Q3 2024 Graco Inc Earnings Call
Good morning, and welcome to the third quarter Conference call for Graco, Inc. If you wish to ask access the replay for this call you may do so by visiting the company's website at Www Dot Graco Dotcom Graco has additional information available in a Powerpoint slide presentation, which is available as part of.
Speaker Change: The webcast player at the request of the company, we will open the conference up for question and answers after opening remarks from the management. During this call various remarks may be made by management about their expectations plans or prospects for the future. These rocky.
Speaker Change: 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.
Speaker Change: Including those identified in item one a of the company's 2023 annual report on Form 10-K, and then I am one of the company's most recently quarterly report on Form 10-Q. These reports are available on the company's website at www Dot graco dot com and the Sec's.
Speaker Change: 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 obligations to update these statements in light of new information or future events I will now turn the conference over to Christian Hansen Executive Vice President corporate controller.
Christian Hansen: Good morning, everyone and thank you for joining our call I'm here today with Mark Sheahan, and David Law I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary yesterday break our reported third quarter sales of $519 million a decrease of 4% from the same quarter last year.
Christian Hansen: Reported and adjusted net earnings decreased 8% to $122 million or <unk> 71 per diluted share excluding the impact of excess tax benefits from stock option exercises the impairment charge and contingent consideration adjustment recorded in the third quarter of 2023 adjusted non <unk>.
Christian Hansen: GAAP net earnings per share decreased 7%.
Christian Hansen: Currency translation had no significant impact on sales or net earnings for the quarter the.
Christian Hansen: The gross margin rate increased 50 basis points in the quarter realized pricing was more than enough to offset sales volume declines occurring in all segments, while product costs were lower for the <unk>.
Christian Hansen: First nine months of the year they were a headwind in the quarter as our production volumes primarily in contractor have decline. We expect these headwinds to continue for the remainder of the year total operating expenses increased $9 million or 7% in the quarter, mainly due to new product development spending growth initiatives and other corporate items, including the <unk>.
Christian Hansen: Location to a new distribution center.
Christian Hansen: Reductions in volume and earnings based expenses of $3 million, partially offset this increase.
Christian Hansen: Margin rate improvement was unable to offset lower sales volumes and increased expenses during the quarter, resulting in an operating margin rate of 28% a decline of two percentage points from the same period last year.
Christian Hansen: The process segment operating margin rate decreased four percentage points to 27% due to the impacts of higher spending and decreased volumes compared to the third quarter last year.
Christian Hansen: Interest and other benefits increased $4 million during the quarter, driven primarily by lower interest expense at our long term debt was repaid in 2023. In addition to increased interest income on cash held.
Christian Hansen: The adjusted effective tax rate was 19%, which is consistent with our expected full year tax rate of approximately 19, 5% to 25% on an as adjusted basis.
Christian Hansen: Cash provided by operations totaled $436 million for the year, a decrease of $55 million from last year, driven mostly by inventory purchases related to new product launches timing of estimated tax payments and lower net earnings cash provided by operations as a percent of reported net earnings of 116% for the year.
Christian Hansen: Year.
Christian Hansen: Significant year to date uses of cash included repurchases of 399000 shares for $31 million dividends.
Christian Hansen: Dividends of $129 million and capital expenditures of $93 million.
Of which $60 million related to facility expansion projects. These cash uses were offset by share issuances of $45 million.
Christian Hansen: A few comments as we look forward to the remainder of the year based on current exchange rates, assuming the same volumes mix of products and mix of business by currency as in 2023 movement in foreign currencies would have no impact on net sales or net earnings for the full year.
Christian Hansen: Our full year estimates for unallocated corporate expense and capital expenditures remain unchanged and can be found in the conference call slide deck on page 10.
Christian Hansen: Finally effective January one 2025, we will move to a global customer centric operating structure with four business divisions industrial powder expansion markets and contractor at that time, our regional teams, which previously operated independently will be integrated into the business divisions.
Christian Hansen: The current industrial and lubrication equipment divisions, along with the process transfer equipment business that is part of the process Division will be combined to form the new global Industrial Division.
Christian Hansen: The powder Division, which is currently structured as a global business will continue to operate as it does today and will combine with the industrial division to form the industrial reporting segment.
Christian Hansen: The new expansion markets Division will focus on driving inorganic growth in new or adjacent markets markets, our existing environmental semiconductor high pressure valves and electric motors businesses together with select future ventures and acquisitions will reside within this newly formed division and reporting segment.
Christian Hansen: The contractor division will be restructured to serve the needs of our global customers and will remain unchanged as a reporting segment relative to prior periods.
Christian Hansen: We will report financial results under these new segments for the first quarter of 2025, we will provide recast segment financial information in connection with our fourth quarter earnings release as supplemental information.
Speaker Change: I'll now turn the call over to Mark for further segment and regional commentary.
Mark Sheahan: Thank you Chris Good morning, everyone I'd like to begin by discussing our recent announcements in September we announced our one graco initiatives focused on driving global growth greater profitability and operational efficiencies.
Mark Sheahan: Starting in 2025, Greg will adopt a new global structure with the commercial focus, enabling our sales marketing and engineering teams to focus squarely on revenue growth. This new customer centric approach focuses on segments with similar needs, helping us scale more easily as we grow and enhance our customer experience.
Mark Sheahan: The strategy builds on the success of our powder coating business it aligns well with the integration of protective coatings and spray foam businesses into the contractor division a few years ago the.
Mark Sheahan: The new structure also strengthens our ability to pursue M&A opportunities through both our legacy divisions and the newly created expansion markets division, enabling us to target significant acquisitions in current and adjacent markets as we establish our new market oriented global structure over the coming months I have full confidence.
Mark Sheahan: And our experienced leadership team and dedicated employees to navigate this change successfully.
Mark Sheahan: During the quarter, we also announced the acquisitions of <unk> systems and Carrabba's piece.
Pct's systems, which provides a mega sonic and ultrasonic wet cleaning systems complements our existing high purity chemical delivery equipment used in semiconductor and electronics production.
Mark Sheahan: Although the PCT acquisition closed during the quarter. It did not have a material impact on quarterly results.
Mark Sheahan: We also reached a definitive agreement to acquire corrupt a global leader in high Tech dispensing and mixing solutions for paints and coatings.
Mark Sheahan: This acquisition enhances our strong position in the growing paint and coating machinery manufacturing category within the contractor division, while expanding our global manufacturing footprint, we expect the <unk> acquisition to close in the fourth quarter and the combined annual revenue of these acquisitions is nearly a $130 million we're very.
Mark Sheahan: Optimistic about these opportunities and confident in our ability to leverage the complementary strengths of these businesses to drive growth and create value for our customers and shareholders.
Mark Sheahan: Moving on to our financial performance all of my comments will be on an organic constant currency basis.
Mark Sheahan: Sales in the third quarter were down 4% with declines in all segments, except industrial which was flat industrial finishing systems sales in the Americas, and EMEA offset steep declines in Asia Pacific, especially China declines continued in the process segment with weakness noted in the semiconductor and mining markets new product.
Mark Sheahan: Introductions in the contractor segment have been well received and global protective coatings markets are strong.
Mark Sheahan: The decrease in China revenue across the industrial and process segments accounted for more than 90% of the overall revenue declined in the quarter and over 60% year to date. This represents broad based weakness in overcapacity across key markets, including automotive batteries solar semiconductor.
Mark Sheahan: And electronics.
Mark Sheahan: Incoming order rates in the third quarter continued to be difficult worldwide as all major product categories with the exception of our powder, finishing business saw order rates declined compared to the second quarter of this year weak demand continued in the Asia Pacific region, especially in China.
Mark Sheahan: These reductions have been consistent throughout the year.
Mark Sheahan: Demand in North America also softened during the quarter impacting all segments. In contrast over the past six weeks, our consolidated global incoming order rates have shown improvement compared to the same period last year experiencing a 11% growth. This double digit increase is primarily driven by both the industrial and process segments.
Mark Sheahan: While this is a relatively short time period. It gives us optimism for the remainder of the year.
Mark Sheahan: Now turning to some commentary on our segments.
Speaker Change: Contract sales were down 1% in the third quarter protective coatings grew across all regions, but it wasn't enough to offset softness in the propane and home center channels.
Speaker Change: Asia Pacific was a bright spot as the container market showed continued improvement after minimal activity last year.
Speaker Change: Sponsor new products continues to be favorably received and inventory levels within the channel are considered normal.
Speaker Change: We have additional new products targeted to be launched prior to the end of the year, which would also have some positive impact for the fourth quarter.
Speaker Change: Industrial sales were flat in the quarter as strong finishing systems sales in both North America, and EMEA were offset by heavy declines in Asia Pacific.
Speaker Change: <unk> revenue in the Americas was higher for the second quarter in a row led by the timing of finishing systems sales along with increased activity across the liquid, finishing and sealants and adhesive businesses.
Speaker Change: The team remains positive as quoting activity remains stable. However, capex investments are being delayed as end users are taking a wait and see approach.
Speaker Change: Moving on to the process segment sales were down 12% compared to the same quarter last year, primarily due to continued weakness in the semiconductor and mining markets along with a slowdown in vehicle service business.
Speaker Change: The decline in sales volume is primarily.
Speaker Change: Is the primary driver of the decrease in profitability with decremental margins of nearly 60% for the quarter.
Speaker Change: Moving onto our outlook overall conditions remained challenging as we continue to experience soft demand trends in many of our core markets. We're encouraged by the increased order activity. So far in the fourth quarter and we have confidence in our new product lineup. However, it's still too early to know if these order rates will continue to the end of the year as a <unk>.
Speaker Change: We're maintaining our full year revenue guide of low single digit decline on an organic constant currency basis.
Speaker Change: That concludes our prepared remarks, operator, we're ready for questions.
Speaker Change: Thank you the question and answer session will begin at this time as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again your questions will be taken any upgrade that they receive please standby for your first question.
Speaker Change: Our first question is going to come from the line of Deane Dray with RBC capital markets. Please proceed.
Speaker Change: Thank you and good morning, everyone, Hi, Dan Good morning.
Deane Dray: When we could start with the usual tour by end market and by region, obviously more of a focus on APAC.
Deane Dray: That 90% data point, where the shortfall was that.
Kind of what's going on there ground level I do notice there is no change in the traffic light.
Deane Dray: Chart Youre already at Red lights in APAC for industrial and process. So maybe we start with that tour end market and region and where the.
Deane Dray: Rises.
Speaker Change: Yes, we are red we couldnt make it any more AD. So it's been kind of been flashing that way for a while for US I mean, the China sales, we wanted to highlight those because we really do feel like.
Speaker Change: That has been the main area, where our business has experienced.
Speaker Change: The softness this year.
Speaker Change: Again.
Speaker Change: Q3, China sales were down about $10 million for industrial and process and the total AP sales were down $11 $2 million. So really all of the decline is coming in those two camps within China and kind of the same story on a year to date basis. If you look across the end markets there.
Speaker Change: For sure automotive is down compared to last year. The construction area is actually up a little bit for us because of what we've got going on in the container industry. So <unk> actually grew which was nice to see but really all of the other big markets in China, whether it's mining battery production solar electronics.
Speaker Change: They're all experiencing headwinds this year compared to what we've had in the past positively Japan seems to be doing pretty well Korea is hanging in there and we're also seeing growth in India. So it really is kind of a China story I think we need to get through the end of the year here and then hopefully we can grow off of a lower base there.
And how about the other regions.
Speaker Change: Europe hanging hung in there pretty well across really all of the different product categories. We have.
Speaker Change: Decent activity in industrial process and contractors. So on an overall basis, while the revenues were down compared to a year ago kind of that low single digit decline really doesn't cause us a whole lot of concern.
Speaker Change: Do we did see Nice act.
Speaker Change: Activity in North America are really driven by some of the larger projects that we had on the finishing systems side of the business that freed up in the quarter that we were able to deliver and get customer recognition for us. So.
Speaker Change: I would probably characterize as the north American market seems decent Europe, Okay, and Asia Pacific market has been really challenging for us.
Speaker Change: That's good on U S.
Speaker Change: Yes, I mean, North America really is primarily U S.
Speaker Change: On that I would say in talking with our teams here in here in North America.
Speaker Change: They've called out over over recent months.
Speaker Change: Good activity in defense.
Speaker Change: Solar market Interestingly here in North America, which is soft in Asia. Despite the challenges in the industry aerospace.
Speaker Change: Electronics, and even automotive in both the legacy and the EV manufacturers are pretty good markets for us.
Deane Dray: Good and then just as a follow up Mark you and I talked about this at RBC Industrials conference a few weeks ago.
Speaker Change: Just the Genesis of the re segmentation.
Speaker Change: Why now how did you lap.
Speaker Change: And in these four categories.
Speaker Change: And from there or is it still too early to talk about where and how the growth can be.
Speaker Change: Yes, you would see some sort of improvement and just where and how would you be measuring those benefits.
Speaker Change: Yes, So I think the Genesis was really this spring when our team got together and looked at some of the data and really figure it out that we weren't growing as much organically as we thought that we could and we felt like some of the structural barriers that we have put up as a team and the silos by creating divisions that had their own factories and their own marketing teams in there.
Speaker Change: Their own engineering teams and approaching our channel partners individually versus trying to leverage as a one graco approach was really what we started with we.
Speaker Change: Commissioned a group of leaders that were not direct reports of my but these were our high potential people within multiple business in regional units do you take a look at the structure and come back with some recommendations and after a few iterations with my team as well as the board of directors, we really landed on the one graco approach I think as well.
Speaker Change: <unk> some efficiencies.
Speaker Change: Just in terms of our ability to target customers.
Speaker Change: Entire product line versus on a division by Division basis, and we'll also <unk>.
Speaker Change: We Orient us a little bit more towards looking at the key customer constituencies in a number of business units.
Speaker Change: It's interesting because the end users the customers in process industrial in led and a lot of cases are very similar you go into a factory in your daily with the Guy that's actually running the machine you are dealing with the factory manager Youre dealing with an engineer youre dealing with procurement people and being able to go in with a one graco approach with the full product line.
Speaker Change: We think it's going to have a lot of value versus having multiple teams interact with those with those customers as well so it's not going to flip a switch overnight.
Speaker Change: I think I told you know structure is perfect, but we really do believe that after running the current playbook for more than 20 years. It was time to take a fresh approach and.
Speaker Change: We're all excited about the prospects that the <unk> will have.
Speaker Change: Yes, that's great color and best of luck. Thank you. Thanks.
Thanks.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Mike Halloran with Baird. Your line is open. Please go ahead.
Mike Halloran: Good morning, everyone Hi, Mike.
Mike Halloran: So a couple of questions just kind of following up on that last.
Mike Halloran: At the end of the day this seems more the restructuring you're doing here seems more like a driver for growth.
In the past you've talked about kind of.
Mike Halloran: That five 5% kind of growth, maybe adding 5% kind of growth last cycle being able to maybe add an incremental point of growth to that.
Mike Halloran: Is that really what the goal here is from a loose quantification and then secondarily.
Mike Halloran: Is there a margin benefit you think youre going to drive from this as well with how you are moving things around globally.
Speaker Change: Yes for sure growth is the driver behind US again as I said, our team got together and we look at the numbers that we felt like we could just do a better job and so that was kind of the general Genesis of this change that were going through I guess the other piece that I didn't mention is that we also created a new group called expansion markets that will be not only.
Speaker Change: Managing some of the businesses that we've acquired over the last few years, but we'll also be looking for adjacent markets that are near those businesses and new sand boxes that we might potentially play into the company I really felt like we didn't have anybody at graco that was focused on that and I think that there are other areas.
Speaker Change: Outside of our current businesses that we can play in on the M&A front and so we will be doing some work there as well I think it gives us maybe a better chance at being able to put points on the board from an M&A standpoint, our divisions are still going to look at the stuff that <unk> always looked at our pipelines look pretty good there but to have in that group.
Speaker Change: Looking at those things I think is going to be a change compared to what we've had in the past in terms of efficiencies. Yes, there will be some I think for now what we're doing is we're.
Speaker Change: Working through the details of what the new structures are going to look like we're going to hit the ground running on January one and I think we'll be ready to talk about efficiencies and what we expect to see after we're done with the work most likely when we make our year end announcement and talk with you guys at that point, we don't have specifics yet that I'm <unk>.
Speaker Change: Vertebral sharing with you, but we are looking to drive both topline and bottomline growth with some of these moves.
Speaker Change: Makes sense and then kind of a two fold question here first.
Speaker Change: Obviously, we're late in the year here. So your guidance you can kind of get some implied growth for the fourth quarter here, but it's a pretty wide range. So the first question is basically.
Speaker Change: Are we talking about a fourth quarter growth rate that is similar to this low single digit.
Speaker Change: <unk> for the full year and then related could you just put what's going on with the backlog and the orders in context and help us understand how that's flowing through things as it sits here.
Speaker Change: Yes, I think the guide is pretty consistent with what we've had now for a couple of quarters, I guess where were targeting this low single digit.
Speaker Change: Constant currency revenue decline. So you guys can do the math on that but I think it would play out that that's likely what you're going to see in Q4, what we saw in Q3 and kind of for the year to date number.
Speaker Change: As well.
Speaker Change: We have experienced quite a bit of backlog reduction I remember on our backlog was $450 million now it's $2 30. So we're at the point now where we're back to I call. It a normal business for Graco, mostly book and ship with a couple of exceptions, one being our powder coating business, where we do have some backlog there and then.
Speaker Change: Or are some of our longer term projects in the industrial side as well.
But in terms of where we're at on backlog I think we're at a point now where we're you should expect to see.
This number kind of hang in there.
Speaker Change: Forward barring any kind of crazy stuff like we had a couple of years ago, where everybody was placing all kinds of orders. So that does create some headwind for us as you know I'm sure. When you look at 'twenty three versus 24.
Speaker Change: That backlog came down in 'twenty three it's come down in 'twenty, four but not quite as much as we look at 24% to 25% if were assuming that were at normal levels. We won't have this built in reduction in backlog. So we factor all of that into the guide that we gave you guys.
Speaker Change: We're comfortable with it at this point and we hope that we're able to hit it by the end of the year and then as we get to 'twenty five obviously, we will update our outlook at that point.
Speaker Change: Thanks, Mark I appreciate it.
Speaker Change: Yes.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: The next question will come from the line of Todd <unk> with Jefferies. Your line is open. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: The gross margin performance was really strong in the quarter up year over year. Despite the lower volumes can you just talk about the contribution of price cost or other productivity drivers that helped offset that lower factory volumes.
Speaker Change: I think.
Speaker Change: This is David I think the starting point is certainly the effectiveness we've had in realized pricing really now for two full years, because we did our interim adjustment.
Speaker Change: In the middle of 'twenty two.
Speaker Change: And one of the consistency in our favorable price cost relationships.
Speaker Change: <unk> has been what we've achieved in pricing admittedly the increases we saw in the second half of 'twenty, two and almost 23, we're a bit more dramatic than what we're seeing today.
Speaker Change: But.
Speaker Change: It's been consistent and it's been consistent across all business units and regions and so I think pricing has been the hero.
Speaker Change: In terms of the cost structure and Chris can correct me if I am.
Speaker Change: Straining a bit.
Speaker Change: <unk> costs have leveled out, but they certainly have not declined to levels that we saw in.
Speaker Change: In Pierre in any meaningful way in periods prior to 2000.
Speaker Change: 2021 in earlier periods. So we are working with a higher cost structure, both for input costs labor.
Speaker Change: And.
Speaker Change: Energy and other things, but we're covering those.
Speaker Change: I think a maybe more recent development that has had impact on us is some less ability to absorb all of the factory overhead because of the policy decline in unit volumes that we touched on in your opening comments, but with that said.
Speaker Change: The overall price cost has remained positive and I'm pretty happy with the factory performance given the fact that we've had volume to clients actually have the margins go up I would say that we are.
Speaker Change: Locked and loaded from a production standpoint, and our ability to react.
Speaker Change: When volumes do pick up we feel like the business is in great shape.
Speaker Change: Once we get the volume growth the leverage is going to be really nice to see.
Speaker Change: Okay.
Speaker Change: You mentioned incoming orders over the last six weeks.
Speaker Change: We have 11% with growth in industrial and process could you just kind of dive into that a bit what markets or regions are driving less and then as you think about North American Industrials, you mentioned the timing of finishing sales it does seem that odd with commentary.
Speaker Change: On the Capex pause. So can you just help us understand what's driving the strong demand.
Speaker Change: Yes, I think.
Speaker Change: The growth in orders over the last six weeks again pretty short time period have been broad based.
Speaker Change: The exception of Asia, which is still challenging to us.
Speaker Change: So and we want to just point out that it was mostly in the industrial and process segments, which have been the ones that have been really cream. This year. When it comes to the declines that we've seen in that in that particular region. So.
Speaker Change: Wouldn't.
Read too much into it other than we thought it was an interesting data point to share with you we want to be as transparent as possible and.
Speaker Change: It will hopefully give you a little bit more confidence in our year full year revenue guide of down low single digits for.
Speaker Change: For the full year when it comes to the North America Industrial business. We did we were able to recognize some larger project activity that was previously but after a customer sign off particularly in the powder industry and so that that really did help drive the growth.
Speaker Change: Were to sort of strip that out you would probably see something similar in North America industrial what we're seeing in Europe from Bill total demand standpoint, if that's helpful.
Speaker Change: I appreciate the color. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Matt Summerville with D. A Davidson. Your line is open. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Within the process business it looks like the Decrementals have been worsening on a year to date basis is there something else Thats, maybe fallen off there when you look at sequentially how that business performed just help me understand a little bit of both.
Speaker Change: Puts and takes from the top and bottom line.
Chris Good: Matt This is Chris.
Chris Good: Looking at that business, the decrementals have been tough for the whole year I would say.
Chris Good: What we do see within that business in particular is when we do see volumes fall off in <unk>.
Chris Good: Almost all of the factory locations.
Chris Good: It really does impact the decrementals pretty hard across the board.
Chris Good: Earlier in the year, we may have had some benefits from one of our factories, having volume, which could have offset some of the costs in some of the other locations.
Chris Good: But what we're seeing now is it's pretty broad based across all of the different business units.
Chris Good: Which is driving that decremental margin, yes, I think the only thing I would add is that as we've kind of rolled the year here a little bit we have seen a little bit more weaker activity in our lubrication businesses, which are really nicely profitable and so when I look at like Q1 Q2 versus Q3.
Chris Good: Those the revenues there have come down a little bit sequentially through those quarters.
The other big one obviously is the semiconductor business, which is way down.
Chris Good: Year ago, but the bookings are starting to pick up there as anticipated with the with the pickup that everyone's predicting for 2025, and I should leave well enough alone, but I'll add that.
Speaker Change: The two points Mark mentioned also ties once again into the whole Asia Pacific Arena, where semiconductor is.
Speaker Change: There's a lot of activity in region and the ongoing softness there there has been.
Speaker Change: No secret pretty dramatic and in the lubrication space.
Speaker Change: The mining markets not just in China, but even in.
Speaker Change: Southeast Asia are a significant portion of that business. So when those markets are soft I'd say, especially in region, you see that flow through to the process segment.
Speaker Change: Got it and then just as a follow up I'm wondering if you could maybe talk about core up for a moment.
Speaker Change: Historical organic growth rate of that business looked like and what is their U S presence today and how are you thinking about being able to leverage your sort of big box relationships will just generically call them to maybe bring core ops presence to the market.
Speaker Change: Eric.
Speaker Change: Lift their presence in the local market. Thank you.
Speaker Change: Yes, I appreciate the question given that we haven't closed the deal I am a little bit limited in what I can say, what I will say well, here's what I like about the business number one we understand the technologies. Its metering, it's mixing it's tempting at stuff that graco knows how to do pretty well. We also do like the overlap on the customers some of their big customers are.
Speaker Change: <unk> customers I think their presence outside of North America is much bigger than it is in North America.
Speaker Change: And we are hopeful that they can help us out in the Asia Pacific region with some of the context, they have like Asian paints and that we can potentially leverage our good relationships at the home center customers that we have and.
Speaker Change: The larger.
Speaker Change: Professional channel customers that we have as well. So I think there are some revenue synergies there that we're hopeful to get in terms of their growth historically, it's kind of been in that low to mid single digit. So it's not too dissimilar from what <unk> has in terms of organic growth through a cycle. So I think that we feel we.
Speaker Change: Feel pretty good about that lastly, what I'll say is that they have really good production in Italy, and they also have a <unk>.
Speaker Change: Print in India production wise that we like and that is an area that we've thought about expanding into for graco to expand our presence in India from a production standpoint, given the activity thats happening. There. So this gives us a footprint immediately to do that and to experiment with it it's a little bit lower risk.
Speaker Change: And if we had planted a flag some larry did that on our own. So I think we're excited about that as well.
Great. Thanks, Mark.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Jeff Hammond with Keybanc capital markets. Your line is open. Please go ahead.
Jeff Hammond: Hey, good morning, guys Hey.
Speaker Change: Jeff.
Jeff Hammond: Just wondering I guess as you talk to customers and you take kind of the.
Jeff Hammond: The last six weeks of orders anything that sticks out that.
Jeff Hammond: Starts to feel better and kind of get you out of this right I think you mentioned Asia still.
Jeff Hammond: Still particularly challenged but just any any kind of green shoots.
Speaker Change: Yes, I think that there is obviously a lot of uncertainty out there. These days and not anything you guys don't know with all these wars going on elections and other things. So I think there's still a fairly cautious mindset. When it comes to our channel partners and end users when they are thinking about making.
Speaker Change: Capital type of investments. So again, we thought the data point. It was interesting I do think that we're starting to anniversary maybe some of the comps that we've had over the last couple of years as I mentioned earlier, our backlogs now are kind of at levels, where you would have expected them to be on a normalized basis and so as those backlogs have come.
Speaker Change: Down obviously customers start to reorder and hopefully we've seen sort of a bottoming out here and we can we can start to see.
Speaker Change: <unk> off of what's.
Speaker Change: It's been a couple of tough years.
Speaker Change: I guess I would add.
Speaker Change: Mark touched on the fact that.
Speaker Change: Six weeks is not a very long very long period, and this is more antidote Dol, but.
Speaker Change: Just in conversations just in a recent conversation taking.
Speaker Change: Taking a look at our EMEA space.
Speaker Change: <unk> there have been okay. Thus far this year for example, the <unk>.
Speaker Change: Protective coating part of the contractor business, especially the that portion of the market that serves energy and some of the.
Speaker Change: The support infrastructure in the Middle East has remained strong.
Speaker Change: Ben.
Speaker Change: Seeing.
Speaker Change: My expectations as somebody who is based in Europe years ago always is a little low on the industrial side, but there has been a fairly stretch steady drumbeat of regular business, including the automotive markets and finally, even in the process space, which has been <unk>.
Speaker Change: Struggling a bit.
Speaker Change: There has been some recent order activity that.
Speaker Change: It was more encouraging than what we have seen earlier in the year.
Speaker Change: Okay, and then just I appreciate the color on the one great go in and then the new segment.
Speaker Change: If we look maybe more technical on the segment changes can you just walk through it sounds like contractors unchanged and then we're moving a business or two from for processing. The industrial is it that simple.
Speaker Change: I think the way that you look at it the way to today, Jeff we have our industrial division.
Speaker Change: And our powder division they will.
Speaker Change: Still stay in the industrial group will move our lubrication and a portion of our process division into that industrial group.
Speaker Change: And the remaining businesses will breakout and create the expansion markets.
Speaker Change: Area, which is the semiconductor the high pressure valves.
Speaker Change: And the environmental businesses.
Yes, the only the only comment I'll make Jeff is that yes for sure. It's just exactly as Chris described but historically, we've operated our regions on a matrix basis, where they had a separate P&L and they would make decisions based on what they thought it was best for the region will move into global structures, where our industrial business will now manage a global P&L.
Speaker Change: And there'll be able to make those decisions based on the opportunities they see.
Speaker Change: Same thing on the contractor side, we're kind of knocking down the matrix's and we're going to be running global businesses, which we're excited about and it's worked really well for us with gamma and we think that.
Speaker Change: Moving to that approach with Greg will be beneficial.
Speaker Change: Well.
Speaker Change: And maybe just last one.
Speaker Change: M&A pipeline behind the two deals.
Speaker Change: And would you expect that.
Speaker Change: Particularly more focus is going to be in this expansion markets or do you think you are still looking pretty broad based.
Speaker Change: Our pipeline that we have has been built up historically by the divisions. So if I look at the pipeline I've got about 100 companies in there that we are talking to active kind of ones that we would consider acquiring if they became available and so we have good momentum there and I think the market is a little more favorable today than it was a year ago and so.
Speaker Change: I am hopeful that we will see some activity coming from that pipeline that we've already got expansion markets to the extent that we've got businesses already there. They have names in the pipeline that they will pursue but in addition to that we're also going to challenge that group, but doing more research outside of our existing markets and <unk>.
Speaker Change: Some spaces that maybe our divisions haven't looked at it and see if there's opportunities for <unk> to expand into those as well we don't have any targets, but I do I do feel really good about the fact that now we're going to have a group that is charged with that kind of responsibility beyond just looking at things that are really closely adjacent to us.
Speaker Change: Okay I appreciate it Mark yes.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Andrew Buscaglia with <unk>.
Speaker Change: BNP Paribas. Your line is open. Please go ahead.
Okay.
Speaker Change: Yes, so I wanted to touch on.
Speaker Change: Within contractor you got.
Speaker Change: These new products, new product cycle rolling out we haven't seen much acceptance from it yet it seems like you're saying, there's more products being coming out in Q4.
Speaker Change: Is that informing your guide you guys maintaining your guidance do you see anything in your orders that.
Speaker Change: <unk>.
Speaker Change: Greater.
Speaker Change: Sales in that area.
Speaker Change: Well I think we've done really well with our new products. So I would say that they've driven a lot of incremental revenue in a market thats not been great. So I mean, if you look at the macro factors and the housing market in North America. For example, there is still flashing kind of red yellow signs and the fact that were we were flat through the first six months in contractor.
Speaker Change: And were flat in Q3, I think it's been fairly consistent it's always hard for us to know exactly what our revenue Ben if we didn't have the new products that we all feel like if we didn't have those new products you would see different numbers than what than what we've reported as we get into Q4, I think it's not going to be like a big step change. We are excited about some of the <unk>.
Speaker Change: So they are coming out in Q4, but I don't know that theyre going to have a meaningful impact over a 13 week time period, and yes that definitely did inform our decision on what we wanted to do for the guide for the full year.
Speaker Change: Okay.
Speaker Change: Hey, Mark Youre talking more about.
Speaker Change: Interesting kind of M&A.
Speaker Change: Looking into like brand new end market that you don't play in yet that are maybe not less correlated with what you guys do or is it is it brand.
Speaker Change: Brand new product for Carnival before that Youre trying to get into that.
Speaker Change: Like a slight change versus the path yes.
Speaker Change: Yes. It is.
Speaker Change: Change and we'll see how we.
Speaker Change: How it unfolds.
Speaker Change: Unfolds here, but I mean, there's a lot of fluid handling opportunities in markets that Greg is on plan and I think we've got a lot of expertise there that we can bring.
Speaker Change: We've got great Engineers, we know how to manufacture stuff, we've got a global footprint, we have customers that have some of those needs that we don't really address today. So it will be challenging our teams.
Speaker Change: Run the numbers look at the opportunities and see if there's anything for US there that we haven't really looked at in the past.
Speaker Change: Yeah.
Speaker Change: Okay interesting alright, thank you.
Speaker Change: Yes. Thank you as a reminder to ask a question at this time. Please press star one on your telephone.
Speaker Change: One moment for our next question.
Speaker Change: Next question is going to come from the line of Walter Liptak with Seaport Research. Your line is open. Please go ahead.
Speaker Change: Alright, Thanks, good morning, everyone.
Speaker Change: So wanted to ask.
Speaker Change: Follow up on China, you talked about the industrial and process, having some headwinds in the $10 million.
Speaker Change: Some falloff in industrial and process.
Speaker Change: So I guess the question is what are we what are we thinking about like with their coding and their funnels, what does it take to get the China or are we looking for macro things like the government stimulus that's going on or.
Speaker Change: How should we think about sort of the.
Speaker Change: Sure.
Speaker Change: Near term outlook.
Speaker Change: Yes, I think there has been over.
Speaker Change: Little bit of overcapacity built over there in the last couple of years. So I think there's some catch up that's going on because if I look at what's happening in our end markets is really kind of across the board in most of the big ones. It sounds like it's limited to any one particular thing if you look at semiconductor Theyre down automotive is down batteries down solar is down so.
Speaker Change: I do feel like over the last few years. They built a lot of capacity whats going to change hopefully at some point, we get to an equilibrium level and then.
Speaker Change: Business conditions are a little bit better for us in China, but what we've had over the last 12 months or so I don't think that the stimulus is going to have a meaningful impact in the short term, we'll see what happens, but we certainly haven't seen it so far in our results.
Speaker Change: Okay, great. It's been a couple of quarters that we've been talking about China now.
Speaker Change: So is it going to be more of the same you think until we get easier comps in the back half of next year.
Speaker Change: Do the comps get easier.
Speaker Change: I would say that.
Speaker Change: The comment about overcapacity is right and eve and here's where you have to go from.
Speaker Change: I think generalizing about the economy to specific markets.
Speaker Change: As an old industrial Guy Im hopeful that theres still going to be lots of interesting investments I believe this.
Speaker Change: In battery and electric vehicle and some of the traditional markets, where we've been there are certain markets.
Speaker Change: For example, the construction sector that would suggest.
Speaker Change: There could be.
Speaker Change: A downturn.
Speaker Change: That could go on for quite a while if you believe some of the reports that have come out and in recent in recent months, where you have millions of you have millions of units that have been constructed that are.
Speaker Change: Empty and I think that could.
Speaker Change: That's going to take more than a.
Speaker Change: Look.
Speaker Change: Liquidity confidence a liquidity program to drive the kind of confidence confidence that.
Speaker Change: Our sorts of end users are going to need to make big investments in that space.
Speaker Change: Okay, Great and then on the.
Speaker Change: On the new segmentation and looks great focused on growth.
Speaker Change: Can you give us an idea of.
Speaker Change: What do your expansion markets with the growth rate you think might look like.
Speaker Change: Okay.
Speaker Change: Well the organic growth of those segments.
Speaker Change: Not going to be vastly different from the organic growth of <unk>, there's a little more volatility in there with semiconductor that youll youll see from quarter to quarter, but again the trends are right now look to be pretty favorable.
Speaker Change: The real.
Speaker Change: Pieces I can't answer the inorganic side.
Speaker Change: Hopefully again the team does work.
Speaker Change: Take time, we're going to be disciplined when it comes up deploying our capital but over time, we're hopeful that that will become a more meaningful piece of the overall graco equation.
Speaker Change: Okay Alright, great.
Speaker Change: <unk> gone through this process.
Could there be divestitures that shakeout from it or do you feel pretty good about all of the P&L.
Speaker Change: Yes.
Speaker Change: I really like what we got.
Speaker Change: But obviously our team will be looking at all different opportunities and what makes sense.
Speaker Change: Right now Theres no obvious.
Speaker Change: Things that we think we need to get ROE.
Speaker Change: Okay, great. Okay. Thanks, so much.
Speaker Change: Thank you if there are no further questions I will turn the conference over to Mark Sheahan.
Mark Sheahan: Alright, well that wraps it up for today I appreciate everybody dialing in this morning and look forward to seeing you here in Q4 and during next next quarter's call.
Speaker Change: This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.
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