Q3 2025 Graco Inc Earnings Call

Speaker #1: 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 website at .

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 website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. At the request of the company, we will open the conference up for questions and answers after the opening remarks from management. During this call, various remarks may be made by management about their expectations, plans, and prospects for the future. These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act.

Speaker #1: Graco has additional information available in a PowerPoint slide presentation , which is available as part of the webcast . Player . At the request of the company , we will open the conference up for questions and answers after the opening remarks from management .

Speaker #1: During this call , various remarks may be made by management about their expectations , plans , and prospects for the future . These remarks constitute forward looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act .

Speaker #1: Actual results may differ materially from those indicated as a result of various risk factors , including those identified in item one of the company's 2024 Annual Report on Form 10-K and an item one A of the company's most recent quarterly Report on Form 10-q .

Operator: Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the company's 2024 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knutson, Vice President, Controller, and Chief Accounting Officer.

Speaker #1: These reports are available in the company's website at . And the SEC's website at fcc.gov . Forward looking statements reflect management's current views and speak only as of the time they are made .

Speaker #1: 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 Christopher Knutson, Vice President, Controller, and Chief Accounting Officer.

Speaker #2: Good morning , everyone , and thank you for joining our call . I'm here today with Mark Sheahan and David Lowe . I will provide a brief overview of our quarterly results before turning the call over to Mark for more commentary .

Chris Knutson: Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for more commentary. Yesterday, Graco reported third-quarter sales of $543 million, an increase of 5% from the same quarter last year. Excluding acquisitions, which contributed 6% growth, and currency translation, which contributed another 1% growth, organic sales declined 2% in the quarter. Reported net earnings increased 13% to $138 million or $0.82 per diluted share. During the quarter, we recognized a $14 million non-cash gain from a reduction in the fair value of contingent consideration related to last year's acquisition of Corab. This gain is an unallocated corporate operating expense.

Speaker #2: Yesterday , Graco reported third quarter sales of $543 million , an increase of 5% from the same quarter last year . Excluding acquisitions , which contributed 6% growth and currency translation , which contributed another 1% growth .

Speaker #2: Organic sales declined 2% in the quarter . Reported net earnings increased 13% to $138 million , or $0.82 per diluted share . During the quarter .

Speaker #2: We recognized a $14 million non-cash gain from a reduction in the fair value of contingent consideration related to last year's acquisition of Krab .

Speaker #2: This gain is in unallocated corporate operating expense , excluding the impact of excess tax benefits from stock option exercises , and this contingent consideration fair value gain adjusted non-GAAP net earnings was $0.73 per diluted share , an increase of 3% .

Chris Knutson: Excluding the impact of excess tax benefits from stock option exercises and this contingent consideration fair value gain, adjusted non-GAAP net earnings was $0.73 per diluted share, an increase of 3%. The gross margin rate was flat compared to the same quarter last year. The effects of our targeted interim pricing actions started to be realized during the quarter, offsetting higher product costs resulting from lower factory volume, unfavorable effects of lower margin rates from acquired operations, and incremental tariffs. Tariffs affected product costs by $5 million in the quarter, resulting in a 100 basis point decline in the gross margin rate. Operating expenses decreased $6 million or 5% in the quarter. The decline was driven primarily by the recognition of the non-cash gain related to the fair value contingent consideration reduction.

Speaker #2: The gross margin rate was flat compared to the same quarter last year . The effects of our targeted interim pricing actions started to be realized during the quarter , offsetting higher product costs resulting from lower factory volume , unfavorable effects of lower margin rates from acquired operations , and incremental tariffs .

Speaker #2: Tariffs affected product costs by $5 million in the quarter , resulting in a 100 basis point decline in the gross margin rate . Operating expenses decreased $6 million , or 5% , in the quarter .

Speaker #2: The decline was driven primarily by the recognition of non-cash gain related to the fair value of contingent consideration , reduction . Excluding this gain .

Chris Knutson: Excluding this gain, total operating expenses increased $8 million or 6%, driven by incremental expenses from acquisitions of $10 million. Excluding expenses of acquired operations, operating expenses declined $2 million. Adjusted operating earnings increased $5 million or 3% during the quarter. Operating earnings as a percent of sales was 28% for the quarter and consistent with the same period last year. The adjusted effective tax rate was 20%, which is consistent with our expected full-year tax rate of 19.5% to 20.5% on an as-adjusted basis. Cash provided by operations totaled $487 million for the year, an increase of $51 million or 12%. Improved inventory management from consolidating operations under One Graco and lower sales and earnings-based incentive payments drove the increase. Cash provided by operations as a percentage of adjusted net earnings was 146% for the quarter and 132% for the year to date.

Speaker #2: Total operating expenses increased $8 million , or 6% , driven by incremental expenses from acquisitions of $10 million , excluding expenses of acquired operations .

Speaker #2: Operating expenses declined $2 million . Adjusted operating earnings increased $5 million , or 3% , during the quarter . Operating earnings . As a percent of sales was 28% for the quarter and consistent with the same period last year .

Speaker #2: The adjusted effective tax rate was 20%, which is consistent with our expected full year tax rate of 19.5% to 21.5% on an as adjusted basis.

Speaker #2: Cash provided by operations totaled $487 million for the year , an increase of $51 million , or 12% . Improved inventory management from consolidating operations under one Graco and lower sales and earnings based incentive payments drove the increase .

Speaker #2: Cash provided by operations . As a percentage of adjusted net earnings was 146% for the quarter and 132% for the year to date .

Speaker #2: Significant year to date uses of cash include share repurchases of 4.4 million shares totaling $361 million , dividends of $138 million , and capital expenditures of $34 million .

Chris Knutson: Significant year-to-date uses of cash include share repurchases of 4.4 million shares, totaling $361 million, dividends of $138 million, and capital expenditures of $34 million. These cash uses were offset by share issuances of $32 million. Few comments as we look forward to the rest of the year. Based on current exchange rates, assuming the same volumes, mix of products, and mix of business by currency as in 2024, movement in foreign currencies would have a 1% favorable impact on net sales and net earnings for the full year. Finally, projected unallocated corporate expenses and capital expenditures are $35 million to $38 million and $50 million to $60 million for the full year, respectively. I will now turn the call over to Mark for further segment and regional commentary.

Speaker #2: These cash uses were offset by share issuances of $32 million. A few comments as we look forward to the rest of the year.

Speaker #2: Based on current exchange rates , assuming the same volumes , mix of products and mix of business by currency as in 2020 for movement in foreign currencies would have a 1% favorable impact on net sales and net earnings for the full year .

Speaker #2: Finally , projected unallocated corporate expenses and capital expenditures are 35 to $38 million and 50 to $60 million for the full year , respectively .

Speaker #2: I will now turn the call over to Mark for further segment and regional commentary .

Speaker #3: Thank you Chris . Good morning everyone , I'm pleased to report that sales were up 5% this quarter with acquisitions contributing a strong 6% growth .

Mark Sheahan: Thank you, Chris. Good morning, everyone. I'm pleased to report that sales were up 5% this quarter, with acquisitions contributing a strong 6% growth. This more than offset a modest 2% decline in organic revenue. Our contractor segment continues to face headwinds from subdued construction activity and cautious consumer sentiment in North America. The industrial segment delivered a 1% sales increase, supported by acquisitions and favorable exchange rates. While growth occurred in many product categories, overall sales were set back by the timing of powder finishing system sales compared to last year. Expansion markets performed well, led by momentum in the semiconductor space. Third-quarter order activity increased mid-single digits across all segments, driven by strategic pricing and steady demand. Last year's third quarter had a nearly $25 million backlog reduction. Excluding this reduction, organic sales grew 4%, aligning with third-quarter order rates.

Speaker #3: This more than offset a modest 2% decline in organic revenue . Our contractor segment continues to face headwinds from subdued construction activity and cautious consumer sentiment in North America .

Speaker #3: The industrial segment delivered a 1% sales increase, supported by acquisitions and favorable exchange rates. While growth occurred in many product categories, overall sales were set back by the timing of powder finishing system sales compared to last year.

Speaker #3: Expansion markets performed well , led by momentum in the semiconductor space . Third quarter order activity increased mid-single digits across all segments , driven by strategic pricing and steady demand .

Speaker #3: Last year's third quarter had a nearly $25 million backlog reduction. Excluding this reduction, organic sales grew 4%, aligning with third quarter order rates.

Speaker #3: Backlog levels are stable and no significant challenges are expected for the rest of the year . Details on backlog reduction by segment are included in the conference call slide deck .

Mark Sheahan: Backlog levels are stable, and no significant challenges are expected for the rest of the year. Details on backlog reduction by segment are included in the conference call slide deck. We announced targeted price increases during the third quarter, and those efforts are gaining traction. These actions are helping to offset the impact of tariffs, which added $5 million in costs this quarter and $9 million year to date. While pricing has not fully covered these costs yet, we expect this by the end of the year. Turning to segment performance, the contractor segment sales increased 8% for the quarter, with acquisitions contributing 11%, more than offsetting a 3% decline in organic sales. Affordability concerns have continued to affect the North American construction market, with declines in both the Pro Paint and the Home Center channels. Channel partners are managing inventory tightly in response to current conditions.

Speaker #3: We announced targeted price increases during the third quarter , and those efforts are gaining traction . These actions are helping to offset the impact of tariffs , which added $5 million in costs this quarter and $9 million year to date .

Speaker #3: While pricing is not fully covered , these costs yet , we expect this by the end of the year . Turning to segment performance , the contractor segment sales increased 8% for the quarter , with acquisitions contributing 11% more than offsetting a 3% decline in organic sales .

Speaker #3: Affordability concerns have continued to affect the North American construction market, with declines in both the Pro Paint and the Home Center channels.

Speaker #3: Channel partners are managing inventory tightly in response to current conditions. On a positive note, protective coatings equipment sales had their best performance of the year, and pavement products saw increased demand, supported by infrastructure investments.

Mark Sheahan: On a positive note, protective coatings equipment sales had their best performance of the year, and pavement products saw increased demand supported by infrastructure investments. Incoming orders grew low single digits in the quarter, giving us confidence heading into the fourth quarter. Industrial segment sales increased 1% in the quarter, with acquisitions and currency offsetting a 2% organic revenue decline. The Americas grew 3% organically, led by good demand in vehicle service and automotive OEM projects, particularly in liquid finishing systems and sealants and adhesives. In AMEA, gains in process manufacturing were not enough to offset a drop in vertical powder coating systems due to project timing. In Asia Pacific, there was solid demand in mining, which was not enough to offset lower solar and EV investments. Despite lower organic sales overall, profitability was extremely strong, with incremental margins of 220% year to date.

Speaker #3: Incoming orders grew low single digits in the quarter , giving us confidence heading into the fourth quarter . Industrial segment sales increased 1% in the quarter , with acquisitions and currency offsetting a 2% organic revenue decline .

Speaker #3: The Americas grew 3% organically, led by strong demand in vehicle service and automotive OEM projects, particularly in liquid finishing systems and sealants and adhesives.

Speaker #3: In EMEA . Games in process manufacturing were not in not enough to offset a drop in vertical powder coating systems due to project timing in Asia Pacific .

Speaker #3: There was solid demand in mining , which was not enough to offset lower solar and EV investments . Despite lower organic sales overall profitability was extremely strong , with incremental margins of 220% year to date .

Speaker #3: Expansion . Market sales were up 3% , with good activity in semiconductor products , partially offset by declines in the environmental business . While semiconductor has grown this year , we are still below peak revenue and continue to face some challenges in China .

Mark Sheahan: Expansion market sales were up 3%, with good activity in semiconductor products, partially offset by declines in the environmental business. While semiconductor has grown this year, we are still below peak revenue and continue to face some challenges in China. Margins have been strong throughout the year, though they may be volatile quarter to quarter due to fluctuating volumes. Moving on to our outlook, year-to-date sales are up 5%, supported by the 6% increase from acquisitions, which have more than offset a slight organic revenue decline of 1%. Heading into the fourth quarter, order rates are satisfactory, and year-over-year comparisons in the contractor segment are becoming easier. As a result, we're keeping our full-year revenue guidance of low single-digit growth on an organic constant currency basis. That concludes our prepared remarks. Operator, we're ready for questions.

Speaker #3: Margins have been strong throughout the year , though they may be volatile . Quarter to quarter due to fluctuating volumes . Moving on to our outlook .

Speaker #3: Year to date sales are up 5% , supported by the 6% increase from acquisitions , which have more than offset a slight organic revenue decline of 1% .

Speaker #3: Heading into the fourth quarter , order rates are satisfactory and year over year comparisons in the contractor segment are becoming easier as a result , we're keeping our full year revenue guidance of low single digit growth on an organic , constant currency basis .

Speaker #3: That concludes our prepared remarks . Operator we're ready for questions .

Speaker #1: Thank you . The question and answer session will begin at this time . To ask a question , please press Star one on your telephone and wait for your name to be announced .

Operator: Thank you. The question and answer session will begin at this time. 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 one again. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Deane Dray of RBC Capital Markets. Please state your question.

Speaker #1: To withdraw your question, please press star one one again. Your question will be taken in the order that it is received.

Speaker #1: Please stand by for your first question . Our first question comes from DeAndre of RBC . Please state your question .

Speaker #4: Thank you . Good morning everyone .

David Lowe: Thank you. Good morning, everyone.

Speaker #3: Hey Dean .

Mark Sheahan: Hi, Dean.

Speaker #4: Hey , maybe we can start with since macro overlay and expectations is so important . Kind of . Can you zip through the end markets and regions ?

David Lowe: Maybe we can start with, since macro overlay and expectations are so important, can you zip through the end markets and regions, just the performance of what stands out versus expectations, up or down, and then any kind of the forward look, the leading indicators, day rates, what you saw the first, the last six weeks of orders too, please.

Speaker #4: Just the performance of what stands out versus expectations—up or down. And then any kind of the forward look, the leading indicators, day rates, what you saw in the first, the last six weeks of orders, please.

Speaker #3: Yeah . So I think it's a continuation of really a lot of the themes that we've been talking about all year . I think that in terms of like the industrial end markets , I wouldn't characterize the demand as robust , but I would also say that , you know , people are still ordering products and , you know , there's targeted opportunities in some of the areas that we talked about , like vehicle service and our process pump segment , which have been pretty good .

Mark Sheahan: Yeah, so I think it's a continuation of really a lot of the themes that we've been talking about all year. I think that in terms of the industrial end markets, I wouldn't characterize the demand as robust, but I would also say that people are still ordering products and there's targeted opportunities in some of the areas that we talked about, like vehicle service and our process pump segment, which have been pretty good. Also, our liquid finishing segment is a lot of customers are looking at converting from air-operated to electric. That's created some opportunities for us as well. It's kind of hit and miss depending upon the customer type, the end market that we're in. The North America market has probably been the one where we've unfortunately seen more caution from customers just because of the changing landscape with respect to the tariff situation.

Speaker #3: And also our liquid finishing segment is a lot of customers are , you know , looking at converting from air operated to electric .

Speaker #3: That's created some opportunities for us as well . So it's kind of , you know , hit and miss depending upon the customer type .

Speaker #3: The end market that we're in , the North America market has probably been the one where we've unfortunately seen more caution from customers just because of the , you know , the changing landscape with respect to , you know , the tariff situation .

Speaker #3: I think it has created some caution in some of the end markets and some of the customers . We're hopeful that that kind of cleans up .

Mark Sheahan: I think it has created some caution in some of the end markets and some of the customers. We're hopeful that that kind of cleans up. If I were to put my hat on from the end of last year when we were putting our plans together, I think we were more hopeful that we would have a more stable environment in North America than what we've experienced. Our teams are still working really hard, they're still executing. There's still opportunities out there, but again, the environment is not what I would characterize as robust. China has really actually held up pretty well for us this year, which after a couple of years of declines there, has been nice to see. Again, it really depends on the end market that you're in.

Speaker #3: But if I were to , you know , put my hat on from the end of last year when we were putting our plans together , I think we're more hopeful that we would have a more stable environment in North America than what we've experienced .

Speaker #3: Our teams are still working really hard. They're still executing. There are still opportunities out there, but again, the environment is not what I would characterize as robust.

Speaker #3: China has really actually held up pretty well for us this year , which , you know , after a couple of years of declines , there was is been nice to see .

Speaker #3: And again , it really depends on the end market that you're in the mining industry in particular in Asia Pacific . And you know , maybe to a lesser extent , China has has held up pretty well .

Mark Sheahan: The mining industry in particular in Asia Pacific and maybe to a lesser extent, China, has held up pretty well. Some of the traditional industrial markets, including adhesives, sealants, and liquid finishing and the powder business, have actually held up pretty well in China. I would say that China's been a positive surprise, maybe, for us after a couple of years of tough business over there. Probably the other big surprise is just the uncertainty in some of the end markets with our industrial business. Contractor, I mean, I know we'll get into it on this call, but the issue there, again, it's just affordability, home affordability issues primarily in North America. Nothing too surprising. We're hopeful that we get a little bit of a break on that, with rates coming down. The environment has been tough.

Speaker #3: And the , you know , some of the traditional industrial markets , including adhesives , sealants and liquid finishing and the powder business have actually held up pretty well in China .

Speaker #3: So I would say that China's been a positive surprise . Maybe for us after a couple of years of of tough of tough business over there and probably the other big surprise is just the the uncertainty in some of the end markets with our with our industrial business contractor .

Speaker #3: I mean , I know we'll get into it on this call , but the issue there again , is just affordability . Part of home affordability issues , primarily in North America .

Speaker #3: Nothing to surprising . We're hopeful that we get a little bit of a break on that with rates coming down . The environment has been tough last year .

Speaker #3: As you know , we had the lowest level of housing sales in this country since 1995 , and this year is even lower than that .

Mark Sheahan: Last year, as you know, we had the lowest level of housing sales in this country since 1995, and this year is even lower than that. Turnover is good for us. Houses need to sell. When houses sell, they hire contractors to paint, and they fix up and they remodel, and it's just good for the overall health of our contractor business. It will get better. We're very well positioned. Once things, you know, firm up on the demand side and we get some volume growth, the P&L is in great shape. Profitability is super high. Incremental margins look good. Cash flow is extremely strong. It's really just making sure that we're all set up for what will be, you know, better volume days ahead in contractor.

Speaker #3: So, turnover is good for us. Houses need to sell. When houses sell, they hire contractors to paint, and they fix up and remodel.

Speaker #3: And it's just good for the overall health of our contractor business . It will get better . We're very well positioned once things you know , firm up on the demand side and we get some volume growth .

Speaker #3: The PNL is in great shape . Profitability is super high . Incremental margins look good . Cash flow is extremely strong . So it's really just making sure that we're all set up for what will be , you know , better volume days ahead in contractor .

Speaker #4: And the leading indicator looks at day rates for October, etc.

David Lowe: The leading indicator looks, day rates, October, et cetera. Great.

Speaker #2: When we look at the rates and what we see coming out from some of those indicators , you know , the pretty flat , I would say on in terms of housing starts with a 30 year interest rate is now at 6.1 , which is lower than it's been in quite some time .

[Company Representative]: When we look at the rates and what we see coming out from some of those indicators, pretty flat, I would say, in terms of housing starts. The 30-year interest rate is now at 6.1%, which is lower than it's been in quite some time. We're hoping that as those rates start to trend downwards, we'll see some improvement come with housing movement, as Mark had previously talked about.

Speaker #2: So we're hoping that as those rates start to trend downwards , that we'll see some improvement come . With housing movement as Mark had had previously talked about .

Speaker #3: Yeah , it's still pretty a pretty sluggish environment . Dean and we're hopeful it's going to get better . But I don't think our results are really all that bad .

Mark Sheahan: Yeah, it's still a pretty sluggish environment, Deane, and we're hopeful it's going to get better, but I don't think our results are really all that bad when you look at how hard this housing and construction industry has been hit. I don't like the fact that we're down a little bit organically in contractor, but, you know, given the pain that's gone on in that market for a while here, it's been a challenge that the team has dealt with in an admirable way.

Speaker #3: When you look at how hard this housing and construction industry has been hit , I never I don't like the fact that we're down a little bit organically and contractor , but , you know , given the the pain that's gone on in that market for a while here , it's been , you know , a challenge that the team has , has dealt with and admirable admirable way .

Speaker #5: Yeah . I would just add that , you know , a fairly significant portion of that market as Mark touched on with resale being so slow is remodeling activity .

David Lowe: Yeah, I would just add that, you know, a fairly significant portion of that market, as Mark touched on with resale being so slow, is remodeling activity. Now, that's one of the areas that affects both our Pro Paint side and our Home Center side of our business. Actually, this was the first year that the group that does forecasting around that, Harvard University, projected that category to grow, that activity to grow this year. That really hasn't happened. I think that holds us back, and we hear some of our channel partners talk about the same things, both on the Home Center side as well as on the paint materials side of the business.

Speaker #5: Now , that's one of the areas that affects both our Pro paint side and our , you know , our our home center side of our business .

Speaker #5: That actually this was the first year that the the group that does forecasting around that Harvard University projected that category to grow that activity to grow this year .

Speaker #5: That really hasn't happened . So I think that that holds back , you know , that holds us back . And we hear some of our channel partners talk about the same things , both on the Home center side and as well as on the paint materials side of the business .

Speaker #4: And then just a follow up , I know it's it's a rare event for you to do a second price increase in the in September , but just kind of give us some color about how it was introduced , you know , are they all sticking and you expect this to fully offset the tariffs .

[Company Representative]: Just to follow up, I know it's a rare event for you to do a second price increase in September, but just kind of give us some color about how it was introduced. You know, are they all sticking and you expect this to fully offset the tariffs? You know, what's the timeframe there? Thanks.

Speaker #4: You know, what's the time frame there? Thanks.

Speaker #3: Yeah . Good question . We did announce price increases in the early third quarter . We like to give our channel partners enough time to digest those before we actually implement them .

Mark Sheahan: Good question. We did announce price increases in the early third quarter. We like to give our channel partners enough time to digest those before we actually implement them. We didn't actually start to really have those take effect until late in the third quarter. I would say sort of low to mid-single-digit kinds of increases across all the business units and all of the regions, with the exception of the Pro Paint channel in North America and the Home Center channel in North America, and those are queued up to go in, in January.

Speaker #3: So we didn't actually start to really have those take effect until late in the third quarter . But I would say sort of , you know , low to mid single digit kinds of increases across all of the business units and all of the regions , with the exception of the propane channel in North America and the Home Center channel in North America .

Speaker #3: And those are queued up to go in in January .

Speaker #4: Thank you .

[Company Representative]: Thank you.

Speaker #3: Yep .

Mark Sheahan: Yep.

Speaker #1: Our next question comes from Mike Halloran with Baird . Please state your question .

Operator: Our next question comes from Mike Halloran with Baird. Please state your question.

Speaker #6: Hey , good morning everyone .

David Lowe: Hey, good morning, everyone.

Speaker #3: Mike .

Mark Sheahan: Hi, Mike.

[Company Representative]: Morning, Mike.

Speaker #6: Can you unpack what what you're implying for the fourth quarter here ? If I , if I , is this magnitude of pricing that hasn't come in fully being more ramped in the fourth quarter .

David Lowe: Can you unpack what you're implying for the fourth quarter here? Is this magnitude of pricing that hasn't come in fully being more ramped in the fourth quarter? Is it something you're fundamentally seeing in the demand outlook that gives you a little bit more confidence in the fourth quarter? I mean, because the inflection of growth is above normal seasonality, and I just want to make sure I understand what those puts and takes are to get you to that positive fourth quarter number that's implied with the guide.

Speaker #6: Is something you're fundamentally seeing in the demand outlook that gives you a little bit more confidence in the fourth quarter . I mean , because the inflection of growth is above normal seasonality .

Speaker #6: And so I just want to make sure I understand what those puts and takes are to get you to that positive fourth quarter number .

Speaker #6: That's implied with the guide .

Speaker #3: Yeah, I think we're, you know, we kept the guide. I think that obviously you'll do the math, and you guys can figure out that it looks like we're going to be on the low end of the guide if we get there.

Mark Sheahan: Yeah, I think we kept the guide. I think that obviously you'll do the math and you guys can figure out that it looks like we're going to be on the low end of the guide if we get there. We're not likely to get all the way up to the high end of the low single-digit guidance. But, you know, despite where we're at here to date, we're down about 1%. We think with our incremental pricing actions that we put in, the order rates have been stable to somewhat better in the third quarter than what we had seen earlier in the year. Obviously, there's some areas of the business that are doing better than others, and then we also have a fairly easy comparison in Q4 with the contractor business.

Speaker #3: We're not likely to get all the way up to the high end of the low single digit guidance . But , you know , despite where we're at year to date , we're down about a percent .

Speaker #3: We think with our incremental pricing actions that we put in the order rates have been stable to , you know , somewhat better in the third quarter than what we had seen earlier in the year .

Speaker #3: Obviously , there's some areas of the business that are , you know , doing better than others . And then we also have a fairly easy comparison in Q4 with the contractor business .

Speaker #3: So you sort of put all that together, and our team's forecasts are rolling up to hitting in somewhere in that low single-digit range.

Mark Sheahan: You sort of put all that together and our teams, our forecasts are rolling up to hitting in somewhere in that low single-digit range.

Speaker #6: So to be clear , it's not like you're assuming there's something fundamentally getting better in the fourth quarter . It's more steady . And then you put the other factors in play , and then that's how you get to that guide .

David Lowe: To be clear, it's not like you're assuming there's something fundamentally getting better in the fourth quarter. It's more steady, and then you put the other factors in play, and then that's how you get to that guide.

Speaker #3: Exactly. Yeah, I think that's fair.

Mark Sheahan: Exactly. Yeah, I think that's fair.

Speaker #6: And if you think about kind of the the second part of . The second question , Dean asked , there , when does price cost turn positive for you guys ?

David Lowe: If you think about the second part of the second question Deane asked there, when does price cost turn positive for you guys? When does that drag in? Is it with those price increases that you said were coming in the first quarter? When you hit the fourth quarter here, does that dynamic normalize out?

Speaker #6: So when does that drag in . Does it with those price increases that you said were coming in the first quarter or when you hit the fourth quarter here ?

Speaker #6: Does that does that dynamic normalize out ?

Speaker #3: Yeah , I think we'll we'll definitely see it here in Q4 . Actually , if you look at Q3 , gross margin , if you were to back out the impact of the of acquisition , our margins were actually up in Q3 .

Mark Sheahan: I think we'll definitely see it here in Q4. Actually, if you look at Q3 gross margin, if you were to back out the impact of the Corab acquisition, our margins were actually up in Q3. We are, you know, doing okay on the price cost. We'll see that roll through here in Q4 as well.

Speaker #3: So we are , you know , doing okay on the on the price cost , we'll see that roll through here in Q4 as well .

Speaker #6: Thanks , Mark . Appreciate it .

David Lowe: Good. Thanks, Mark. Appreciate it.

Speaker #3: Yeah .

Mark Sheahan: Yep.

Speaker #1: Our next question comes from the line of Sara Boroditsky of Jefferies . Please state your question .

Operator: Our next question comes from the line of Saree Boroditsky of Jefferies. Please state your question.

Speaker #7: Hi . Good morning . Thank you . Alluded to this just a second ago on the price , but it looks like contractor was the only segment to have a large headwind from product cost .

[Analyst]: Hi, good morning.

Operator: Hi.

[Analyst]: You alluded to this just a second ago on the price, but it looks like contractor was the only segment to have a large headwind from product cost. I think you mentioned putting in pricing actions in North America in January. Just maybe talk through your ability to push through price in that segment versus the others.

Speaker #7: I think you mentioned putting in price increases in North America in January . So just maybe talk through your ability to push through price in that segment versus the others .

Speaker #3: Yeah , it's good . But we are respectful of the fact that we deal with large channel partners and it's , you know , conversations happen around this time of the year .

Mark Sheahan: Yeah, it's good. We are respectful of the fact that we deal with large channel partners, and conversations happen around this time of the year. They start at that level. We intentionally did not try to push price mid-year with them, which I think is appreciated because some of our competitors did. We fully expect that we'll be able to realize some pricing, starting at the beginning of the year with our larger channel partners. We did raise prices in contractor in the spray foam category and the high-performance coatings category and in our line striping and texture businesses. It's not like we didn't raise prices at all in contractor. We did hit those categories, with the other industrial categories in the September timeframe.

Speaker #3: They start at that level . We intentionally did not try to push price mid-year with them , which I think is appreciated because some of our competitors did .

Speaker #3: And so we fully expect that we'll be able to realize some pricing starting at the beginning of the year with our larger channel partners .

Speaker #3: We did raise prices in contractor in the spray foam category , and the high performance coatings category , and in our line striping and texture businesses .

Speaker #3: So it's not like we didn't raise prices at all in contractor . We did hit those categories with the other industrial categories in the September time frame .

Speaker #5: And you will see in Q4 in our international locations , the product lines , especially , we're talking about the propane line , which of course is largely sold through some of these big channel partners here in North America .

David Lowe: You will see in Q4, in our international locations, the product lines, especially we're talking about the Pro Paint line, which, of course, is largely sold through some of these big channel partners here in North America. Price adjustments will be processed there now, and we'll see some benefit even before the end of the quarter in that category too.

Speaker #5: Price , price adjustments will be processed . There . You know , in now , and we'll see some benefit even before the end of the quarter in that category to .

Speaker #7: Appreciate the color . Looks like you turned a little less negative on APAC and expansion . Just maybe some an update on what you're seeing there .

[Analyst]: Appreciate the color. Looks like you turned a little less negative on Asia Pacific and expansion. Just maybe an update on what you're seeing there and the key driver of that decision to update that, the pie chart. Thank you.

Speaker #7: And the key driver of that decision to update that the pie chart . Thank you .

Speaker #3: Yeah , I think that the Asia Pacific region , as I said earlier , I think overall the China business has actually held up better than maybe what we thought .

Mark Sheahan: I think that the Asia Pacific region, as I said earlier, overall the China business has actually held up better than maybe what we thought. The comments that I made during the opening remarks were targeted at the semiconductor space where, despite decent levels of demand, there's still some challenges in getting licenses and getting products into China, which we are hopeful we'll get cleaned up at some point. That's really, I think, part of the reason why we moved a little bit to a less optimistic view in that region overall. I wouldn't call it a dramatic change, but just a kind of fine-tuning of where we see things as we make our way through the year.

Speaker #3: The comments that I made during the opening remarks were targeted at the semiconductor space , where despite , you know , decent levels of demand , there's still some challenges in getting licenses and getting products into China , which we are hopeful will get cleaned up at some point .

Speaker #3: And that's really , I think , part of the reason why we we moved a little bit to a less optimistic view in that region overall , I wouldn't call it a dramatic change , but just a kind of a fine tuning of of where we see things at here as we make our way through the year .

Speaker #7: Thanks . Appreciate the color .

[Analyst]: Thanks. Appreciate the color.

Speaker #8: Yep .

Mark Sheahan: Yeah.

Speaker #1: Our next question comes from Brian Blair of Oppenheimer . Please state your question .

Operator: Our next question comes from Bryan Blair of Oppenheimer. Please state your question.

Speaker #4: Thank you . Good morning everyone .

[Analyst]: Thank you. Good morning, everyone.

Speaker #8: Good morning . Good morning .

Mark Sheahan: Morning. Morning.

Speaker #4: So you're a few quarters in now with the new organizational structure . And obviously you've been navigating a pretty choppy , sluggish backdrop to date .

[Analyst]: You're a few quarters in now with the new organizational structure. Obviously, you've been navigating in a pretty choppy, sluggish backdrop. To date, how has the more market and customer-centric framework helped your team to navigate this volatility and better position for recovery? On the side of M&A strategy, has there been a noticeable difference in funnel development? Just curious what "proof points" you could call out.

Speaker #4: How is the more market and customer centric framework helped your teams navigate this ? This volatility and better position for recovery ? And then on the side of M&A strategy , has there been a noticeable difference in funnel development ?

Speaker #4: Just curious what you know , quote unquote proof points . You could call out .

Speaker #3: Yeah , thanks for asking . On the one Graco side of the of the house , I think that it's still fairly early days , but for sure we're seeing a lot of margin improvement from some of the cost initiatives that we took last year .

Mark Sheahan: Yeah, thanks for asking. On the One Graco side of the house, I think that it's still fairly early days, but for sure, we're seeing a lot of margin improvement from some of the cost initiatives that we took last year. Just look at the industrial incremental margins as probably a good benchmark for you in terms of what we've done there, and you know, we're on track with the targeted number that we had given to you last year. Those things are moving forward quite well. Commercially, the teams are really starting to gel with respect to having distributors be able to carry multiple product lines that they weren't in the past. We're seeing upticks in some of the MRO business, because those are broad-ranging distributors that carry multiple products, and they're very interested in being able to get access to some things like our lubrication products, for example.

Speaker #3: Just look at the industrial incremental margins is probably a good benchmark for you in terms of what we've done . There . And , you know , we're on track with the targeted number that we had given to you last year .

Speaker #3: Those things are moving forward quite well commercially . The teams are really starting to gel with respect to having distributors be able to carry multiple product lines that they weren't in the past .

Speaker #3: So we're seeing upticks in some of the MRO business because , you know , those are broad ranging distributors that carry multiple products , and they're very interested in being able to get access to some things like our lubrication products , for example .

Speaker #3: We're also getting , I would say , better penetration in some of the international markets , like down in Mexico , where historically maybe we were a little bit more protective in terms of who would get access to products like our quantum pumps , which are going into a lot of different applications on the process .

Mark Sheahan: We're also getting, I would say, better penetration in some of the international markets, like down in Mexico, where historically, maybe we're a little bit more protective in terms of who would get access to products like our quantum pumps, which are going into a lot of different applications on the process and sanitary side. Now we've opened that up a bit, and we're seeing some traction there as well. The teams are working well, but it is still early days. I mean, there's growing pains that happen whenever you put multiple business units together, and then you also put the regions together. I'm very happy with what I'm seeing and what I'm hearing from the teams.

Speaker #3: And sanitary side . Well , now we've opened that up a bit and we're seeing some , some traction there as well . The teams are working well , but it is still early days .

Speaker #3: I mean , there's growing pains that happen whenever you put multiple business units together , and then you also put the regions together .

Speaker #3: But I'm very happy with what I'm seeing and what I'm hearing from the teams . When I meet with customers , distributors , they're really happy .

Mark Sheahan: When I meet with customers, distributors, they're really happy, because they view this as us taking down a lot of the walls that maybe prevented them from being able to sell different product categories that they walk by applications every day, and they weren't able to have access to, let's say, for example, lubrication products. Now they have that. It's really a matter of getting them trained, making sure that they've got the opportunities, and then if they do and they're trained, we're going to open up those channels for them. I'm very happy. On the M&A front, it's kind of a continuation. I like the pipeline. We got a lot of companies in there. We're talking with them regularly. We're on top of any of the targets that we're interested in.

Speaker #3: Because they view this as us taking down a lot of the walls that maybe prevented them from being able to sell different product categories that they walk by applications every day , and they weren't able to have access to , let's say , for example , lubrication products .

Speaker #3: Well , now they have that . So it's really a matter of getting them trained , making sure that they've got the opportunities .

Speaker #3: And then if they do and they're trained , we're going to open up those those channels for them . So I'm I'm very happy .

Speaker #3: On the M&A front . It's kind of a continuation . I like the pipeline . We got a lot of companies in there .

Speaker #3: We're talking with them regularly . We're on top of any of the targets that we're interested in . We've had some success this year , obviously , with the color service acquisition that we announced during the quarter .

Mark Sheahan: We've had some success this year, obviously, with the Color Service acquisition that we announced during the quarter. There are other things in the pipeline that we're also excited about. It is for sure a secondary to our organic growth strategy. We want to execute on M&A. We like these businesses where they're technology-based, where we think we can add some value, where they're growing, where we like the management team, where we can add value. We're continuing to push those types of opportunities pretty aggressively here at Graco. Hopefully, some stuff pops here over the next 6 to 12 months. I think we're in a good spot.

Speaker #3: There's other things in the pipeline that we're also excited about , but it is a for sure it is a secondary or a secondary to our organic growth strategy .

Speaker #3: We want to execute on M&A . We like these businesses where their technology based , where we think we can add some value , where they're growing or we'd like the management team where we can add value and we're continuing to push those types of opportunities pretty aggressively .

Speaker #3: Here at Graco . So hopefully some stuff pops here over the next , 6 to 12 months . But I think we're in a good spot .

Speaker #4: All there encouraging . Appreciate the color . It looks like top line contribution from your acquisitions pretty solid , at least in combination .

[Analyst]: All very encouraging. Appreciate the color. It looks like top-line contribution from your acquisitions, you know, pretty solid, at least in combination. Maybe offer a quick update on Corab and Color Service integration. I know the latter is still, you know, quite early stage. Just how they're performing relative to deal model today.

Speaker #4: Maybe offer quick update on on carob and color service integration . I know the latter is still quite early stage just how they're performing relative to deal model to date .

Speaker #3: Yeah , I think that for sure . Carob is coming in right where we thought it would be , which was , you know , our expectation was that we wanted to make sure that we retained what we had , you know , seen from them previously in the earlier year in terms of their revenue .

Mark Sheahan: Yeah, I think that for sure, Corab is coming in right where we thought it would be, which was, you know, our expectation was that we wanted to make sure that we retained what we had seen from them previously in the earlier year, in terms of their revenue. We feel really good about where that one's at. No surprises. Great business, great management team. Super excited on how we can help them collaborate here better in North America, particularly with some of the larger channel partners like, you know, the Home Centers and the Pro Paint side, where their penetration isn't as good as some of their competition. Very good there. Color Service, yeah, brand new. It is part of the Gama Powder business. It's being managed by a leadership team that is actually in charge of running our SAT vertical lines business. They're both in Italy.

Speaker #3: So we feel really good about where that one's at . No surprises . Great business , great management team . Super excited . On how we can help them collaborate here better in North America , particularly with some of the larger channel partners like , you know , the home centers and the propane side where their penetration isn't as good as some of their competition .

Speaker #3: So very good . There . Color service . They have brand new . It is part of the game powder business . It's being managed by a leadership team that is actually in charge of running our SaaS vertical lines business .

Speaker #3: There , both in Italy . They're closely located to one another . Those teams are really early days , but they've got ideas as well on how to integrate and how to implement some of the best practices that the gamma organization has shown over the years into the color service business model .

Mark Sheahan: They're closely located to one another. Those teams are really early days, but they've got ideas as well on how to integrate, and how to implement some of the best practices that the Gama organization has shown over the years into the Color Service business model. We're excited about that one too. It's a nice technology business. They're solving customers' problems. They're moving materials that people care about. It fits really well with what we're trying to do.

Speaker #3: So we're excited about that one , too . It's a nice technology business . They're solving customers problems or moving materials that people care about .

Speaker #3: It fits really well with what we're trying to do .

Speaker #5: Yeah , and I would just add on the on the color service side , they they take us into some large , large markets that historically we haven't had a lot of exposure to , like the textile market , tire market .

David Lowe: Yeah, I would just add on the Color Service side, they take us into some large markets that historically we haven't had a lot of exposure to, like the textile market and tire market. Those could be good learnings, in addition to, as Mark referred to, their powder technology expertise that our powder equipment business is quite excited about.

Speaker #5: And those could be , you know , those could be good learnings . In addition to as Mark referred to , they're they're powder technology expertise that our powder equipment business is quite excited about .

Speaker #4: Understood . Thanks again .

[Analyst]: Understood. Thanks again.

Speaker #3: Thanks , Brian .

Mark Sheahan: Thanks, Brian.

Speaker #1: Our next question comes from the line of Andrew Buscaglia of BNP Paribas . Please state your question .

Operator: Our next question comes from the line of Andrew Buscaglia of BNP Paribas Exane. Please state your question.

Speaker #9: Hey , good morning everyone .

[Analyst]: Hey, good morning, everyone.

Speaker #8: Good morning .

Mark Sheahan: Morning!

Speaker #9: I just want to dig in on one comment you've been making the last several quarters on vehicle service . First off , how big is that ?

[Analyst]: I just want to dig in on one comment you've been making in the last several quarters on vehicle service. First off, how big is that? It just seems to be an interesting market that's bucking a lot of trends you're seeing across, I guess, general automotive. What are the dynamics there driving such good growth for you guys?

Speaker #9: And then it just seems to be an interesting market that's bucking a lot of trends you're seeing across I guess general Automotive . And what are the dynamics there driving such good growth for you guys ?

Speaker #3: Yeah , we don't break out the revenue on that . But it is a nice business for us . Actually , it was the business at Graco started with back in 1926 .

Mark Sheahan: Yeah, we don't break out the revenue on that, but it is a nice business for us. Actually, it was the business that Graco started with, back in 1926. We've been in it for quite a long time. I think that the teams would tell you that probably the biggest driver of the demand here more recently has been our focus on creating fluid management systems that really track the information by vehicle in terms of the amounts of fluids that are being dispensed. These are materials that people care about. They're expensive. They matter.

Speaker #3: So we've been in it for for quite a long time . I think that the teams would tell you that probably the biggest driver of the demand here , more recently has been our focus on creating fluid management systems that really track the information by vehicle in terms of the amounts of fluids that are being dispensed .

Speaker #3: So going back to these are materials that people care about their expensive , they matter . Making sure that every single vehicle gets lubricated appropriately and that they're tracking the inventory of fluids that they need to be able to make sure that that service is done correctly .

Mark Sheahan: Making sure that every single vehicle gets lubricated appropriately and that they're tracking the inventory of fluids that they need to be able to make sure that that service is done correctly, and having that tie into the back office systems where they can do demand planning, order planning, schedule when the guy needs to come to take out the used oil, all those things. We bring a really nice package together for a lot of the larger fleets and auto dealerships and large users of this type of equipment. That's really been a nice recurring theme for that group. It started with the product and the technology.

Speaker #3: And having that tie in to the back office systems where they can do demand planning , order planning , schedule when the guy needs to come to take out the used oil , all those things , we bring a really nice package together for a lot of the larger fleets and auto dealerships , and large users of this type of equipment , and that's really been a nice recurring theme for that group .

Speaker #3: But it started with the product and the technology .

Speaker #5: And I would just add that motivating the these dealers that Mark mentioned is the fact that along with their used car activity , this is a service is a very profitable area for them .

David Lowe: I would just add that motivating these dealers that Mark mentioned is the fact that, along with their used car activity, this is a very service is a very profitable area for them. Anything they can do to expand the share of wallet of either the customers or the manufacturers during the early years of a new car's service period is very interesting to them.

Speaker #5: And anything they can do to expand the share of wallet of either the customers or the manufacturers during the , you know , the early years of a of a new car service period is very interesting to them .

Speaker #9: Yeah . Interesting . Okay , okay . And you know , your free cash flow has been it's been delivering really strong conversion lately .

[Analyst]: Interesting. Okay. Your free cash flow has been delivering really strong conversion lately. You guys probably should do over 100% free cash flow conversion this year. I think that's the second year in a row now. You're typically, historically, more of like an 80% to 90% converter. Is this kind of the new normal going forward? What is behind that and how sustainable is that going forward?

Speaker #9: You guys should probably should do over 100% free cash flow conversion this year . I think that's the second year in a row now .

Speaker #9: And you're typically historically more of like a 80 to 90% converter . Is this kind of the new normal going forward ? And what is behind that and how sustainable is that going forward ?

Speaker #8: Yeah .

Speaker #3: I don't I don't know that I would I don't know that I a view on whether it's the new normal or not , but I will tell you that it is something that we're focused on .

Mark Sheahan: I don't know that I have a view on whether it's the new normal or not, but I will tell you that it is something that we're focused on. Cash matters. We know that. We are challenging our teams to make sure that we're not overutilizing the balance sheet when it comes to things like inventory and accounts receivable. I will say that the One Graco initiative helped clean some of that stuff up, where in the past you've had multiple factories, every division had their own factory, every division had their own warehouse and operations around that. Being able to put that all under one organization has really driven a lot of improvements.

Speaker #3: Cash matters . We know that we are challenging our teams to make sure that we're not , you know , over utilizing the balance sheet when it comes to things like inventory and accounts receivable .

Speaker #3: I will say that the one Graco initiative helped clean some of that stuff up. In the past, you've had multiple factories.

Speaker #3: Every division had their own factory , every division had their own warehouse , and operations around that . So being able to put that all under one organization has really driven a lot of improvements .

Speaker #3: It's early days for us in terms of what we think we have available to us , and improvements , but it is getting a lot of attention and focus on our end because we all know that it is very important metric and it is a value creator for the company .

Mark Sheahan: It's early days for us in terms of what we think we have available to us in improvements, but it is getting a lot of attention and focus on our end because we all know that it is a very important metric and it is a value creator for the company. That's not something that we take lightly and it's not something that we have lost sight of. I feel like we're in a really good spot to continue to drive improvements going forward. David, I don't know if you have anything else.

Speaker #3: And that's not something that we take lightly , and it's not something that we have lost sight of . And I feel like we're in really good spot to continue to drive improvements going forward .

Speaker #3: David , I don't know if you have anything .

Speaker #5: No , I think that , you know , even on the I think an important point is the one Graco point is that the we didn't we didn't take the steps as a strategy to drive operations .

David Lowe: No, I think that, you know, even on the, I think an important point is the One Graco point is that this is the, we didn't take the steps as a strategy to drive operations. As we talk to our operating team, sort of quarter by quarter, they're finding opportunities where they can eliminate duplication activities, have these centers of excellence that we've talked about before. Not only can it improve quality, include service levels, there's really money to be saved on the factory floor by eliminating those.

Speaker #5: But as we talk to our operating team , sort of quarter by quarter , they're finding opportunities where they can eliminate duplication activities , have these centers of excellence that we've talked about before , and not only can it improve quality , include service levels , there's really money to be saved on the factory floor by eliminating those .

Speaker #8: Yeah .

Speaker #3: The only other thing I might add too , just as I was thinking about it , is over the last five years , we've added a lot of production capability here at Graco .

Mark Sheahan: Yeah, the only other thing I might add too, just as I was thinking about it, is over the last, you know, five years, we've added a lot of production capability here at Graco. We've expanded multiple facilities. We've broken ground on a bunch of new ones. We're in really good shape brick-and-mortar-wise. We did announce earlier in the year that we're going to be consolidating operations out of our Minneapolis factory into currently existing Graco facilities, both here in Minnesota as well as in South Dakota and down in Ohio. Being able to do that, those types of things, again, kind of lines up with One Graco. It might have been harder to do that under the old regime, but now, you know, being able to really close a factory here and move all the production into these new state-of-the-art facilities is pretty exciting.

Speaker #3: We've expanded multiple facilities . We broke ground on a bunch of new ones . We're in really good shape , brick and mortar wise .

Speaker #3: We did announce earlier in the year that we're going to be consolidating operations out of our Minneapolis factory into currently existing Graco facilities , both here in Minnesota as well as in South Dakota and down in Ohio .

Speaker #3: So being able to do that , those types of things , again , kind of lines up with one Graco it might have been harder to do that under the old regime , but now , you know , being able to really close a factory here and move all the production into these new state of the art facilities is is pretty exciting .

Speaker #3: Plus all the , you overhead cost infrastructure things of keeping a factory up and running will go away .

Mark Sheahan: Plus all the, you know, overhead cost, infrastructure, things of keeping a factory up and running, will go away.

Speaker #9: Very helpful . Thank you .

[Analyst]: Very helpful. Thank you.

Speaker #8: Yep .

Mark Sheahan: Yep.

Speaker #1: Our next question comes from Joe Ritchie of Goldman Sachs. Please state your question.

Operator: Our next question comes from Joe Ritchie of Goldman Sachs. Please state your question.

Speaker #4: Hey good morning guys .

Mark Sheahan: Hey, good morning, guys.

Speaker #8: Hey Joe .

[Analyst]: Hey, Joe.

Speaker #10: I just I was curious around the additional disclosure you guys gave this quarter on backlog because I historically have just never thought of you guys as a backlog company .

Mark Sheahan: Good morning.

[Analyst]: I was curious around the additional disclosure you guys gave this quarter on backlog because I historically have just never thought of you guys as a backlog company. I just wanted to get a better understanding as to what you were trying to, I don't know, signal, not signal, by providing that information.

Speaker #10: And so just wanted to get a better understanding as to as to what you were trying to . I don't know , signal not signal by providing that information .

Speaker #8: Yeah . We thought it would be helpful .

Mark Sheahan: Yeah, we thought it would be helpful, and that's why we put it in there. You're right. We don't normally talk about it. When you just look at the third quarter in and of itself, last year, we did have a significant amount of backlog that flowed through the top line, to the tune of about $25 million, $30 million, something like that. Some of that was in our industrial business, on the Gama Powder side, on some of the sealants and adhesive systems that were being sold during that time period. Part of it too was on the contractor side as well, where they had some new products that were a little bit late on the launch cycle last year. They had built up some orders and got those shipped out in Q3.

Speaker #3: And that's why we put it in there . You're right . We don't normally talk about it , but when you just look at the third quarter in and of itself last year we did have a significant amount of backlog that that flowed through the top line to the tune of about 25 , $30 million , something like that .

Speaker #3: Some of that was in our industrial business on the game of powder side , on some of the sealants and adhesives systems that were being sold during that time period .

Speaker #3: And then part of it , too , was on the contractor side as well , where they had some new products that were a little bit late on the launch cycle last year .

Speaker #3: So they had built up some orders and got those shipped out in Q3 . What I'll say is that right now , our backlog is about where it was at the beginning of the year , and we feel like that is a really good place to be in .

Mark Sheahan: What I'll say is that right now our backlog is about where it was at the beginning of the year, and we feel like that is a really good place to be in. We don't have any more headwinds. Our backlog is in the neighborhood of $225 million, $230 million. I'm looking at Chris. He's nodding his head. At one time, our backlog was $500 million at Graco. That was obviously when the supply chain crisis happened and all these orders come flying in and inflation's hitting and everyone's putting their orders in ahead of time. We've really unwound that now over the last two and a half, three years, and we're at a point now where it's really back to more or less a book and ship business with the exception of maybe the Gama Powder business, which is more project-based.

Speaker #3: We don't have any more headwinds . Our backlog is in the neighborhood of 225 , $230 million . I'm looking at Chris . He's nodding his head .

Speaker #3: At one time , our backlog was $500 million at Graco , and that was obviously when the supply chain , you crisis happened .

Speaker #3: And all those orders come flying in and , you know , inflation hitting and everyone's putting their orders in ahead of time . So we've really unwound that now over the last , you know , two and a half , three years .

Speaker #3: And we're at a point now where it's really back to a more or less a book and ship business , with the exception of maybe the game of powder business , which is , you know , more project based .

Speaker #10: Got it . That's that's super helpful . And you appreciate that context . And I know look , I know that you guys don't give you know , guidance outside of your expectations for growth for the entire year .

[Analyst]: Got it. That's super helpful. I do appreciate that context. I know that you guys don't give guidance, outside of your expectations for growth for the entire year. As you kind of think about maybe kind of like an early framework for 2026, what's interesting to me is that you look across your different businesses. Outside of expansion of late, you really hadn't seen a lot of growth across contractor or industrial, but your margin expansion in industrial particularly has been notable. I'm just trying to get a sense for how to think about maybe segment margins going forward into 2026. Any kind of qualitative or quantitative comment would be helpful.

Speaker #10: But as you kind of think about maybe kind of like an early framework for 2026 , what's interesting to me is that you look across your different businesses and look outside of expansion , you know , of late you really hadn't seen a lot of growth across contractor and industrial , but you're , you know , your margin expansion in industrial particularly has been has been notable .

Speaker #10: I'm just trying to get a sense for how to think about maybe segment margins going forward into 2026 . And so any kind of qualitative or quantitative comment would be helpful .

Speaker #5: Well , I think the key , the key to margins in our business model is going to be the volumes . I think that we believe one of our sort of bedrock ways , we think about our business is in in all of our businesses , we have opportunities to improve margins and we've I've demonstrated I'm not much of a forecaster in terms of when the business is going to turn , but I do believe with some with some volume growth , moderate volume growth in industrial and in contractor , when that happens , it can carry these margins that are aren't bad today .

David Lowe: I think the key to margins in our business model is going to be the volumes. I think that we believe one of our sort of bedrock ways we think about our business is in all of our businesses, we have opportunities to improve margins. I've demonstrated I'm not much of a forecaster in terms of when the business is going to turn, but I do believe with some volume growth, moderate volume growth, in industrial and in contractor, when that happens, it can carry these margins that aren't bad today, I think is your point, to an even higher level.

Speaker #5: I think as your point to an even higher level.

Speaker #3: Yeah , I would just say too that we're we're really good operators at Graco . We you know , we we I think we do a great job in terms of getting our teams oriented around making sure that we're not spending resources that we don't need to spend .

Mark Sheahan: I would just say it too, that we're really good operators at Graco. We, you know, I think we do a great job in terms of getting our teams oriented around making sure that we're not spending resources that we don't need to spend. As we add into next year, I think that that's going to be the going mantra, that we're really going to keep a close eye on our expenses and manage that well. If we get some tailwind, hopefully, on some of the pricing actions that we've done, and if we get a little bit of help on the, you know, half of our business is tied in with commercial construction, housing, those end markets, contractor-type markets. If we get any help on that, as David said, the volume will really, really help the equation.

Speaker #3: And as we head into next year , I think that that's going to be the go in mantra that we're really going to keep a close eye on our expenses , manage that well .

Speaker #3: If we get some tailwind , hopefully on some of the pricing actions that we've done and if we , you know , get a little bit of help on the , you know , half of our business is tied in with commercial construction housing , those end markets , contractor type markets .

Speaker #3: If we get any help on that , as David said , the volume will really , really help the equation .

Speaker #10: Makes a lot of sense . Thanks guys . Yep .

[Analyst]: Makes a lot of sense. Thanks, guys.

Mark Sheahan: Yep.

Speaker #1: Our next question comes from Jeff Hammond of KeyBanc Capital Markets . Please state your question .

Operator: Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Please state your question.

Speaker #11: Hi , everyone . This is Mitch Moran for Jeff . Thanks for taking my question . Yep . Maybe first , I know there's a lot of moving pieces with the macro right now , but you know , how should we be thinking about the magnitude of the price increases for early 2026 .

[Analyst]: Hey, everyone. This is Mitch Moore on for Jeff. Thanks for taking my question.

Mark Sheahan: Yep.

[Analyst]: I know there's a lot of moving pieces with the macro right now, but how should we be thinking about the magnitude of the price increases for early 2026 in contractor? More broadly for the segments, does the fact that this recent price and that you did this recent pricing action change your view on doing another price increase here in a couple of months?

Speaker #11: And contractor and then more broadly for the segments , does the fact that this recent price that you did this recent pricing action change your view on , you know , doing another price increase here in a couple of months ?

Speaker #3: Yeah . So we're not going to comment on the the level of the pricing with the , you know , the home centers and the pro channel , just because those negotiations are happening and our teams are working .

Mark Sheahan: Yeah, we're not going to comment on the level of the pricing with the Home Centers and the Pro Channel just because those negotiations are happening and our teams are working. I don't want to say anything that will put them in a bad spot. I would expect that we're going to get what we are proposing, which will be reasonable. It'll be fact-based. It'll be based on what we're seeing for input costs. We're very transparent. We share all that information with them, and also based on what we view pricing in the market to look like. We're expecting that those will kick in in the January timeframe. As for the rest of it, I think in terms of what else we might do in other business units, I'm going to leave that up to them.

Speaker #3: I don't want to , you know , say anything that is will put them in a bad spot . So , you know , I would expect that we're going to get what we are proposing , which will be reasonable .

Speaker #3: It'll be fact based , it'll be based on what we're seeing for input costs . We're very transparent . We share all that information with them .

Speaker #3: And also based on what we view , you pricing in the market to look like . So we're expecting that those will kick in in the January in the January time frame .

Speaker #3: As of the rest of it , I think in terms of what else we might do in other business units , I'm going to leave that up to them .

Speaker #3: Obviously , to the extent that we think that we have the ability to raise prices again in 2026 , we'll do that . But I think we are also cognizant of the fact that over the last 3 to 5 years , there's been a lot of pricing that's going on in our end markets .

Mark Sheahan: Obviously, to the extent that we think that we have the ability to raise prices again in 2026, we'll do that. I think we are also cognizant of the fact that over the last three to five years, there's been a lot of pricing that's gone on in our end markets. It's really competitive-based, and there will likely be some targeted price increases. We've been aware of the fact that this is the market where, because of all the activity on the pricing front, including the stuff that we just did, my preference would be to not push quite as hard as what we have.

Speaker #3: So it's really competitive based and and , you know , they're will likely be some targeted price increases . But you know , we we've we we're we're aware of the fact that the market where you know , because of all the activity on the pricing front , including the stuff that we just did , my preference would be to , you know , not not push quite as hard as what we have .

Speaker #11: Okay . That's helpful . And then just maybe sticking with pricing and competition and tariffs , I was just wondering , particularly with the DIY and propane channels , just wondering if there's been any evidence of share shift towards Graco versus some of your foreign competition .

[Analyst]: Okay, that's helpful. Maybe sticking with pricing, competition, and tariffs, I was just wondering, particularly with the DIY and Pro Paint channels, if there's been any evidence of share shift towards Graco versus some of your foreign competition. Thanks.

Speaker #11: Thanks .

Speaker #3: I don't think that that's something that we can quantify because it's really difficult . But I will tell you that the , you know , in the home center channel in North America , which is like really the the primary channel for those types of products , their business is down pretty significantly .

Mark Sheahan: I don't think that that's something that we can quantify because it's really difficult. I will tell you that, you know, in the Home Center channel in North America, which is really the primary channel for those types of products, their business is down pretty significantly. Are we down more than our competition? Are we down less? It's really hard to know. I just know that it's down, and their foot traffic is down, their level of business activity is down. It ties back in with this whole turnover, affordability, remodeling. Those markets have just been pretty flat to down. I think we're seeing that in that channel. It's hard to know whether we're not as bad as our competitors, but I don't like the fact that we're down.

Speaker #3: So are we down more than our competition ? Are we down less ? It's really hard to know . I just know that it's down and their foot traffic is down .

Speaker #3: Their level of business activity is down . It ties back in with this whole turnover , affordability , remodeling . Those markets have just been , you know , pretty flat to down .

Speaker #3: And I think we're seeing that in that channel. So it's hard to know whether we're doing... we're not as bad as our competitors.

Speaker #3: But I don't like the fact that we're down .

Speaker #5: Yeah . The premise is , of course , that everybody has a different , you know , somewhat different manufacturing footprint . And , you know , sometimes they go for price and sometimes they have to they have to lump it .

David Lowe: The premise is, of course, that everybody has a different, you know, somewhat different manufacturing footprint. Sometimes they go for price and sometimes they have to lump it. I think that applies really across most of our niche businesses, that we could be talking about liquid finishing too. Each of the major manufacturers has very different global footprints. There's frequently a story behind the story. Mark's underlying point is absolutely right on. In the short term, there are switching costs, which tend to make our relationship sticky. Big picture, long term, products have to be priced as to what the market will bear.

Speaker #5: And I think that , you know , that , you know , that applies really across most of our niche businesses is that we could be talking about liquid finishing to in each of the major manufacturers have very different global footprints .

Speaker #5: So there's , you know , there's there's frequently a story behind the story , but Mark's underlying point is absolutely right on in the short term , they're switching costs , which tend to make our relationships sticky .

Speaker #5: But big picture long term products have to be priced as to what the market will bear .

Speaker #11: Great . Thanks for the questions .

[Analyst]: Great. Thanks for the questions.

Speaker #3: Yep .

Mark Sheahan: Yep.

Speaker #1: Our next question comes from the line of Matt Summerville of Da Davidson . Please state your question .

Operator: Our next question comes from the line of Matt Summerville of D.A. Davidson. Please state your question.

Speaker #12: Just a couple of quick ones . Do you have an early read on what the contractor kind of new product pipeline looks for 2026 is ?

[Analyst]: Just a couple of quick ones. Do you have an early read on what the contractor kind of new product pipeline looks for 2026? As you think about maybe trying to use innovation to reinvigorate demand if we're going to be in this, I'll just call it general housing malaise for longer, things maybe to help stimulate a replacement cycle, or is that something maybe you've already done in the recent past?

Speaker #12: You think about maybe trying to use innovation to reinvigorate demand . If we're going to be in this , I'll just call it general housing malaise for longer things , maybe to help stimulate a replacement cycle .

Speaker #12: Or is that something maybe you've already done in the recent past ?

Speaker #3: I would say the pipeline looks pretty similar to what we would have experienced over the last few years . I'd call it more of a normal year .

Mark Sheahan: I would say the pipeline looks pretty similar to what we've experienced over the last few years. I'd call it more of a normal year. You know, some additions in the paint category, some in the line striping category, and some in the texture category. It's a good pipeline. It should help drive some demand. I'd call it kind of a normal year next year in terms of what we're seeing.

Speaker #3: You know , some additions in the paint category , some in the line stripping category and some of the texture category . But it's it's a good pipeline .

Speaker #3: It should help drive some demand . Yeah . So I call kind of a normal year next year in terms of what we're seeing .

Speaker #12: And then you’ve mentioned in the contract, I think it was in your prepared remarks, that you’re seeing both home center and propane customers tightly manage inventory.

David Lowe: You mentioned in contractor, I think it was in your prepared remarks that you're seeing both Home Center and Pro Paint customers tightly manage inventory. Do you expect inventories to further decline into calendar year end, or are they running about as lean as you would expect them to run given the environment we're in?

Speaker #12: Do you expect inventories to further decline into calendar year end , or are they running about as lean as you would expect them to run , given the environment we're in ?

Speaker #3: Yeah , I think they're pretty smart . I think that they're I don't sense that they've got a lot of inventory that they got to get rid of or deal with here .

Mark Sheahan: Yeah, I think they're pretty smart. I think that they're, I don't sense that they've got a lot of inventory that they've got to get rid of or deal with here. I think that they're just managing it to the levels of the business that they're seeing.

Speaker #3: I think that they're just managing it to the levels of the business that they're seeing . Yeah .

David Lowe: Yeah, got it. Thanks, Mark.

Speaker #12: Got it. Thanks, Mark.

Speaker #3: Yep .

Mark Sheahan: Yep.

Speaker #1: Our next question comes from Walter Liptak of Seaport Research. Please state your question.

Operator: Our next question comes from Walter Liptak of Seaport Research. Please state your question.

Speaker #9: Hi . Thanks . Good morning guys .

[Analyst]: Hi, thanks. Good morning, guys.

Mark Sheahan: Morning.

Speaker #13: One to ask . Kind of similar to what Matt was just asking on 2026 . You know , I know you don't get a whole lot of visibility , but I wonder if you could comment a little bit about , you know , maybe an industrial some of those , you know , capital projects , you know , is there , you know , is there a lot of quotes out there , you know , could they get released ?

David Lowe: Hey, wanted to ask, kind of similar to what Matt was just asking on 2026. I know you don't get a whole lot of visibility, but I wonder if you could comment a little bit about, you know, maybe in industrial, some of those capital projects. Is there a lot of quotes out there? Could they get released? When you think about 2026 and the One Graco and kind of the new go-to-market strategies, all things being equal, could you get another % or so of organic growth just from your own kind of strategic changes?

Speaker #13: And then when you when you think about 20 , 26 and the one Graco and kind of the , the new go to market strategies , you know , all things being equal , you know , could you get another percent or so of organic growth ?

Speaker #13: You know, just from your own, you know, kind of strategic changes?

Speaker #3: Yeah , I think that I'll take the I'll take the second one . I that's what we're driving for is , you know , you don't go through all the work to do this without really expecting that your channel partners are going to get access to more products and sell more and have it easier to do business with .

Mark Sheahan: I think that's what we're driving for. You don't go through all the work to do this without really expecting that your channel partners are going to get access to more products and sell more and have this easier to do business with. I think it translates into growth for us vis-à-vis what we would have had under the old regime. I haven't put a number to it. I don't know if it's a % thing, but that is definitely the reason why we did it.

Speaker #3: I think that translates into growth for us vis a vis what we would have had under the old , under the old regime .

Speaker #3: I haven't put a number to it . I don't know if it's , you , a percentage thing , but that that is definitely the reason why .

Speaker #3: The reason why we did it .

Speaker #5: I'll take a shot on the investment side . Your first question , you know , when we look around , you know , when we sell to so many different markets , it's it's always hard to generalize .

David Lowe: I'll take a shot on the investment side. Your first question, you know, when we look around, you know, when we sell to so many different markets, it's always hard to generalize. We can always find three or four positive stories, a couple of disappointments. What I would say in terms of quotation activity and discussions around projects, which is, you know, while we're short cycle, we sometimes have an indication that a major customer is working on, say, a new paint line or a new sealant line or something like that. We have good quotation activity in traditional Graco markets like farm and construction equipment. Even throughout the, call it, the turbulent times of the last couple of years, automotive, as a business, both in the legacy and the EV, has been consistent in making investments.

Speaker #5: And so we can always find 3 or 4 positive stories . A couple of , you know , a couple of disappointments . What I would say in terms of quotation activity and discussions around projects , which is , you know , while we're short cycle , we sometimes have a indication that a major customer is working on , say , a new paint line or a new sealant line or something like that .

Speaker #5: We we have good quotation activity in traditional Graco markets like farm and construction equipment . Even throughout the call it the turbulent times of the last couple of years .

Speaker #5: Automotive as you know , as a business , both in the legacy and the EV has been consistent in in making , you know , making investments and and , you know , when I talk about other some of the other niche markets that we serve , they get pretty small .

David Lowe: When I talk about some of the other niche markets that we serve, they get pretty small. We can have a couple of orders, say, from the commercial aerospace market. There aren't that many manufacturers around the world, but we have heard of investment possibilities that are at least intriguing going into the coming year. Of course, there are markets that have been soft, as we've talked about lately, both on the construction and on the industrial side, especially those markets that serve the construction industry, like window and door, furniture, some of the white goods people that can swap over into a couple of, you know, two or three of our different business units. On the construction side, I would say our premise that you've heard us talk about, Walt, over the last five years hasn't changed. We're still underbuilt.

Speaker #5: So we can have a couple of orders , say from the commercial aerospace market . There aren't that many manufacturers around the world , but we have heard of investment possibilities that are at least intriguing going into going into coming year .

Speaker #5: But of course , there's markets that have been soft as we've talked about , late , late , both on the construction and on the industrial side , especially those markets that that serve the construction industry , like window and door furniture , you know , some of the white goods people that can swap over into a couple , you know , 2 or 3 of our different business units on the construction side , I would say our premise that you've heard us talk about Walt over the last five years hasn't changed .

Speaker #5: We're still underbuilt. We have a, you know, we have a generation of people that, if we can see some improvement in affordability, and that does start with mortgage rates.

David Lowe: We have a generation of people that if we can see some improvement in affordability, and that does start with mortgage rates. That's why we track them, probably as closely as you people do. We really believe that when we have a little bit better dynamics there, there's a lot of housing to be constructed. As we've already touched on, a lot of remodel and repaint work that will help us.

Speaker #5: That's why we track them probably as closely as you people do . We really believe that when we have a little bit better dynamics , there , there's there's a lot of housing to be constructed .

Speaker #5: And as we've already touched on , a lot of remodeling , repaint , work that will help us .

Speaker #13: Okay , okay . Great . I appreciate the kind of thoughts on that macro . Maybe another one that's on 2026 . You know , when you think about the one Graco and you know , there's a profit component of it , a margin component that you talked about as well as the organic growth component , you know , which one's easier , you know , which one could you see the most benefits from in 2026 ?

[Analyst]: Okay, great. I appreciate the thoughts on that macro. Maybe another one that's on 2026. When you think about the One Graco and if there's a profit component of it, a margin component that you talked about, as well as the organic growth component, which one's easier? Which one could you see the most benefits from in 2026? Is it more top line or is it more on the profit improvement?

Speaker #13: Is it more top line or is it more on the profit improvement ?

Speaker #3: Yeah, I think for sure, if we can get volume on the top line, it's going to really be nice for us.

Mark Sheahan: I think for sure, if we can get volume on the top line, it's going to really be nice for us. I'd say that one.

Speaker #3: So I'd say that one.

Speaker #13: Okay, okay. Great. Thank you.

[Analyst]: Okay, great. Thank you.

Speaker #3: Yep .

Mark Sheahan: Yep.

Speaker #1: Thank you . As a reminder to ask a question at this time , please press star one one on your touchtone telephone . Our next question comes from Brad Hewitt of Wolfe Research .

Operator: Thank you. As a reminder, to ask a question at this time, please press star 11 on your touch-tone telephone. Our next question comes from Brad Hewitt of Wolfe Research. Please state your question.

Speaker #1: Please state your question .

Speaker #6: Hey .

Speaker #14: Good morning guys .

[Analyst]: Hey, good morning, guys.

Speaker #3: Good morning .

Mark Sheahan: Morning.

Speaker #14: So as we think about contracting margins , it looks like you've done about 20% margins year to date , excluding Chorob . I guess .

[Analyst]: As we think about contractor margins, it looks like you've done about 28% margins year to date, excluding Corab. I guess, how do you think about incremental margins for contractor going forward, and how much volume recovery do you think is necessary to get back to kind of a 29 to 30% zone ex-Corab?

Speaker #14: How do you think about incremental margins for contractor going forward and how much volume recovery do you think is necessary to get back to kind of a 29 to 30% zone X core output ?

Speaker #3: Yeah , I don't think a lot of volume is needed . Obviously , the pricing is going to help us offset some of the tariff costs .

Mark Sheahan: Yeah, I don't think a lot of volume is needed. Obviously, the pricing is going to help us offset some of the tariff costs. If volume starts coming back, then you can realize a lot of efficiencies in the factory that we're just not seeing when volumes are flat or even slightly down. I have no concerns whatsoever in terms of them getting back up to those kinds of margin rates, even with a very small amount of volume increase.

Speaker #3: Volume starts coming back . Then you can , you know , you realize a lot of efficiencies in the in the factory that we're just not seeing when volumes are flat or even slightly down .

Speaker #3: So I have no concerns whatsoever in terms of them getting back up to those kinds of margin rates , even with a very small amount of volume increase .

Speaker #14: Okay, great. And then, I'm curious if you could provide a little more color on what you're seeing in the White Knight business from a growth perspective this year.

[Analyst]: Okay, great. Could you provide a little more color on what you're seeing in the white knight business from a growth perspective this year? From a medium-term perspective, is there potentially any change to your thoughts on the growth algorithm for that business as a result of the proposed sectoral tariffs on semiconductors?

Speaker #14: And then from a medium term perspective , is there potentially any change to your thoughts on the growth algorithm for that business ? As a result of the proposed sectoral troughs on semiconductors ?

Speaker #3: Yeah , I don't know that we are going to be able to give you specifics on revenue for the white Knight business , but it has come back , obviously , everyone knows that there was about a two year period there where a lot of those investments were not happening , but it's a it's a cyclical business and we recognize that .

Mark Sheahan: Yeah, I don't know that we are going to be able to give you specifics on, you know, revenue for the white knight business, but it has come back. Obviously, everyone knows that there was about a two-year period there where a lot of those investments were not happening. It's a cyclical business, and we recognize that. Things have picked up there, and they are getting orders, and we're happy about that. I think, as I said in the earlier comments, they're not back to the levels that they were at a couple of years ago. The macro still looks pretty favorable. There's still a lot of investment going on. I'm sure that we'll be able to get our fair share of that.

Speaker #3: And things have picked up there and they are getting orders and we're we're happy about that . But I think as I said in the earlier comments , they're not back to the levels that they were at a couple of years ago .

Speaker #3: The macro still look pretty favorable . There's still a lot of investment going on . And I'm sure that we'll be able to , you know , get our share of that .

Speaker #14: Great . Thank you .

[Analyst]: Great. Thank you.

Speaker #3: Yep .

Mark Sheahan: Yep.

Speaker #1: Thank you. If there are no further questions, I will now turn the conference over to Mark Sheehan.

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

Speaker #3: Okay. Well, I want to thank everyone for participating today and look forward to chatting with you down the road.

Mark Sheahan: I want to thank everyone for participating today, and I look forward to chatting with you down the road.

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