutsey, Executive Vice President Corporate Controller. Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheehan and David Low.

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

In the face of a modest 2% revenue decline, we reported record third quarter operating earnings and operating profit margin we.

Christopher Knutson: I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion. Yesterday, Greco reported third-quarter sales of $540 million, a decrease of 1% from the third quarter of last year. The effect of currency translation increased sales by 1% or approximately $5 million. Based on current exchange rates, currency translation should have no effect on full-year net sales and an unfavorable impact of approximately 1% at point on net earnings for the full year.

We experienced another quarter of strong broad based sales growth and the process segment, which was up 9% and 13% for the quarter and year respectively.

The industrial segment was down slightly on lower project activity in our game up powder business in our contractor segment declined 8% from a combination of a difficult comparison in EMEA up versus last year's record quarter and the softening of global construction markets.

Overall, we're pleased that the company achieved third quarter operating margins of 30%.

Christopher Knutson: Reported net earnings increased 15% to $133 million for the quarter, diluted net earnings per share with 77 cents and increased of 15% over last year. During the quarter, we recognized a non-cash goodwill impairment charge of $8 million and a $9 million gain from the reduction in the fair value of contingent consideration related to the reorganization of a business acquired in 2020. Both of these items were included in unallocated operating expense, excluding the impairment charge, contingent consideration adjustment and tax benefits from stock option exercises, adjusted net earnings per share with 76 cents.

Or more in each of our segments.

This was driven by a significant growth from the process segment, coupled with strong operating performance from both industrial and contractor.

Realized pricing actions remains strong and our factories have rebounded nicely. After a couple of tough years of getting product out the door.

Input costs to remain elevated but in general commodity prices have stabilized and should provide less of a headwind for the remainder of the year.

At the close of the quarter, our consolidated backlog was $300 million.

A decrease of $30 million in the previous quarter and $55 million lower than at the beginning of the year.

Backlogs have returned to normal levels within contractor, but there remains slightly elevated in semiconductor products and our game our powder business.

Christopher Knutson: The gross margin rate increased 490 basis points in the quarter. Strong price realization and lower-product costs were more than enough to offset lower-backary volumes. While material costs have somewhat moderated compared to what we experienced last year, lower-backary volumes and increased operational spending continued to be headwinds for the quarter and year to day.

Now turning to some commentary on our segments and regions.

Contractor segment sales were down 8% for the quarter sales decline across all regions with the steepest contraction on a percentage basis being in EMEA.

Christopher Knutson: State. Total operating expenses increased $3 million or 3% in a quarter, primarily from volume and rate-related increases of $1 million, and incremental share-based compensation of $2 million. Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of 4% points. Contractor and process operating margins increased 7 percentage points to 31% compared to the third quarter last year. At current volumes, we believe these operating margin rates are sustainable for the remainder of the year.

<unk> results for the quarter were impacted by challenging year over year comparisons in 2022 contractor sales in EMEA were up 12% in the third quarter as we were able to ship a considerable amount of our backlog when supply chain constraints started to alleviate.

There is also a robust order activity in the third quarter of 2022 in advance of our October price increase.

In Asia Pacific strong growth outside of China was not enough to offset declines in China from weaker container and construction markets. This year.

New product introductions and contractor have helped drive incremental revenue in a challenging macro environment.

Christopher Knutson: Non-operating expenses decreased $2 million as a result of increased interest income on cash health. The adjusted effective tax rate was 19% for the quarter, which is consistent with our expected full-year tax rate were approximately 19% to 20% on an as-adjusted basis. Cash provided by operations told $491 million for the year to date an increase of $219 million from last year, mostly driven by higher net earnings and a reduction in inventory purchases.

<unk> like our new lightweight quick shot electric powered architectural coatings gun package and the reactor to component proportioning system for spray foam and pollo urea applications have been well received by customers globally.

<unk> ability has improved and contractor as pricing actions are now starting to offset the significant cost increases experienced in the last two years and product mix is more favorable than it was a year ago.

Industrial segment sales declined 1% strong sales in Asia Pacific were offset by timing of project completion and acceptance in our powder coating business.

Christopher Knutson: Cash provided by operations as a percentage of net earnings is 124% for the year. Through the end of the quarter, we re-purchased $427,000 shares for $31 million. We have continued to re-purchase shares in the first weeks of October, and as of market close yesterday, we have re-purchased $1.3 million shares for $93 million here to date. During the quarter, we repaid $75 million in private placement notes, plus a prepayment fee of $700,000.

Activity in key end markets, such as alternative energy electronics and battery has been good.

Elevated backlogs are expected to decrease as we work our way through the fourth quarter.

The process segment grew 9% in the third quarter increases were posted in most business units and across all reportable regions led by double digit growth in vehicle services and semiconductor.

Christopher Knutson: This represented the final series of the private placement debt we entered into in 2012. We also made year-to-date dividend payments of $119 million and capital expenditures of $146 million with $89 million related to facility expansion projects.

Resilient volume strong pricing and good expense management drove incremental margins of 102% for the quarter and operating earnings of 31%.

Our lubrication equipment diaphragm pumps semi conductor equipment and environmental equipment businesses, all posted revenue gains in the third quarter and for the year.

Christopher Knutson: Finally, our full-year estimates for unallocated corporate expense and capital expenditures can be found in the conference call slide deck on page 10.

We've been able to leverage this growth into record operating profit margins for this segment this year.

Mark Sheahan: I'll now turn the call over to Mark for further segment and regional commentaries. Thank you, Chris. Good morning, everybody.

Moving to our outlook our sales results for the first nine months were in line with our annual our annual guide of low single digits organic growth on a constant currency basis.

Mark Sheahan: All of my comments this morning will be on an organic constant currency basis. In the face of a modest 2% revenue decline, we reported record third quarter operating earnings and operating profit margin. We experienced another quarter of strong, broad-based sales growth in the process segment, which was up 9%, and 13% for the quarter and year respectively. The industrial segment was down slightly on lower-project activity in our game-up powder business, and our contractor segment declined 8% from a combination of a difficult comparison in Amea versus last year's record quarter and the softening of global construction markets.

While macroeconomic conditions worldwide are unpredictable.

And business tempo has slowed from a year ago. We're pleased with the improvements that we're making in the business and that are driving record levels of profitability.

Current order rates, along with backlogs new product activity and strong pricing gives us confidence that we will attain our full year 2023 revenue guide.

That concludes our prepared remarks, operator, we're ready for questions.

Thank you the question and answer session will begin at this time.

Mark Sheahan: Overall, we're pleased that the company achieved third quarter operating margins of 30% or more in each of our segments. This was driven by significant growth from the process segment coupled with strong operating performance from both industrial and contractor. Realized pricing actions remain strong, and our factories have rebounded nicely after a couple of tough years of getting product out the door. Input costs remain elevated, but in general commodity prices have stabilized and should provide less of a headwind At the close of the quarter, our consolidated backlog was $300 million, a decrease of $30 million from the previous quarter and $55 million lower than at the beginning of the year. Backlogs have returned to normal levels within Contractor, but they remain slightly elevated in semiconductor products and our game of powder business.

As a reminder to ask a question. Please press star one one on your telephone.

<unk> for your name to be announced to withdraw your question. Please press star one again your questions will be taken in the order that is received please standby for your first question.

Our first question comes from Mike Halloran with Robert W. Baird. Your line is open.

Hey, good morning, everybody.

Mike today.

I know that.

I know, we picked up this last quarter, but I'm going to take another stab at it.

Obviously process has been a bright spot in the portfolio both from a top line and a margin perspective, but can you maybe dig in about why the sustainability of demand has been so good.

Particularly why.

Lubrication and vehicle services continue to be so strong and then.

Mark Sheahan: Now turning to some commentary on our segments and regions. Contractor segment sales were down 8% for the quarter, sales declined across all regions with the steepest contraction on a percentage basis being in AMA. AMA's results for the quarter were impacted by challenging year-over-year comparisons. In 2022, Contractor sales in AMA were up 12% in the third quarter, as we were able to ship a considerable amount of our backlog when supply chain constraints started to alleviate.

Additionally, I know you mentioned that backlog in semi continues to be good can you maybe talk about why.

Youre seeing maybe more sustainable trends versus some of the broader maybe your broader peers in the semi space recognizing that you're offering is a little bit different using peers very loosely there.

Yeah sure I'll take a stab at it I mean, a couple of things obviously, we did some nice pricing actions over the last.

18 months, or so which I think we're still seeing the benefit of so when you look at our headline numbers the revenue growth does have pricing baked into it.

Mark Sheahan: There was also robust order activity in the third quarter of 2022 in advance of our October price increase. In Asia-Pacific, strong growth outside of China was not enough to offset the clines in China from weaker container and construction markets this year. New product introductions in Contractor have helped drive incremental revenue in a challenging macro environment. Products like our new lightweight, quickshot, electric-powered, architectural coatings gun package and the reactor to component proportioning system for spray foam and polyurea applications have been well received by customers globally.

Withstanding that though when you look across the portfolio of things that we have in that segment, whether it's our diaphragm pump business, where we've got some really good new products that are contributing to the growth.

In semiconductor we have been working down backlog orders throughout the year, which were actually embarrassingly high a year ago and the team has done a really nice job of getting some throughput in the factory and making a lot of efficiency improvements there the outlook for semiconductor this year wasn't so good and I think our orders.

That kind of falling in line with that but as you look into 'twenty four it into 25, there is a lot of investment going on there and so we feel like this is a good catch up year for us and hopefully our business remains robust as we kind of work our way through the backlog. We've got left and then as we roll into 2025.

Mark Sheahan: Profitability has improved in Contractor as pricing actions are now starting to offset the significant cost increases experience in the last two years and product mix is more favorable than it was a year ago. Industrial segment sales declined 1%, strong sales in Asia-Pacific were offset by timing of project completion and acceptance in our powder coating business. Activity in key end markets such as alternative energy, electronics and battery has been good. Elevated backlogs are expected to decrease as we work our way through the fourth quarter.

Vehicle serviced team is just doing really well in lubrication overall of course, we got the <unk>, but we also have industrial lube and we're seeing decent growth in both of those categories. It's a combination of superior execution the ability to deliver out of the factory some new product launches that we've had that have really.

And the nice hold in the marketplace, and that's and combined with the pricing actions they've done and watching expenses, they've really been able to drive profitability at an extremely high rate. There are environmental businesses are doing well.

Mark Sheahan: The process segment grew 9% in the third quarter. Increases were posted in most business units and across all reportable regions led by double digit growth in vehicle services and semiconductor. Resilient volume, strong pricing and good expense management drove incremental margins of 102% for the quarter and operating earnings of 31%. Our lubrication equipment, diaphragm pumps, semiconductor equipment and environmental equipment businesses all posted revenue gains in the third quarter and for the year. We've been able to leverage this growth into record operating profit margins for the segment this year.

Of course, the QED business.

Where we manage the fluids in and around landfills and also the <unk>.

<unk> analyzer business that we have that does that.

<unk> the methane gas that's coming off of the landfills. It seems like after a couple of years, where the big players in landfill weren't making investments they have started to pick up a little bit there and so we've got a great product line and I think we're benefiting there we have a strong team good factory performance.

I think that it's a combination of pricing great execution in the factories, some nice new product launches.

Mark Sheahan: Moving to our outlook, our sales results for the first nine months were in line with our annual guide of low single digits organic growth on a constant currency basis. While macroeconomic conditions worldwide are unpredictable, and business temple has flowed from a year ago, we're pleased with the improvements we're making in the business and that are driving record levels of profitability. Currently, current order rates, along with backlogs, new product activity, and strong pricing gives us confidence that we will attain our full year 2023 revenue guide.

And reduction of backlog, it's really drive driven our results this year.

Thank you really robust answers super helpful Mark.

And maybe switching gears a little bit obviously.

Andrew has been with the team now for a little bit of time, I know that working on M&A and building that pipeline has been a priority priority could you maybe comment on the progress with building that pipeline.

Whether you feel like Youre getting the appropriate traction and where you need to be any color on the pipeline development and kind of the process would be helpful. Yes. Thanks, thanks for bringing it up to <unk> been on my team now for almost two years I think it'll be two years in January.

Operator: That concludes our prepared remarks, operator, we're ready for questions. Thank you.

Operator: The question and answer session will begin at this time. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Your questions will be taken in the order that it is received. Please stand by for your first question.

Ingo.

Ryan Patrick who works within that I've done a really nice job of working with the business units and developing our M&A pipeline of ideas and companies.

It's interesting I would tell you that a couple of years ago I, probably could have walked around the company and asked people to give me their M&A pipelines and I might have come up with a 100 companies, but I would say that less than half of them had been fully vetted, where we actually knew about the company, we knew who to contact.

Mike Halloran: Our first question comes from Mike Halloran with Robert W. Baird. Your line is open. Good morning, everybody. It depends on for Mike today. I know we picked at this last quarter, but I'm going to take another stab at it. Obviously, process has been a bright spot in the portfolio, both from a top line and a margin perspective. But can you maybe dig in about why the sustainability of demand has been so good?

Have a good understanding of what the strategic fit was and why they might be an attractive target. So while we've been doing in the last year or so is really sorting through those pipelines and adding to them where it made sense in taking out some of the companies, where we really didn't have a good strategic vision. So as I sit here today I think we have over 100 companies in our pipe.

Mike Halloran: Particularly why lubrication and vehicle services continue to be so strong? Additionally, I know you mentioned that backlog in semi continues to be good. Can you maybe talk about why you're seeing maybe more sustainable trends versus some of the broader... Maybe your broader peers in the semi-space recognizing that you're offering is a little bit different. Using peers very loosely there. Yeah, sure. I'll take a stab at it. I mean, a couple things.

They've all been fully vetted.

So theres a lot of things that go into whether you can actually do a deal or not but I feel like where we are in better shape today than we've been for quite some time in terms of the robustness of the pipeline the quality of the pipeline and the quality of the discussions that we're having with companies that we're interested in.

Great. That's super helpful. I appreciate all the color I'll pass it on.

Thanks Pat.

Mike Halloran: Obviously, we did some nice pricing actions over the last 18 months or so, which I think we're still seeing the benefit of. So when you look at our headline numbers, the revenue growth does have pricing baked into it. Notwithstanding that, though, when you look across the portfolio of things that we have in that segment, whether it's our diaphragm pump business, where we've got some really good new products that are contributing to the growth.

Our next question comes from the line of Deane Dray with RBC capital markets. Your line is open.

Hi, This is Tyler avoid on for Dan.

My first question.

Could you give us a sense for what the monthly cadence of.

Sales were.

Decelerate.

Mike Halloran: In semi-conductor, we have been working down back orders throughout the year, which were actually embarrassingly high a year ago. And the team has done a really nice job of getting some throughput in the factory and making a lot of efficiency improvements there. The outlook for semi-conductor this year wasn't so good. And I think our orders are kind of falling in line with that. But as you look into 24 and into 25, there is a lot of investment going on there.

The quarter went on.

Or any color there as well as how things are trending in October.

Yes, I think the cadence was pretty stable to be honest with you. It's been hanging in there the comps are interesting right because of last year with all the pricing stuff that we did and the supply chain constraints and people, placing orders ahead of time just to get into the queue of that type of thing, but in terms of the absolute level of orders that we're seeing across graco.

Mike Halloran: And so we feel like this is a good catch-up year for us. And hopefully business remains robust as we kind of work our way through the backlog we've got left. And then as we roll into 2025 vehicle service team is just doing really well in lubrication overall. Of course, we've got VS, but we also have industrial loop. And we're seeing decent growth in both of those categories. It's a combination of superior execution, the ability to deliver out of the factory.

I'd characterize it is as stable at this point.

Great that's really helpful and then.

Do you mind touching on how inventories are looking in the channel at both the home center and propane.

Yes, when we put all of our team on that topic, which we do frequently particularly.

In the home center and at.

The retail paint stores, where we sell product to.

The feedback that we're getting is that the pipeline of inventory is in good shape it pretty much matches up with the level of activity that they're seeing in the marketplace.

Mike Halloran: Some new product launches that we've had that have really taken a nice hold in the marketplace. And that's in combined with the pricing actions they've done and watching expenses, they've really been able to drive profitability at an extremely high rate there. Our environmental businesses are doing well. Of course, QED business where we manage the fluids in and around landfills. And also the gas analyzer business that we have that does that, analyzes the methane gas that's coming off of the landfills.

I can't tell you that that was the case a year ago I think a year ago. It may have they may have still been playing a little bit of catch up in terms of trying to build up their inventory levels and this year. The feedback that we're getting is that.

Folks feel like things are things are in pretty good shape, you probably know, but the home center has been challenging this year foot traffic is down.

Mike Halloran: It seems like after a couple of years where the big players in landfill weren't making investments. They have started to pick up a little bit there. And so, you know, we've got a great product line. And I think we're benefiting there. We have a strong team, good factory performance. I think that, you know, it's a combination of pricing, great execution, and the factories. Some nice new product launches. And, you know, reduction of backlogs that's really driven our results. Thank you.

The big retailers have reacted to that but again I think that they've worked through any.

Excess inventory that they may have had.

As their foot traffic came down I think we're I think we're in a good spot right now yes.

Yes. This is David I'd, just like to volunteer that on the inventory side, you may know this but others.

You're newer to the story.

It's helpful to remind them when they read that other companies are talking about destocking in channel working off excess inventories because they have more confidence in the supply chain.

Mark Sheahan: That's really robust answers. Super helpful, Mark. And maybe switching gears a little bit. You know, obviously, you know, and you've been with the team now for a little bit of time. I know that working on M&A and building that pipeline has been a priority priority. You may be comments on, you know, the progress with building that pipeline, you know, whether you feel like you're getting the appropriate traction and where you need to be any color on the pipeline development.

<unk> isn't a significant factor.

Excess inventory in our businesses, because our channel partners in industrial and in process.

Really don't stop much outside of the spare parts space.

Through good times, and bad and through periods of greater or lesser demand, we have and continue to have a high level of confidence that.

Mark Sheahan: And kind of the process would be helpful. Yeah, thanks. Thanks for bringing it up to you. Inga has been on my team now for almost two years. I think it'll be two years in January and Inga and Ryan Patrick, who works with Inga. I've done a really nice job of working with the business units and developing our M&A pipeline of ideas and companies. It's interesting. I would tell you that a couple of years ago, I probably could have walked around the company and asked people to give me their M&A pipelines.

Wholesale equals retail and there is not an inventory overhang in those two segments that gives us any degree of concern.

Great. Thank you.

Okay.

One moment for our next question.

Our next question comes from Saree <unk> with Jefferies. Your line is open.

Good morning. This is James on for Sarah Thanks for taking my questions today.

Mark Sheahan: And I might have come up with 100 companies, but I would say that less than half of them had been fully vetted, where we actually knew about the company. We knew who to contact. We had a good understanding about the strategic fit was and why they might be an attractive target. So what we've been doing in the last year or so is really sorting through those pipelines and adding to them where it made sense and taking out some of the companies where we really didn't have a good strategic vision.

And I wanted to talk about contractor margins. So the margins improved quite significantly year over year and quarter over quarter, Despite lower revenue levels.

On a sequential basis. So can you. Please provide more color on the magnitude of benefit from pricing product cost and mix and also can you talk about the sustainability of the margin level. Thank you.

Mark Sheahan: So as I sit here today, I think we have over 100 companies in our pipeline. They've all been fully vetted. Of course, there's a lot of things that go into whether you can actually do a deal or not, but I feel like we're in better shape today than we've been for quite some time in terms of the robustness of the pipeline, the quality of the pipeline, and the quality of the discussions that we're having with companies that we're interested in. Great. That's super helpful. I appreciate all the color. I'll pass it on. Thanks, Beth.

Yes, I don't think we are going to be able to fine tune the different components, there, but for sure price has had a nice impact for CBD.

Might remember a year ago, when we were talking about all our input costs going through the rough and how.

Contractor was really bearing most of that burden.

And in things like electronic components that were very expensive and hard to get and you had to.

Make it a special accommodations to suppliers to actually get parts in the door with that that has really freed up so a lot of that hyper inflation that was going on in some of the things that they purchased as has subsided.

Deane Dray: Our next question comes from the line of Dean Dre with RBC Capital Markets. Your line is open. Hi, this is Tyla Voidon for Dean.

Our pricing actions that we took were really designed to offset the cost pressures that we had in the business.

Tyler Voidon: My first question. Can you give us a sense for what the monthly cadence of sales were? What did you tell her as the quarter went on? Or any color there as well as how things are trending in October? Yeah, I think the cadence was pretty stable. To be honest with you, it's been hanging in there. The cops are interesting, right? Because the last year with all the pricing stuff that we did and the supply chain constraints and people placing orders ahead of time just to get into the queue of that type of thing. But in terms of the absolute level of orders that we're seeing across Graco, I characterize it as stable at this point.

And we're seeing that happen so youre seeing margin rates kind of go back to more of a normal level I would believe in that business and what we had seen maybe over the last couple of years.

Tyler Voidon: Great. That's really helpful.

The team is doing a great job managing their expenses.

They're not.

They understand the dynamics in the market right now are not as good as they were the last couple of years and I think that I am pleased with how they are making sure that we're keeping an eye on spending and not adding to our fixed cost base, we do have some.

Variable expenses in our P&L in contractor.

Related to incentive payments that last year were higher than they are this year. So there is a little bit of.

Tyler Voidon: And then I'm just touching on how inventory they're looking in the channel at both the home center and propane. Yeah. When we probe our team on that topic, which we do frequently, particularly in the home center. And at, you know, the retail paint stores or sell product to the feedback that we're getting is that the pipeline of inventory is in good shape. It pretty much matches up with the level of activity that they're seeing in the marketplace.

Tailwind from from that activity. In addition to what Youre seeing on the gross margin line in that business, but overall.

There are 30% operating margins I don't know if the business is ever been that high I think in Q1, we might have touched that level, but as we work our way through the rest of the year I think as Chris said in his comments, we really believe that those those rates of operating profitability are sustainable as long as we continue to run at that.

Tyler Voidon: I can't tell you that that was the case a year ago. I think a year ago it may have they may have still been playing a little bit of catch up in terms of trying to build up their inventory levels. And you know, this year, the feedback that we're getting is that folks feel like things are things are pretty good shape.

Volumes that we're seeing which we're pretty confident that we will.

Got it thanks for that color that's very helpful.

Staying with contractor. So can you kind of talk about how different markets. We think the contracts are kind of played out in the quarter. Since one of your large customers talked about consolidated commercial performance, while new rescue remains pressures and have you seen any.

David Lowe: You probably know, but the home center has been challenging this year. Foot traffic is down. The big retailers have reacted to that. But again, you know, I think that they've worked through any, you know, excess inventory that they may have had as their foot traffic came down. I think we're in a good spot right now.

Pressure or headwind from interest on the commercial side. Thank you.

Yes, so I mean, if you were to look at the business in <unk> I mean, there's a ton of moving parts right. We've got the propane side, we have the.

Tradesmen and DIY side of the business, we have spray foam we are protective coatings, we have.

David Lowe: So yeah, this is David. I just like the volunteer that on the inventory side, you may know this, but others that maybe you're newer to the story. It's helpful to remind them when they read that other companies are talking about destocking and channel working off excess inventories because they have more confidence in the supply chain. It really isn't the significant factor excess inventory in our businesses because our channel partner is an industrial and in process, really don't stop much outside of the spare parts space.

<unk> striping, we have.

Stucco and texture.

Of.

All kinds of different segments within contractor so in any one of them they might be up or there might be down I would say that generally speaking when you read all the headlines about how bad it is in the housing market.

The uncertainty around all of that I feel pretty good about how our businesses performed this year.

For sure protective and marine.

David Lowe: So through good times and bad and through periods of greater or lesser demand, we have and continue to have a high level of confidence that wholesale equals retail. And there is not an inventory overhang in those two segments that gives us any degree of concern.

Protective coatings spray foam anything in what we call our high performance coatings and foam business has been good.

The pro business has held in there better than what I think most people would have expected and home center has been tough so.

Operator: Great. Thank you. One moment for our next question.

When you get outside of North America, and you started talking about Europe I think the pro business has held up pretty well on a year to date basis.

And when you look over in Asia, I think it's really limited the weakness that we've seen has really been limited to China and there is two things. There one is the container business, where they put coatings onto containers for that go onto ships for cargo that business has dropped pretty pretty significantly. So we're just not selling as much equipment.

Saree Boroditsky: Our next question comes from Saree Boroditsky with Jeffries. Your line is open. Good morning. This is James on for Saree. Thanks for taking my questions today. And I wanted to talk about contractor margins. So the margins improved like kind of significantly year over year and quarter over quarter. Like despite lower revenue levels and on a sequential basis. So can you please provide more color on the magnitude of benefit from price product cost and mix.

Saree Boroditsky: And also can you talk about the sustainability of the margin level. Thank you. Yeah, I don't think we are going to be able to fine tune, you know, the different components there, but for sure price has had a nice impact for CD. You might remember a year ago when we were talking about all our input costs going through the rough and how contractor was really bearing most of that burden. And, you know, in things like electronic components that were, you know, very expensive and hard to get and you had to make, you know, special accommodations to suppliers to actually get parts in the door with that, that is really freed up.

There.

I actually ran the business for a while so youll live through these periods, where it's up and then it's down kind of in a down period and then in China I was over there about a month ago and the construction market over there has really softened quite a bit.

You would drive around the city and you'd see cranes.

But you would see no activity at all around the cranes.

Which is vastly different than what it was when I was over there for years ago. Unfortunately had been that long because of the pandemic, but four years ago, you'd see cranes, but you'd see all kinds of stuff happening. So it's really not too surprising that our business has kind of played out the way that it has.

Got it thank you I will pass it on.

Our next question comes from the line of Jeff Hammond with Keybanc Capital Markets, Inc. Your line is open.

Saree Boroditsky: So a lot of that hyperinflation that was going on in some of the things that they purchased has has subsided our pricing actions that we took. We're really designed to offset the cost pressures that we had in the business. And we're seeing that happen. So you're seeing margin rates kind of go back to more of a normal level. I would believe in that business and what we had seen maybe over the last couple of years.

Jeff Hammond your line is open.

One moment for our next question.

Saree Boroditsky: The team is doing a great job managing their expenses. They're not, you know, they understand the dynamics in the market right now are not as good as they were the last couple of years. And I think that I'm pleased with how they're, you know, making sure they're keeping an eye on spending and not adding to our fixed cost base. We do have some, you know, variable expenses in our P and L and contractor related to incentive payments that, you know, last year were higher than they are this year.

Our next question comes from Matt Summerville with D. A Davidson your line is open.

Thanks.

Turning.

Can you Mark.

You're doing can you maybe help me kind of square the comments you made just on the.

Powder, finishing business gamma.

Talk about backlog being healthy, but projects, maybe pushing to the right adverse timing can you just provide a little bit more detail as to what youre seeing there.

Saree Boroditsky: So there's a little bit of tailwind from that activity in addition to what you're seeing on the gross margin line in that business. But overall, you know, they're, they're at 30% operating margins. I don't know if the business has ever been that high. I think in two, one, we might have touched that level. But as we work our way through the rest of the year, I think is Chris said in his comments.

Yeah. Good question. So there is really at a really high level theres kind of two big pieces to the Gamer business one of our powder systems and the other are the.

The equipment side.

Packages in guns, and accessories, and those types of things and.

What we.

We acquired a business I don't know half a dozen years or so ago that really focuses on the powder systems.

Saree Boroditsky: We really believe that those rates of operating profitability are sustainable as long as we continue to run at the volumes that we're seeing, which we're pretty confident that we will. Got it. Thanks for the detail, Collar. It's very helpful. And the thing with contractor, so can you kind of talk about how different markets within the contractor kind of played out in the quarter, since one of your large customers talked about kind of solid commercial performance, while new resin remains precious and have you seen any pressure or had wins from interest on the commercial side.

Side of the business and in particular, they make conveyors systems for vertical line coatings.

And these are.

Aluminum extruded.

Materials that are used in a.

A lot of different applications in those.

Extruded aluminum pieces get coated with with powder coatings and there are a large user of gaming equipment.

Their business has been softer than what we experienced over the last couple of years, So theres a little bit of volatility there in terms of the overall <unk>.

Saree Boroditsky: Thank you. Yeah, so I mean, if you were to look at the business in CED, I mean, there's a ton of moving parts, right? We've got the propane side, we have the tradesmen, high-end DIY side of the business, we have spray form, we have protective coatings, we have line striping, we have, you know, stucko and texture, we have all kinds of different segments within contractors. So in any one of them, they might be upper, they might be down.

<unk> within the game of powder business I would say that.

The other side of the game of business has been actually pretty good.

Anything as standard equipment distributed product.

Parts and accessories as sort of mirroring what we see on the other side of the <unk> industrial businesses, which are liquid, finishing and sealants and adhesives.

But the systems business can be kind of lumpy.

And we still have some orders in the backlog that hopefully it will ship between now and the end of the year, but it does create some a little bit of volatility on a quarterly basis, we do try to factor all of this into our annual revenue guide outlook and so.

Saree Boroditsky: I would say that generally speaking, when you read all the headlines about how bad it is in the housing market and, you know, the uncertainty around all that, I feel pretty good about how our businesses perform this year, for sure, protective and marine, protective coatings, spray foam, anything, and what we call our high performance coatings and foam business has been good. The pro-business is held in there better than what I think most people would have expected, and the home center has been tough.

Knowing what we know about the backlog and what's going to ship out of powder for the rest of the year, we feel pretty confident that we're still gonna be able to hit those numbers. Yes. Excuse me. This is David again, I would underline Mark's point about the.

I'll call it the lumpiness of closure or in sign off of systems.

Saree Boroditsky: So when you get outside of North America, and you start talking about Europe, I think the pro-business is held up pretty well on a year-to-date basis, and when you look over in Asia, I think it's really limited, the weakness that we've seen has really been limited to China. And there's two things there. One is the container business where they put coatings onto containers for, they go onto ships for cargo. That business has dropped pretty, pretty significantly, so we're just not selling as much equipment there.

Tends to be.

Tends to be very tends to be more active based on our history. In Q4. So we're confident that we'll see a more elevated level in Q4, we don't have a sense of the absolute number and there are complexities in our systems business that we don't see as primarily a component supplier in most of our businesses.

And sometimes a final sign off of our system is held up by factors not related to us but related to the project, meaning the conveyor supplier or the robot supplier or the HVAC supplier hasnt gotten their work.

Saree Boroditsky: I actually ran the business for a while, so you live through these periods where it's up, and then it's down, and it's kind of in a down period. And then in China, I was over there about a month ago, and the construction market over there has really soft and quite a bit. You would drive around the city, and you'd see cranes, but you would see no activity at all around the cranes, which is vastly different than what it was when I was over there four years ago.

Fully flushed out and completed yet and with the supply chain challenges of the last couple of years.

Frankly, coupled with Covid to those are I'd say.

TIK, Kimberly sophisticated and complex logistical problems, especially in the markets in South America, and in Asia and in Eastern Europe, where a lot of the new powder systems are installed.

Saree Boroditsky: Unfortunately, it had been that long because of the pandemic, but four years ago, you'd see cranes, but you'd see all kinds of stuff happening. So it's really not too surprising that our business has kind of played out the way that it has. Got it. Thank you.

Saree Boroditsky: I will pass it on.

Thanks, and then just as a follow up on.

Honestly, it's a law.

Little bit early but I'm sure. It's top of mind, Mark how are you thinking about pricing as you go into 'twenty four.

Jeffrey Hammond: Our next question comes from the line of Jeff Hammond with Keybank Capital Markets Inc. Your line is open.

Yes, I think it's going to be more of a normal year for us.

We try to realise one 5% to 2% pricing in a normal environment inflation is still running hotter than it was a few years ago. So in terms of like the absolute level of price increase lift a lift I think we're going to be.

Jeffrey Hammond: Jeff Hammond, your line is open. One moment for our next question.

Higher than what we would have been let's say in the two.

2018, 2019 timeframe, but.

Matt Summerville: Our next question comes from Matt Somerville with DA Davidson. Your line is open. Jeff Hammond, your line is open. Thanks, good morning. Can you mark how you're doing? Can you maybe help me kind of square the comments you made just on the powder finishing business, Gemma, is kind of talk about backlog being healthy, but projects may be pushing to the right adverse timing. Can you just provide a little bit more detail as to what you're seeing there?

We're right now we're thinking that there'll be one price increase will be doing it in January and it will be more in line with what we've done historically.

Great. Thanks, guys, yes, thanks, Matt.

Our next question comes from the line of Larry de Maria William Blair. Your line is open.

Hi, Thanks.

Morning, everybody.

First question, you mentioned semiconductors as an opportunity for kind of 'twenty four 'twenty five.

Matt Summerville: Yeah, good question. So there's really in a really high level, there's kind of two big pieces to the game of business, one are powder systems, and the other are, you know, the the equipment side, you know, packages and guns and accessories and those types of things. And what we we acquired a business, I don't know half a dozen years ago, that really focuses on the powder systems side of the business, and in particular they make conveyor systems for vertical line coatings.

As we sit here today.

Some other big organic opportunities through segments for 24, specifically, because it sort of feels a little bit about <unk>.

<unk> market is backlog comes down and we had these headwinds contract yourself.

The words, it seems to be things looking sort of flattish as we look out to the right as the backlog has come down to try to see if there's anything besides price.

On the organic side that can drive volume higher next year.

Yes, it's a good question I think I would turn to the products that we have in the portfolio and some of the things that we plan to launch in some of the ones. We already have there is obviously big macro trends out there on the <unk>.

Matt Summerville: And these are, you know, aluminum extruded materials that are used in, you know, a lot of different applications, and those extruded aluminum pieces get coated with with powder coatings, and they're a large user of Gamma equipment, and their business has been softer than what we experienced over the last couple years. So, you know, there's a little bit of volatility there in terms of the overall results within the game of powder business.

Movement from Air operated pumps to electric drive pumps, and I think we're capitalizing on that advantage, we got some products coming out.

In the next 12 months, so that I think will be even more able to capitalize on that opportunity.

The alternative energy space is still pretty hot there is a lot going on in battery manufacturing. We're heavily involved with that solar panels are going up all over the place and obviously, where we're making equipment and fine tuning our our portfolio of products that we offer in that in that particular space.

Matt Summerville: I would say that the other side of the game of business has been actually pretty good. Anything standard equipment, distributed product, parts and accessories is sort of mirroring what we see on the other side of the graco industrial businesses, which are like with finishing and sealant and adhesive, but the systems business can be kind of lumpy, and you still have some orders in the backlog that hopefully I'll ship between now and the end of the year, but it does create some little bit of volatility on our quarterly basis.

So all in all.

There is there are nice new products coming out within the portfolio, which are going to help us hopefully offset any kind of macro.

Sluggishness I'll call it that people are expecting in 2004.

Okay. Thank you and then secondly, just.

Matt Summerville: We do try to factor all this into our annual revenue guide outlook, and so, you know, knowing what we know about the backlog and what's going to ship out of powder for the rest of the year, we feel pretty confident that we're still going to be able to hit those numbers.

Two quick questions here, you bought back some stock it sounds like Youre doing some more is there a target number to think about here for share repurchases for the full year and also can you give us.

I apologize if I missed it but what was price and volume in the quarter specifically.

Matt Summerville: Yeah, excuse me, this is David again, I would underline Mark's point about the call it the lumpiness of closure or in sign-off of systems tends to be very, tends to be more active based on our history in Q4, so we're confident that we'll see a more elevated level in Q4, we don't have a sense of the absolute number, and there are complexities in a systems business that we don't see as primarily a component supplier in most of our businesses, and sometimes a final sign-off of our system is held up by factors not related to us, but related to the project, meaning the conveyor supplier or the robot supplier or the HVAC supplier hasn't gotten their work fully fleshed out and completed yet, and supply chain challenges of the last couple of years, you know, frankly, coupled with COVID too, those are, I'd say particularly sophisticated and complex logistical problems, especially in the markets in South America and in Asia and in Eastern Europe, where a lot of the new powder systems are Thanks, and then just as a follow up, obviously it's a little bit early but I'm sure it's top of mind, Mark, how are you thinking about pricing as you go into 24? Yeah, I think it's going to be more of a normal year for us.

So I think that we I think we disclosed that we will disclose that in terms of the absolute levels that we've.

<unk> purchase I think Chris gave gave that information.

Well, we tried to do here when we evaluate when to buy stock and how much to buy as we really run a discounted cash flow analysis on graco and we treat it like any other capital projects that we might consider within the company and long story short we come up with the number we look at the market cap of the <unk>.

<unk> in the overall valuation and to the extent that we feel like there is a mismatch there.

We are active in the market and of course, if we become more active in the market when we think that mismatches.

Is that is broader.

Historically I think our approach has worked extremely well.

The last number that I saw that I think David shared with me is that over the last dozen or so years are our own IRR on stock buybacks is somewhere around 13 or 14%.

I feel really good about so here in this quarter, obviously, there has been some weakness in the stack we've.

<unk> gotten involved with that and we will continue to be opportunistic as the year goes on and I think thats. The really remains the key the key word is opportunistic.

And the way Mark described the discounted cash flow slash ROI.

Process. We go through really is the way we do it.

Matt Summerville: We've tried to realize one and a half to two percent pricing in a normal environment. Inflation's still running hotter than it was a few years ago, so in terms of like the absolute level of price increase, lift to lift, I think we're going to be higher than what we would have been, let's say in the 2018-2019 timeframe. But right now we're thinking there'll be one price increase, we'll be doing it in January and there'll be more in mind before we've done historically. Thanks, guys.

And.

Wow.

I may not necessarily think of graco as a classic cyclical we serve cyclical markets and so the street tends to think of us that way and because of that there will be opportunities from time to time.

Matt Summerville: Thanks, Matt.

To be more aggressive and I think it's a.

Something we keep in mind, because when days when times are dark like they were in <unk> nine and briefly in 2014 and 15 and certainly in 'twenty, we were positioned strongly to move aggressively and take advantage of those those short term discrepancies.

Larry D. Maria: Our next question comes from the line of Larry D. Maria at William Blair. Your line is open. Hi, thanks. Good morning, everybody. Hey, first question, if you mentioned semiconductor as an opportunity for kind of 24 or 25. As we sit here today, there are some other big organic opportunities, we look through segments for 24 specifically because this sort of feels a little bit of a sideways market as backlogs come down and we have these headwood to contractors.

Does that seem to appear every so often.

Okay. Thank you very much good luck and if you have the price value number that would be helpful. Good.

Larry D. Maria: In other words, it seems to be looking sort of flatish as we look out to the right as the backlogs come down. It's fun to see if there's anything besides price on their data side that can drive volume higher next year. Yeah, that's a good question. I think I would turn to the products that we have in the portfolio and some of the things that we plan to launch and some of the ones we already have.

Good luck. Thank you.

Okay.

As a reminder.

To ask a question. Please press star one one on your telephone.

Our next question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open.

Hello, Jeff if you're on mute please on mute yourself.

Larry D. Maria: There's obviously big macro trends out there on the movement from air operated pumps to electric drive pumps. And I think we're capitalizing on that advantage. We got some products coming out in the next 12 months. I think we'll be even more able to capitalize on that opportunity. The alternative energy space is still pretty hot. There's a lot going on in battery manufacturing. We're heavily involved with that. Solar panels are going up all over the place and obviously we're making equipment and fine tuning our portfolio products that we offer in that particular space.

If there are no further questions I will now turn the conference over to Mark Sheahan.

Okay, well again I want to thank everyone for participating in today's call and thank you for your loyalty and continued interest in and Greg All have a great day.

This concludes our conference for today, Thank you for participating and have a nice day.

Parties may now disconnect.

Larry D. Maria: So, you know, all in all, you know, there's there are nice new products coming out within the portfolio, which are going to help us. Hopefully offset any kind of macro sluggishness. I'll call it that people are expecting in 24.

Okay.

Yes.

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Yes.

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Yes.

Okay.

Larry D. Maria: Okay, thank you. And then second two questions here, you go back to stock. If you're doing some more, if you're a target member to think about here for share repurchases for the whole year. And also, can you give us and maybe do the typologists are missing, but what was price and volume in the quarter specifically? Yeah, so I think that we, I think we disclose that we will disclose that in terms of the absolute levels that we've, that we purchase, I think Chris gave, gave that information.

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Larry D. Maria: What we try to do here when we evaluate when to buy stock and how much to buy is we really run a discounted cash flow analysis on Grigal. And we treat it like any other capital project that we might consider within the company. And long story short, we come up with a number. We look at the market cap of the company and the overall valuation and the extent that we feel like there's a mismatch there.

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Larry D. Maria: We are active in the market. And of course, we become more active in the market when we think that mismatch is broader historically. I think our approaches worked extremely well. The last number that I saw that I think David shared with me is that over the last dozen or so years are our own IRR on stock by backs is somewhere around 13 or 14%, which I feel really good about. So here in this quarter, obviously, there's been some weakness in the stock.

Okay.

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Larry D. Maria: We've gotten involved with that and will continue to be opportunistic as the year goes on. Yeah, and I think that's the, that really remains the key, the key word is opportunistic and the way Mark described the discounted cash flow slash ROI process. We go through really is the way we do it, and while I may not necessarily think of Graco as a classic cyclical, we serve cyclical markets and so the street tends to think of us that way.

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Larry D. Maria: And because of that, there will be opportunities from time to time to be more aggressive. And I think it's a something we keep in mind because when times are dark, like they were in 09 and briefly in 15 and certainly in 20, we were positioned strongly to move aggressively and take advantage of those short-term discrepancies that seem to appear every so often.

Okay.

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Operator: Thank you very much. Good luck. And if you have the price-value number, that would be helpful. As a reminder to ask a question, please press star 1-1 on your telephone.

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Jeffrey Hammond: Our next question comes from the line of Jeff Hammond. The key bank capital markets your line is open.

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Jeffrey Hammond: Hello, Jeff. If you're on mute, please unmute yourself.

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Mark Sheahan: If there are no further questions, I will now turn the conference over to Mark Jean. Okay, well, again, I want to thank everyone for participating in today's call and thank you for your loyalty and continued interest in Graco.

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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 visiting the Companys website at Www Dot Graco Dotcom graco.

<unk> has additional information available in the 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 purpose of the Safe Harbor provisions of the private Securities Litigation Reform Act.

Reports are available on the company's website at Www Dot <unk> dot com and the Sec's website at Www Dot FCC Doctor.

I will now turn the conference over to Chris can Etsy exec.

Executive Vice President corporate controller.

Yesterday, <unk> reported third quarter sales of $540 million, a decrease of 1% from the third quarter of last year.

The effect of currency translation increased sales by one percentage point or approximately $5 million.

Just on current exchange rates currency translation should have no effect on full year net sales and an unfavorable impact of approximately one percentage point on net earnings for the full year.

Reported net earnings increased 15% to $133 million for the quarter diluted net earnings per share was <unk> 77.

An increase of 15% over last year.

During the quarter, we recognized a noncash goodwill impairment charge of $8 million and a $9 million gain from the reduction in the fair value of contingent consideration related to the reorganization of our business acquired in 2020.

<unk> for the quarter and year to date.

Total operating expenses increased $3 million or.

Or 3% in the quarter, primarily from volume and rate related increases of $1 million and incremental share based compensation of $2 million.

Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of four percentage points.

Contractor operating margins increased five percentage points to 30% and process operating margins increased seven percentage points to 31% compared to the third quarter last year at current volumes. We believe these operating margin rates are sustainable for the remainder of the year.

Non operating expenses decreased $2 million as a result of increased interest income on cash held the.

<unk> effective tax rate was 19% for the quarter, which is consistent with our expected full year tax rate of approximately 19% to 20% on an as adjusted basis.

Mark Sheahan: Have a great day.

Cash provided by operations totaled $491 million for the year to date in.

An increase of $219 million from last year.

Mostly driven by higher net earnings and a reduction in inventory purchases.

Cash provided by operations as a percentage of net earnings is 124% for the year.

Through the end of the quarter, we repurchased 427000 shares for $31 million. We have continued to repurchase shares in the first weeks of October and as of market close yesterday, we have repurchased one 3 million shares for $93 million year to date.

During the quarter, we repaid $75 million in private placement notes plus a prepayment fee of $700000. This represented the final series of the private placement that we entered into in 2012.

We also made year to date dividend payments of $119 million and capital expenditures of $146 million with $89 million related to facility expansion projects.

Finally, our full year estimates for unallocated corporate expense and capital expenditures can be found in the conference call slide deck on page 10.

Ill now turn the call over to Mark for further segment and regional commentary.

Thank you Chris Good morning, everybody all of my comments. This morning will be on an organic constant currency basis.

In the face of a modest 2% revenue decline, we reported record third quarter operating earnings and operating profit margin, we experienced another quarter of strong broad based sales growth and the process segment, which was up 9% and 13% for the quarter and year respectively.

Operator: This concludes our conference for today. Thank you for participating and have a nice day.

Operator: All parties may now disconnect. David Liptak, Joseph Ritchie, Andrew Buscaglia, Michael Halloran, Michael Halloran David Liptak, Joseph Ritchie, Michael Halloran, Michael Halloran, Michael Halloran, Michael Halloran, Michael Halloran, Michael Halloran[inaudible][inaudible] .

The industrial segment was down slightly on lower project activity in our game up powder business in our contractor segment declined 8% from a combination of a difficult comparison in EMEA versus last year's record quarter and the softening of global construction markets.

<unk>, we're pleased that the company achieved third quarter operating margins of 30%.

Or more in each of our segments.

This was driven by a significant growth from the process segment, coupled with strong operating performance from both industrial and contractor.

Realized pricing actions remained strong and our factories have rebounded nicely. After a couple of tough years, where getting product out the door.

Input costs remain elevated but in general commodity prices have stabilized and should provide less of a headwind for the remainder of the year.

At the close of the quarter, our consolidated backlog was $300 million.

A decrease of $30 million from the previous quarter and $55 million lower than at the beginning of the year.

Backlogs have returned to normal levels within contractor, but there remains slightly elevated in semiconductor products and our game our powder business.

Now turning to some commentary on our segments and regions.

Contractor segment sales were down 8% for the quarter sales decline across all regions with the steepest contraction on a percentage basis being in EMEA up.

There is also a robust order activity in the third quarter of 2022 in advance of our October price increase.

In Asia Pacific strong growth outside of China was not enough to offset declines in China from weaker container and construction markets. This year.

New product introductions and contractor have helped drive incremental revenue in a challenging macro environment.

<unk> like our new lightweight quick shot electric powered architectural coatings gun package and the reactor to component proportioning system for spray foam and Paula urea applications have been well received by customers globally.

Industrial segment sales declined 1% strong sales in Asia Pacific were offset by timing of project completion and acceptance in our powder coating business.

Activity in key end markets, such as alternative energy electronics and battery has been good.

Elevated backlogs are expected to decrease as we work our way through the fourth quarter.

The process segment grew 9% in the third quarter increases were posted in most business units and across all reportable regions led by double digit growth in vehicle services and semiconductor.

<unk> resilient volume strong pricing and good expense management drove incremental margins of 102% for the quarter and operating earnings of 31%.

Our lubrication equipment diaphragm pumps semi conductor equipment and environmental equipment businesses, all posted revenue gains in the third quarter and for the year.

We've been able to leverage this growth into record operating profit margins for this segment this year.

Operator: 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 purpose of the safe harbor provisions of the private security's litigation reform act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in the item 1A of the company's 2022 and a report on form 10K and in the item 1A of the company's most recent quarterly report on form 10Q.

Operator: These reports are available on the company's website at www.graco.com and the SEC's website at www. SEC.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events.

Moving to our outlook our sales results for the first nine months were in line with our annual our annual guide of low single digits organic growth on a constant currency basis.

Christopher Knutson: I will now turn the conference over to Chris Knutson, Executive Vice President Corporate Controller. Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe.

Christopher Knutson: I will provide a brief overview of our quarterly results before turning the call over to Mark for additional discussion. Yesterday, Graco reported third quarter sales of $540 million, a decrease of 1% from the third quarter of last year. The effect of currency translation increased sales by 1% or approximately $5 million. Based on current exchange rate, currency translation should have no effect on full-year net sales and an unfavorable impact of approximately 1% point on net earnings for the full year. Reported net earnings increased 15% to $133 million for the quarter, diluted net earnings per share with 77 cents and increase of 15% over last year.

Christopher Knutson: During the quarter, we recognized a non-cash goodwill impairment charge of $8 million and a $9 million gain from the reduction in the fair value of contingent consideration related to the reorganization of a business acquired in 2020. Both of these items were included in unallocated operating expense, excluding the impairment charge, contingent consideration adjustment and tax benefits from stock option exercises, adjusted net earnings per share with 76 cents. The gross margin rate increased 490 basis points in the quarter.

Macroeconomic conditions worldwide are unpredictable.

And business tempo has slowed from a year ago. We're pleased with the improvements that we're making in the business and that are driving record levels of profitability.

Current order rates, along with backlogs new product activity and strong pricing gives us confidence that we will attain our full year 2023 revenue guide.

That concludes our prepared remarks, operator, we're ready for questions.

Thank you the question and answer session will begin at this time.

As a reminder to ask a question. Please press star one one on your telephone.

<unk> for your name to be announced to withdraw your question. Please press star one again your questions will be taken in the order that is received please standby for your first question.

Christopher Knutson: Strong price realization and lower-product costs were more than enough to offset lower-backary volumes. While material costs have somewhat moderated compared to what we experienced last year, lower-backary volumes and increased operational spending continued to be headwinds for the quarter and year to date. Total operating expenses increased $3 million or 3% in the quarter, primarily from volume and rate-related increases of $1 million and incremental share-based compensation of $2 million. Gross margin rate improvement more than offset these increased operating expenses during the quarter, resulting in operating margin rate growth of 4 percentage points.

Our first question comes from Mike Halloran with Robert W. Baird. Your line is open.

Hey, good morning, everybody.

Mike today.

I know that.

I know we picked at this last quarter, but I'm going to take another stab at it.

Obviously process has been a bright spot in the portfolio both from a top line and a margin perspective, but can you maybe dig in about why the sustainability of demand has been so good.

Particularly why.

Lubrication and vehicle services continue to be so strong and then.

Additionally, I know you mentioned that backlog in semi continues to be good can you maybe talk about why.

Youre seeing maybe more sustainable trends versus some of the.

The broader maybe your broader peers in the semi space recognizing that you're offering is a little bit different using peers very loosely there.

Yeah sure I'll take a stab at it I mean, a couple of things obviously, we did some nice pricing actions over the last.

18 months, or so which I think we're still seeing the benefit of so when you look at our headline numbers the revenue growth does that pricing baked into it.

Notwithstanding that though when you look across the portfolio of things that we have in that segment, whether it's our diaphragm pump business, where we've got some really good new products that are contributing to the growth.

Is that kind of falling in line with that but as you look into 'twenty four and into 25. There is a lot of investment going on there and so we feel like this is a good catch up year for us and hopefully our business remains robust as we kind of work our way through the backlog. We've got left and then as we roll into 2025.

Christopher Knutson: Contractor operating margins increased 5 percentage points to 30 percent and process operating margins increased 7 percentage points to 31 percent compared to the third quarter last year. At current volumes, we believe these operating margin rates are sustainable for the remainder of the year. Non-operating expenses decreased $2 million as a result of increased interest income on cash health. The adjusted effective tax rate was 19 percent for the quarter, which is consistent with our expected full-year tax rate were approximately 19 to 20 percent on an as adjusted basis.

Vehicle service team is just doing really well in lubrication overall of course, we got the <unk>, but we also have industrial lube and we're seeing decent growth in both of those categories. It's a combination of superior execution the ability to deliver out of the factory some new product launches that we've had that have really.

Christopher Knutson: Cash provided by operations told $491 million for the year to date, an increase of $219 million from last year, mostly driven by higher net earnings and a reduction in inventory purchases. Cash provided by operations as a percentage of net earnings is 124 percent for the- for the year. Through the end of the quarter, we re-purchased $427,000 shares for $31 million. We have continued to re-purchase shares in the first weeks of October, and as of March at close yesterday, we have re-purchased $1.3 million shares for $93 million here today.

Christopher Knutson: During the quarter, we repaid $75 million in private placement notes plus a prepayment fee of $700,000. This represented the final series of the private placement debt we entered into in 2012.

And a nice hold in the marketplace and that's and combined with the pricing actions they've done and watching expenses, they've really been able to drive profitability at an extremely high rate. There are environmental businesses are doing well.

Christopher Knutson: We also made year-to-date dividend payments of $119 million and capital expenditures of $146 million with $89 million related to facility expansion projects.

Christopher Knutson: Finally, our four-year estimates for unallocated corporate expense and capital expenditures can be found in the conference call slide deck on page 10.

Mark Sheahan: I'll now turn the call over to Mark for further segment and regional commentaries. Thank you, Chris. Good morning, everybody.

Of course, the QED business.

Where we manage the fluids in and around landfills and also the <unk>.

Mark Sheahan: All of my comments this morning will be on an organic constant currency basis. In the face of a modest 2% revenue decline, we reported record third quarter operating earnings and operating profit margin. We experienced another quarter of strong broad-based sales growth in the process segment, which was up 9% and 13% for the quarter and year respectively. The industrial segment was down slightly on lower project activity in our game-up powder business, and our contractor segment declined 8% from a combination of a difficult comparison in Amea versus last year's record quarter and the softening of global construction markets.

Gas analyzer business that we have that does that.

Mark Sheahan: At the close of the quarter, our consolidated backlog was $300 million. A decrease of $30 million from the previous quarter and $55 million lower than at the beginning of the year. Backlogs have returned to normal levels within contractor, but they remain slightly elevated in semiconductor products and our game-up powder business. Now, turning to some commentary on our segments and regions, contractor segment sales were down 8% for the quarter, sales declined across all regions with the steepest contraction on a percentage basis being in Amea.

I think that it's a combination of pricing great execution in the factories, some nice new product launches.

Mark Sheahan: Amea's results for the quarter were impacted by challenging year-over-year comparisons. In 2022, contractor sales in Amea were up 12% in the third quarter, as we were able to ship a considerable amount of our backlog when supply chain constraints started to alleviate. There was also robust order activity in the third quarter of 2022 in advance of our October price increase. In Asia Pacific, strong growth outside of China was not enough to offset the clines in China from weaker container and construction markets this year.

And reduction of backlog, that's really drive driven our results this year.

Mark Sheahan: New product introductions and contractor of help drive incremental revenue in a challenging macro environment. Products like our new lightweight, quick shot, electric powered, architectural coatings gun package, and the reactor to component proportioning system for spray foam and polyurea applications have been well received by customers globally. Profitability has improved in contractor as pricing actions are now starting to offset the significant cost increases experience in the last two years, and product mix is more favorable than it was a year ago.

Thank you really robust answers super helpful Mark.

And maybe switching gears a little bit obviously.

Mark Sheahan: Industrial segment sales declined 1%, strong sales in Asia Pacific were offset by timing of project completion and acceptance in our powder coating business. Activity in key end markets such as alternative energy, electronics, and battery has been good. Elevated backlogs are expected to decrease as we work our way through the fourth quarter. The process segment grew 9% in the third quarter. Increases were posted in most business units and across all reportable regions led by double-digit growth in vehicle services and semiconductor.

Whether you feel like Youre getting the appropriate traction and where you need to be any color on the pipeline development and kind of the process would be helpful. Yes. Thanks, thanks for bringing it up to Ingo spin on my team now for almost two years I think it will be two years in January.

Mark Sheahan: Resilient volume, strong pricing, and good expense management drove incremental margins of 102% for the quarter and operating earnings of 31%. Our lubrication equipment, diaphragm pumps, semiconductor equipment, and environmental equipment businesses all posted revenue gains in the third quarter and for the year. We've been able to leverage this growth into record operating profit margins for the segment this year.

Mark Sheahan: Moving to our outlook, our sales results for the first nine months were in line with our annual guide of low single digits organic growth on a constant currency basis. While macroeconomic conditions worldwide are unpredictable, and business temple has flowed from a year ago, we're pleased with the improvements we're making in the business and that are driving record levels of profitability. Current order rates along with backlogs, new product activity, and strong pricing gives us confidence that we will attain our full year 2023 revenue guide.

Operator: That concludes our prepared remarks, operator. We're ready for questions. Thank you. The question and answer session will begin at this time. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Your questions will be taken in the order that it is received. Please stand by for your first question.

And Ryan Patrick who works with and have done a really nice job of working with the business units and developing our M&A pipeline of ideas and companies.

It's interesting I would tell you that a couple of years ago I, probably could have walked around the company and asked people that give me their M&A pipelines and I might have come up with a 100 companies, but I would say that less than half of them had been fully vetted, where we actually knew about the company, we knew who to contact we had a good understanding of what the strategic fit was and why they might be in.

Mike Halloran: Our first question comes from Mike Halloran with Robert W. Baird. Your line is open. Good morning, everybody. It depends on for Mike today. I know that we. I know we picked at this last quarter, but I'm going to take another stab at it. You know, obviously process has been a bright spot in the portfolio, both from a top line and a margin perspective. But can you maybe dig in about why the sustainability of demand has been so good, you know, particularly why lubrication and vehicle services continue to be so strong and then, you know, additionally, I know you mentioned that backlog in semi continues to be good.

Attractive targets, so while we've been doing in the last year or so is really sorting through those pipelines and adding to them where it made sense in taking out some of the companies, where we really didn't have a good strategic vision. So as I sit here today I think we have over 100 companies in our pipeline they've all been fully vetted and of course, there is a lot.

Out of things that go into whether you can actually do a deal or not but I feel like we're in better shape today than we've been.

Mike Halloran: But can you maybe talk about why you're seeing maybe more sustainable trends versus some of the broader, maybe your broader peers in the semi space, recognizing that you're offering is a little bit different using peers very loosely there. Yeah, sure. I'll take a stab at it. I mean, a couple things. Obviously, we did some nice pricing actions over the last 18 months or so, which I think we're still seeing the benefit of.

For quite some time in terms of the robustness of the pipeline the quality of the pipeline and the quality of the discussions that we're having with companies that we're interested in.

Great. That's super helpful. I appreciate all the color I'll pass it on.

Thanks Pat.

Our next question comes from the line of Deane Dray with RBC capital markets. Your line is open.

Mike Halloran: So when you look at our have my numbers, you know, the revenue growth does have pricing baked into it. Notwithstanding that though, when you look across the portfolio of things that we have in that segment, whether it's our diaphragm pump business, where we've got some really good new products that are contributing to the growth. In semiconductor, we have in working down back orders throughout the year, which were actually embarrassingly high a year ago.

Hi, This is Tyler avoid on for Dan.

<unk>.

My first question just.

Can you give us a sense for what the monthly cadence of.

Sales were.

Decelerate.

The quarter went on.

Or any color there as.

As well as how things are trending into October.

Yes, I think the cadence was pretty stable to be honest with you. It's been hanging in there the comps are interesting right because of last year with all the pricing stuff that we did and the supply chain constraints and people are placing orders ahead of time just to get into the queue of that type of thing, but in terms of the absolute level of orders that we're seeing across graco.

Mike Halloran: And the team has done a really nice job of getting some throughput in the factory and making a lot of efficiency improvements there. The outlook for semiconductor. This year wasn't so good. And I think our orders are kind of falling in line with that. But as you look into 24 and into 25, there is a lot of investment going on there. And so we feel like this is a good catch up year for us.

I would characterize it is as stable at this point.

Mike Halloran: And hopefully this is really what remains robust as we kind of work our way through the backlog we've got left. And then as we roll into 2025. Vehicle service team is just doing really well in lubrication overall. Of course, we got VS, but we also have industrial loop. And we're seeing decent growth in both of those categories. It's a combination of superior execution, the ability to deliver out of the factory, some new product launches that we've had that have really taken a nice hold in the marketplace.

Great that's really helpful and then.

And just touching on how inventories are looking in the channel at both the home center and propane.

Yes, when we Pearl by our team on that topic, which we do frequently particularly.

In the home center and at.

The retail paint stores or we sell product to.

The feedback that we're getting is that the pipeline of inventory is in good shape it pretty much matches up with the level of activity that they're seeing in the marketplace. I can't tell you that that was the case a year ago I think a year ago. It may have they may have still been playing a little bit of catch up in terms of.

Mike Halloran: And that's in combined with the pricing actions they've done and watching expenses, they've really been able to drive profitability at an extremely high rate there. Our environmental businesses are doing well. Of course, the QED business, where we manage the fluids in and around landfills. And also the gas analyzer business that we have that does that analyzes the methane gas that's coming off at the landfills. It seems like after a couple of years where the big players in landfill weren't making investments.

Trying to build up their inventory levels and this year the feedback that we're getting is that.

Folks feel like things are things are in pretty good shape.

You probably know, but the home center has been challenging this year foot traffic is down.

The big retailers have reacted to that but again I think that they've worked through any.

Mike Halloran: They have started to pick up a little bit there. And so, you know, we've got a great product line. And I think we're benefiting there. We have a strong team, good factory performance. I think that, you know, it's a combination of pricing, great execution in the factories, some nice new product launches. And, you know, reduction of backlogs that's really driving our results this year. Thank you. That's really robust answer. Super helpful Mark.

Excess inventory that they may have had.

As their foot traffic came down I think we're I think we're in a good spot right now.

Yes. This is David I'd, just like to volunteer that on the inventory side, you may know this but others.

You're newer to the story.

It's helpful to remind them when they read that other companies are talking about destocking in channel working off excess inventories because they have more confidence in the supply chain.

Mike Halloran: And maybe switching gears a little bit, you know, obviously, you know, and you've been with the team now for a little bit of time. I know that working on M&A and building that pipeline has been a priority priority. Could you maybe comment on, you know, the progress with building that pipeline, you know, whether you feel like you're getting the appropriate traction and where you need to be any color on the pipeline development and kind of the process would be helpful.

<unk> isn't a significant factor.

Excess inventory in our businesses, because our channel partners in industrial and in process.

Really don't stop much outside of the spare parts space.

Through good times, and bad and through periods of greater or lesser demand, we have and continue to have a high level of confidence that.

Wholesale equals retail and there is not an inventory overhang in those two segments that gives us any degree of concern.

Mike Halloran: Yeah, thanks. Thanks for bringing it up to you. Inga has been on my team now for almost two years. I think it'll be two years in January and Inga and Ryan Patrick who works with Inga. I've done a really nice job of working with the business units and developing our M&A pipeline of ideas and companies. It's interesting. I would tell you that a couple of years ago, I probably could have walked around the company and asked people to give me their M&A pipelines.

Great. Thank you.

Yes.

One moment for your next question.

Our.

Question comes from Saree <unk> with Jefferies. Your line is open.

Good morning. This is James on for Sarah Thanks for taking my questions today.

Mike Halloran: And I might have come up with 100 companies, but I would say that less than half of them had been fully vetted where we actually knew about the company. We knew who to contact. We had a good understanding about the strategic fit was why they might be in attractive targets. So what we've been doing in the last year or so is really sorting through those pipelines and adding to them where it made sense and taking out some of the companies where we really didn't have a good strategic vision.

And I wanted to talk about contractor margins so the margins improved.

Significantly year over year and quarter over quarter, despite lower revenue levels.

On a sequential basis.

Can you. Please provide more color on the magnitude of benefit from pricing product cost and mix and also can you talk about the sustainability of the margin level. Thank you.

Mike Halloran: So as I sit here today, I think we have over 100 companies in our pipeline. They've all been fully vetted. Of course, there's a lot of things that go into whether you can actually do a deal or not. But I feel like we're in better shape today than we've been for quite some time in terms of the robustness of the pipeline, the quality of the pipeline and the quality of the discussions that we're having with companies that we're interested in. Mr. Dan. Great, that's super helpful. I appreciate all the color. I'll pass it on.

Yes, I don't think we are going to be able to fine tune the different components, there, but for sure price has had a nice impact for CBD.

Mike Halloran: Thanks, Beth.

Might remember a year ago, when we were talking about all our input costs going through the rough and how.

Contractor was really bearing most of that burden.

And things like electronic components that were very expensive and hard to get and you had to.

Make it a special accommodations to suppliers to actually get parts in the door with that has really freed up so a lot of that hyper inflation that was going on in some of the things that they purchased as has subsided.

Deane Dray: Our next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open. Hi, this is Tyler Voidon for Deane.

Pricing actions that we took were really designed to offset the cost pressures that we had in the business.

Tyler Voidon: My first question, can you give us a sense for what the monthly cadence of sales were? Was it deceler as the quarter went on? Or any color there as well as how things are trending into October? Yeah, I think the cadence was pretty stable. To be honest with you, it's been hanging in there. The cops are interesting, right? Because the last year with all the pricing stuff that we did and the supply chain constraints and people placed in orders ahead of time just to get into the queue of that type of thing. But in terms of the absolute level of orders that we're seeing across Graco, I characterize it as stable at this point.

And we're seeing that happen so youre seeing margin rates kind of go back to more of a normal level I would believe in that business and what we had seen maybe over the last couple of years. The team is doing a great job managing their expenses.

Tyler Voidon: Great, that's really helpful.

They're not.

Variable expenses in our P&L in contractor.

Related to incentive payments that last year were higher than they are this year. So there is a little bit of tailwind from that activity. In addition to what youre seeing on the gross margin line in that business, but overall.

Tyler Voidon: And then do I'm just touching on how inventory they're looking in the channel at both the home center and propane? Yeah, when we probe our team on that topic, which we do frequently, particularly in the home center and at the retail paint stores where we sell product to. The feedback that we're getting is that the pipeline of inventory is in good shape. It pretty much matches up with the level of activity that they're seeing in the marketplace.

Tyler Voidon: I can't tell you that that was the case a year ago. I think a year ago it may have still been playing a little bit of catch-up in terms of trying to build up their inventory levels. And this year, the feedback that we're getting is that folks feel like things are pretty good shape.

Volumes that we're seeing which we're pretty confident that we will.

Got it thanks for the detail color that's very helpful.

The thing with contractor. So can you kind of talk about how different end markets. We think the contracts are kind of played out in the quarter. Since one of your large customers talked about consolidated commercial performance.

David Lowe: You probably know, but the home center has been challenging this year. Foot traffic is down. The big retailers have reacted to that. But again, I think that they've worked through any excess inventory that they may have had as their foot traffic came down. I think we're in a good spot right now.

With new ratio remains pressures and have you seen any.

Pressure or headwind from interest on the commercial side. Thank you.

Yes, so I mean, if you were to look at the business in <unk> I mean, there is a ton of moving parts right. We've got the propane side, we have the.

Tradesmen and DIY side of the business, we have spray foam, we have protective coatings we have.

David Lowe: Yeah, this is David. I just like the volunteer that on the inventory side, you may know this, but others that maybe you're newer to the story. It's helpful to remind them when they read that other companies are talking about destocking and channel working off excess inventories because they have more confidence in the supply chain. It really isn't the significant factor excess inventory in our businesses because our channel partner is an industrial and in process really don't stop much outside of the spare parts space.

Line striping, we have.

Stucco and texture, we have all.

The uncertainty around all of that I feel pretty good about how our businesses performed this year.

For sure protective and marine.

Protective coatings spray foam anything in what we call our high performance coatings informed business has been good.

The pro business has held in there better than what I think most people would have expected and home center has been tough. So when you get outside of North America and you start talking about Europe I think the pro business has held up pretty well on a year to date basis and when you look over in Asia I think it's really limited the weakness that we've seen has really been.

Operator: Great, thank you.

Saree Boroditsky: One moment for our next question.

Saree Boroditsky: Our next question comes from Saree Boroditsky with Jeffries. Your line is open. Good morning. This is James on for Saree. Thanks for taking my questions today. And I wanted to talk about contractor margins, so the margins improve like kind of significantly year over year and quarter over quarter, like despite lower revenue levels and on a sequential basis. So can you please provide more color on the magnitude of benefits from price product cost and mix?

Limited to China, and there is two things there one is the container business, where they put coatings onto containers for they go onto ships for cargo that business has dropped pretty pretty significantly. So we're just not selling as much equipment there.

I actually ran the business for a while so you lived through these periods, where it's up and then it's down.

In a down period, and then in China I was over there.

A month ago.

The construction market over there has really softened quite a bit.

Saree Boroditsky: And also can you talk about the sustainability of the margin level? Thank you. Yeah, I don't think we are going to be able to fine tune, you know, the different components there. But for sure, price has had a nice impact for CED. You might remember a year ago when we were talking about all our input costs going through the rough and how contractor was really bearing most of that burden. And, you know, in things like electronic components that were, you know, very expensive and hard to get.

Drive around the city and you'd see cranes, but you would see no activity at all around the cranes.

Is vastly different than what it was when I was over there for years ago. Unfortunately had been that long because of the pandemic, but four years ago, you'd see cranes, but you'd see all kinds of stuff happening so.

Saree Boroditsky: And you had to make, you know, special accommodations to suppliers to actually get parts in the door. That is really freed up. So a lot of that hyperinflation that was going on and some of the things that they purchased has subsided. Our pricing actions that we took, we're really designed to offset the cost pressures that we had in the business. And we're seeing that happen. So you're seeing margin rates kind of go back to more of a normal level.

It's really not too surprising that our business has kind of played out the way that it has.

Got it thank you I will pass it on.

Our next question comes from the line of Jeff Hammond with Keybanc Capital Markets, Inc. Your line is open.

Jeff Hammond your line is open.

Saree Boroditsky: I would believe in that business and what we had seen maybe over the last couple of years. The team is doing a great job managing their expenses. They're not, you know, they understand the dynamics in the market right now are not as good as they were the last couple of years. And I think that I'm pleased with how they're, you know, making sure they're keeping an eye on spending and not adding to our fixed cost base.

One moment for our next question.

Our next question comes from Matt Summerville with D. A Davidson your line is open.

Thanks.

Good morning, Amit.

Can you Mark.

How you're doing could you maybe help me kind of square the comments you made just on the <unk>.

Finishing business gamma as you kind of talk about backlog being healthy.

Saree Boroditsky: We do have some, you know, variable expenses in our P&L and contractor related to incentive payments that, you know, last year, we're higher than they are this year. So there's a little bit of tailwind from that activity in addition to what you're seeing on the gross margin line in that business. But overall, you know, they're at 30% operating margins. I don't know if the business has ever been that high. I think in 2-1, we might have touched that level.

Projects, maybe pushing to the right adverse timing can you just provide a little bit more detail as to what youre seeing there.

Yeah. Good question. So there is really at a really high level theres kind of two big pieces to the game of business one of our powder systems and the other are the.

The equipment side.

Packages in guns, and accessories, and those types of things and.

Saree Boroditsky: But as we work our way through the rest of the year, I think as Chris said in his comments, we really believe that those rates of operating profit ability are sustainable as long as we, you know, continue to run at the volumes that we're seeing, which we're pretty confident that we will. Got it. Oh, thanks for the detailed color. It's very helpful. And the thing with contractor, so can you kind of talk about how different markets within the contractor kind of played out in the quarter, since one of your large customers talked about kind of solid commercial performance while new revenue remains precious.

We.

We acquired a business I don't know half a dozen years or so ago that really focuses on the powder systems.

Side of the business and in particular, they make conveyors systems for vertical line coatings and these are.

Aluminum extruded.

Materials that are used in a lot of different applications and those.

Extruded aluminum pieces get coated with with powder coatings and there are a large user of gamma equipment.

Saree Boroditsky: And have you seen any pressure or has wins from interest on the commercial side? Thank you. Yeah, so I mean, if you were to look at the business in CED, I mean, there's a ton of moving parts, right? We've got the propane side. We have the tradesmen, high-end DIY side of the business. We have spray foam. We have protective coatings. We have line striping. We have, you know, stucco and texture. We have all kinds of different segments within contractors.

Their business has been softer than what we experienced over the last couple of years, So theres a little bit of volatility there in terms of the overall.

Results within the game of powder business I would say that.

The other side of the game of business has been actually pretty good.

Anything standard equipment distributed product.

Parts and accessories as sort of mirroring what we see on the other side of the graco industrial businesses, which are liquid, finishing and sealants and adhesives.

But the systems business can be kind of lumpy.

Saree Boroditsky: So in any one of them, they might be up or there might be down. I would say that, generally speaking, when you read all the headlines about how bad it is in the housing market and, you know, the uncertainty around all that, I feel pretty good about how our businesses perform this year. For sure, protective and marine, protective coatings, spray foam, anything, and what we call our high performance coatings and foam business has been good.

And we still have some orders in the backlog that hopefully will ship between now and the end of the year, but it does create some a little bit of volatility on a quarterly basis, we do try to factor all of this into our annual revenue guide outlook and so.

Knowing what we know about the backlog and what's going to ship out of powder for the rest of the year, we feel pretty confident that we're still going to be able to hit those numbers. Yes. Excuse me. This is David again, I would underline Mark's point about the.

Saree Boroditsky: The pro business has held in there better than what I think most people would have expected. And the home center has been tough. So when you get outside of North America and you start talking about Europe, I think the pro business has held up pretty well on a year-to-date basis. And when you look over into Asia, I think it's really limited the weakness that we've seen has really been limited to China.

I'll call it the lumpiness of closure or in sign off of systems.

Tends to be.

<unk> tends to be very tends to be more active based on our history. In Q4. So we're confident that we'll see a more elevated level in Q4, we don't have a sense of the absolute number and there are complexities in our systems business that we don't see as primarily a component supplier in most of our businesses.

Saree Boroditsky: And there's two things there. One is the container business where they put coatings on to containers for, they go on to ships for cargo. That business has dropped pretty significantly, so we're just not selling as much equipment there. I actually ran the business for a while, so you live through these periods where it's up, and then it's down in kind of a down period. And then in China, I was over there about a month ago, and the construction market over there has really softened quite a bit.

And sometimes a final sign off of our system has held up by factors not related to us but related to the project, meaning the conveyor supplier or the robot supplier or the HVAC supplier hasnt gotten their work.

Fully flushed out and completed yet and with the supply chain challenges of the last couple of years Covenant on Franklin coupled with Covid to those are I'd say.

Saree Boroditsky: You would drive around the city and you'd see cranes, but you would see no activity at all around the cranes, which is vastly different than what it was when I was over there four years ago. Unfortunately, it had been that long because of the pandemic, but four years ago you'd see cranes, but you'd see all kinds of stuff happening. So it's really not too surprising that our business has kind of played out the way that it has. Joseph. Got it. Thank you.

Kicked kimberly sophisticated and complex logistical problems, especially in the markets in South America, and in Asia and in Eastern Europe, where a lot of the new powder systems are installed.

Saree Boroditsky: I will pass it on.

Thanks, and then just as a follow up.

Obviously, it's a little bit early but I'm sure. It's top of mind Mark how are you thinking about pricing as you go into 'twenty four.

Jeffrey Hammond: Our next question comes from the line of Jeff Hammond with Keybank Capital Markets. Inc, your line is open.

Yes, I think it's going to be more of a normal year for us.

We try to realise one 5% to 2% pricing in a normal environment inflation still running hotter than it was a few years ago. So in terms of like the absolute level of price increase lift a lift I think we're going to be.

Jeffrey Hammond: Jeff Hammond, your line is open. One moment for our next question.

Higher than what we would've been let's say in the two.

2018, 2019 timeframe, but.

Matt Summerville: Our next question comes from Matt Summerville with DA Davidson. Your line is open. Thanks. Good morning. Hi, Matt. Can you mark how you do? Can you maybe help me kind of square the comments you made just on the powder finishing business, Gamma? You kind of talk about backlog being healthy, but projects may be pushing to the right adverse timing. Can you just provide a little bit more detail as to what you're seeing there?

We're right now we're thinking that there'll be one price increase will be doing it in January and it will be more in line with what we've done historically.

Great. Thanks, guys, yeah. Thanks, Matt.

Our next question comes from the line of Larry de Maria William Blair. Your line is open.

Hi, Thanks.

Morning, everybody.

First question, you mentioned semiconductors as an opportunity for kind of 'twenty four 'twenty five.

Matt Summerville: Yeah, good question. So there's really at a really high level, there's kind of two big pieces to the game of business, one are powder systems, and the other are the the equipment side packages and guns and accessories and those types of things. And what we acquired a business, I don't know, half a dozen years ago, that really focuses on the powder systems side of the business. And in particular, they make conveyor systems for vertical line coatings.

As we sit here today.

Some other big organic opportunities through segments for 24, specifically, because it sort of feels a little bit about <unk>.

<unk> market as backlog comes down and we had these headwinds the contract yourself.

In other words, it seems to be things looking sort of flattish as we look out to the right as the backlog has come down to trying to see if there's anything besides price.

On the organic side that can drive volume higher next year.

Matt Summerville: And these are, you know, aluminum extruded materials that are used in, you know, a lot of different applications. And those extruded aluminum pieces get coated with powder coatings and they're a large user of Gamma equipment. And their business has been softer than what we experienced over the last couple of years. So, you know, there's a little bit of volatility there in terms of the overall results within the Gamma powder business. I would say that the other side of the Gamma business has been actually pretty good.

Movement from Air operated pumps to electric drive pumps, and I think we're capitalizing on that advantage, we got some products coming out.

In the next 12 months, so that I think will be even more able to capitalize on that opportunity.

The alternative energy space is still pretty hot there is a lot going on in battery manufacturing, we're heavily involved with that.

Solar panels are going up all over the place and obviously, where we're making equipment and fine tuning our our portfolio of products that we offer in that in that particular space.

Matt Summerville: Anything standard equipment, distributed product, parts and accessories is sort of mirroring what we see on the other side of the graco industrial businesses, which are liquid finishing and sealant adhesives. But the systems business can be kind of lumpy. And, you know, we still have some orders in the backlog that hopefully I'll ship between now and the end of the year. But it does create some little bit of volatility on a quarterly basis.

So all in all there is.

There are nice new products coming out within the portfolio, which are going to help us hopefully offset any kind of macro.

Sluggishness I'll call it that people are expecting in 2004.

Okay. Thank you and then second Bob.

Matt Summerville: We do try to factor all this into our annual revenue guide outlook. And so, you know, knowing what we know about the backlog and what's going to ship out a powder for the rest of the year, we feel pretty confident that we're still going to be able to hit those numbers. Yeah, excuse me. This is David again. I would underline Mark's point about the call it the lumpiness of closure or in sign-off of systems tends to be very, tends to be more active based on our history in Q4.

Just two quick questions here you bought back some stock sounds like you're doing some more is there a target number to think about here for share repurchases for the full year and also can you give us maybe just and I apologize if I missed it but what was price and volume in the quarter specifically.

Yes, so I think that we I think we disclosed that we will disclose that in terms of the absolute levels that we've that we purchase I think Chris gave gave that information.

Well, we tried to do here when we evaluate when to buy stock and how much to buy as we really run a discounted cash flow analysis on Greg.

Matt Summerville: So, we're confident that we'll see a more elevated level in Q4. We don't have a sense of the absolute number. And there are complexities in a systems business that we don't see as primarily a component supplier in most of our and other businesses. And sometimes, a final sign off of our system is held up by factors not related to us but related to the project, meaning the conveyor supplier or the robot supplier or the HVAC supplier hasn't gotten their work fully fleshed out and completed yet.

And we treat it like any other capital projects that we might consider within the company.

And long story short, we come up with the number we look at the.

Market cap of the company and the overall valuation and to the extent that we feel like there is a mismatch there.

Our active in the market and of course, if we become more active in the market when we think that mismatches.

As his broader.

Historically I think our approach has worked extremely well.

The last number that I saw that I think David shared with me is that over the last dozen or so years are our own IRR on stock buybacks is somewhere around 13 or 14%.

Matt Summerville: And with the supply chain challenges of the last couple years, you know, frankly a couple with COVID-2, those are, I'd say, particularly sophisticated and complex logistical problems, especially in the markets in South America and in Asia and in Eastern Europe, where a lot of the new powder systems are installed. Thanks.

Which I feel really good about so here in this quarter, obviously, there has been some weakness in the stock.

Gotten involved with that and we will continue to be opportunistic as the year goes on.

That's the really remains the key the key word is opportunistic.

Matt Summerville: And then just as a follow up, obviously it's a little bit early but I'm sure it's top of mind Mark, how are you thinking about pricing as you go into 24? Yeah, I think it's going to be more of a normal year for us. You know, we try to realize one and a half to two percent pricing in a normal environment. Inflation's still running, you know, hotter than it was a few years ago.

And the way Mark described the discounted cash flow slash ROI.

Matt Summerville: So in terms of like the absolute level of price increase, list the list, I think we're going to be, you know, higher than what we would have been, let's say in the, you know, 2018, 2019 timeframe. But, you know, it'll work right now. We're thinking there'll be one price increase. We'll be doing it in January and it'll be more in line with what we've done historically. Thanks guys. Thanks, man.

Process. We go through really is the way we do it and.

Wow.

I may not necessarily think of graco as a classic cyclical we serve cyclical markets and so the street tends to think of us that way and because of that there will be opportunities from time to time.

To be more aggressive.

And I think it say.

Larry D. Maria: Our next question comes from a line of Larry D. Maria at William Blair. Your line is open. Hi, thanks. Good morning, everybody. Hey, first question, if you mentioned semiconductor as an opportunity for kind of 24 or 25. As we sit here today, there are some other big organic opportunities. We look through segments for 24, specifically because this sort of feels a little bit of a sideways market as backlogs come down and we have these headwood to contractors.

Those short term discrepancies that seem to appear every so often.

Okay. Thank you very much good luck and if you have the price value number that would be helpful.

Good luck. Thank you.

Okay.

Larry D. Maria: So, you know, in other words, it seems to be things looking sort of flatish as we look out to the right as the backlogs come down. It's fun to see if there's anything besides price on their data side that can drive volume higher next year.

As a reminder to ask a question. Please press star one one on your telephone.

Our next question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open.

Hello, Jeff if you're on mute please on mute yourself.

Larry D. Maria: Yeah, it's good question. You know, I think I would turn to the products that we have in the portfolio and some of the things that we plan to launch and some of the ones we already have. There's obviously big macro trends out there on the movement from air operated pumps to electric drive pumps. And I think we're capitalizing on that advantage. We got some products coming out in the next 12 months, so I think we'll be even more able to capitalize on that opportunity.

If there are no further questions I will now turn the conference over to Mark Sheahan.

Okay, well again I want to thank everyone for participating in today's call and thank you for your loyalty and continued interest in and Greg All have a great day.

Larry D. Maria: The alternative energy space is still pretty hot. There's a lot going on in battery manufacturing. We're heavily involved with that. Solar panels are going up all over the place and obviously we're making equipment and you know, fine tuning our portfolio products that we offer in that particular space. So, you know, all in all, you know, there's there are nice new products coming out within the portfolio, which are going to help us. Hopefully, I've said any kind of macro sluggishness. I'll call it that people are expecting in 20.

This concludes our conference for today, Thank you for participating and have a nice day.

Parties may now disconnect.

Matt Summerville: Thank you. And then second two cool questions here. You go back to stock if you're doing some more. If you're a target member to think about here for share repurchases for the whole year, and also can you give us and maybe do the typologist I missed it, but what was price and volume in the quarter specifically? Yeah, so I think that we I think we disclosed that we will disclose that in terms of the absolute levels that we've that we've purchased and I think Chris gave that information.

Matt Summerville: Well, we try to do here when we evaluate when to buy stock and how much to buy is we really run a discounted cash flow analysis on Graco and we treat it like any other capital project that we might consider within the company and long story short, we come up with a number. We look at the market cap of the company and the overall valuation and the extent that we feel like there's a mismatch there.

Matt Summerville: We are active in the market and of course we become more active in the market when we think that mismatch is is is is broader historically. I think our approaches worked extremely well. The last number that I saw that I think David shared with me is that over the last you know dozen or so years are our own IRR on stock by backs is somewhere around 13 or 14 percent which I feel really good about.

Matt Summerville: So here in this quarter obviously there's been some weakness in the stock. We've gotten involved with that and we'll continue to be opportunistic as the year goes on. Yeah and I think that's the that really remains the key the key word is opportunistic and the way Mark described the discounted cash flow slash ROI process we go through really is the way we do it. And while I may not necessarily think of great go as a classic cyclical we serve cyclical markets and so the street tends to think of us that way and because of that there will be opportunities from time to time to be more aggressive.

Matt Summerville: And I think it's a something we keep in mind because when days when when times are dark like they were in oh nine and briefly in 15 in 15 and certainly in 20 we were positioned strongly to move aggressively and take advantage of those those short term discrepancies that seem to appear every so often.

Matt Summerville: Thank you very much good luck and if you have the price value number that would be helpful.

Operator: As a reminder to ask a question please press star one one on your telephone.

Jeffrey Hammond: Our next question comes from the line of Jeff Hammond the key bank capital markets your line is open.

Jeffrey Hammond: Hello Jeff if you're on mute please unmute yourself.

Mark Sheahan: If there are no further questions, I will now turn the conference over to Mark Sheahan.

Mark Sheahan: Okay, well, I, again, want to thank everyone for participating in today's call and thank you for your loyalty and continued interest in, in Graco.

Operator: Have a great day.

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

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