Graco Inc.

Good morning and welcome to the third quarter conference call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company's website at www.graco.com. Graco has additional information available in 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 question and answers after opening remarks from the management. During this call, various remarks may be made by management about their expectations, plans of prospects for the future. These remarks constitute forward-looking statements for the purpose of the safe harbor provisions of the Private Security Litigation Reform Act. 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 2023 annual report on Form 10-K and in item 1A of the company's most recently quarterly report on Form 10-Q. These reports are available on the company's website at www.greco.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 obligations to update these statements in the light of new information or future events. I will now turn the conference over to Chris Knutson, Executive Vice President, Corporate Controller.

Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheehan and David Lowe. I will provide a brief overview of our quarterly results before turning the call over to Mark for additional commentary. Yesterday, Greco reported third quarter sales of $519 million, a decrease of 4% from the same quarter last year. Reported and adjusted net earnings decreased 8% to $122 million, or 71 cents per diluted share. Excluding the impact of excess tax benefits from stock option exercises, the impairment charge and contingent consideration adjustment recorded in the third quarter of 2023 adjusted non-GAAP net earnings per share decreased 7%. The effect of currency translation had no significant impact on sales or net earnings for the quarter. The gross margin rate increased 50 basis points in the quarter. Realized pricing was more than enough to offset Sales volume declines occurring in all segments. While product costs were lower for the first nine months of the year, they were at headwind in the quarter as our production volumes, primarily in contractor, have declined. We expect these headwinds to continue for the remainder of the year. Total operating expenses increased $9 million or 7% in the quarter, mainly due to new product development spending, growth initiatives, and other corporate items, including the relocation to a new distribution center. Reductions in volume and earnings-based expenses of $3 million partially offset this increase. Gross margin rate improvement was unable to offset lower sales volumes and increased expenses during the quarter, resulting in an operating margin rate of 28%, a decline of 2 percentage points from the same period last year. The process segment operating margin rate decreased 4 percentage points to 27%, due to the impacts of higher spending and decreased volumes compared to the third quarter last year. Interest and other benefits increased $4 million during the quarter, driven primarily by lower interest expense as our long-term debt was repaid in 2023, in addition to increased interest income on cash held. The adjusted effective tax rate was 19%, which is consistent with our expected full-year tax rate of approximately 19.5% to 20.5%. on an as-adjusted basis. Cash provided by operations totaled $436 million for the year, a decrease of $55 million from last year, driven mostly by inventory purchases related to new product launches, timing of estimated tax payments, and lower net earnings. Cash provided by operations as a percent of reported net earnings is 116% for the year. Significant year-to-date uses of cash included repurchases of 399,000 shares for $31 million, dividends of $129 million, and capital expenditures of $93 million, of which $60 million related to facility expansion projects. These cash uses were offset by share issuances of $45 million. A few comments as we look forward to the remainder of the year. Based on current exchange rates assuming the same volumes, mix of products, and mix of business by currency as in 2023, Movement in foreign currencies would have no impact on net sales or net earnings for the full year. Our full year estimates for unallocated corporate expense and capital expenditures remain unchanged and can be found in the conference call slide deck on page 10. Finally, effective January 1st, 2025, we will move to a global customer-centric operating structure with four business divisions, industrial, powder, expansion markets, and contractor. At that time, our regional teams, which previously operated independently, will be integrated into the business divisions. The current industrial and lubrication equipment divisions, along with the process transfer equipment business that is part of the process division, will be combined to form the new global industrial division. The powder division, which is currently structured as a global business, will continue to operate as it does today and will combine with the industrial division to form the industrial reporting segment. The new expansion markets division will focus on driving inorganic growth in new or adjacent markets. Our existing environmental, semiconductor, high-pressure valves, and electric motors businesses, together with select future ventures and acquisitions, will reside within this newly formed division and reporting segment. The contractor division will be restructured to serve the needs of our global customers and will remain unchanged as a reporting segment relative to prior periods. We will report financial results under these new segments for the first quarter of 2025. We will provide recast segment financial information in connection with our fourth quarter earnings release as supplemental information. I'll now turn the call over to Mark for further segment and regional commentary.

Thank you, Chris. Good morning, everyone. I'd like to begin by discussing our recent announcements. In September, we announced our OneGRACO initiative focused on driving global growth greater profitability, and operational efficiencies. Starting in 2025, Graco will adopt a new global structure with a commercial focus, enabling our sales, marketing, and engineering teams to focus squarely on revenue growth. This new customer-centric approach focuses on segments with similar needs, helping us scale more easily as we grow and enhance our customer experience. The strategy builds on the success of our powder coating business, It aligns well with the integration of protective coatings and spray foam businesses into the contractor division a few years ago. The new structure also strengthens our ability to pursue M&A opportunities through both our legacy divisions and the newly created expansion markets division, enabling us to target significant acquisitions in current and adjacent markets. As we establish our new market-oriented global structure over the coming months, I have full confidence in our experienced leadership team and dedicated employees to navigate this change successfully. During the quarter, we also announced the acquisitions of PCT Systems and Karab. PCT systems, which provides megasonic and ultrasonic wet cleaning systems, complements our existing high-purity chemical delivery equipment used in semiconductor and electronics production. Although the PCT acquisition closed during the quarter, it did not have a material impact on quarterly results. We also reached a definitive agreement to acquire Carab, a global leader in high-tech dispensing and mixing solutions for paints and coatings. This acquisition enhances our strong position in the growing paint and coating machinery manufacturing category within the contractor division, while expanding our global manufacturing footprint. We expect the Kurob acquisition to close in the fourth quarter, and the combined annual revenue of these acquisitions is nearly $130 million. We're very optimistic about these opportunities and confident in our ability to leverage the complementary strengths of these businesses to drive growth and create value for our customers and shareholders. Moving on to our financial performance, all of my comments will be on an organic, constant currency basis. Sales in the third quarter were down 4% with declines in all segments except industrial, which was flat. Industrial finishing system sales in the Americas and EMEA offset steep declines in the Asia Pacific, especially China. Declines continued in the process segment with weakness noted in the semiconductor and mining markets. New product introductions in the contractor segment have been well received, and global protective coatings markets are strong. The decrease in China revenue across the industrial and process segments accounted for more than 90% of the overall revenue decline in the quarter and over 60% year-to-date. This represents broad-based weakness and overcapacity across key markets, including automotive, battery, solar, semiconductor, and electronics. Incoming order rates in the third quarter continue to be difficult worldwide as all major product categories, with the exception of our powder finishing business, saw order rates decline compared to the second quarter of this year. Weak demand continued in the Asia Pacific region, especially in China. These reductions have been consistent throughout the year. Demand in North America also softened during the quarter, impacting all segments. In contrast, over the past six weeks, our consolidated global incoming order rates have shown improvement compared to the same period last year, experiencing 11% growth. This double-digit increase is primarily driven by both the industrial and process segments. While this is a relatively short time period, it gives us optimism for the remainder of the year. Now turning to some commentary on our segments. Contractor sales were down 1% in the third quarter. Protective coatings grew across all regions, but it wasn't enough to offset softness in the propane and home center channels. Asia Pacific was a bright spot as the container market showed continued improvement after minimal activity last year. Response to new products continues to be favorably received, and inventory levels within the channel are considered normal. We have additional new products targeted to be launched prior to the end of the year, which should also have some positive impact for the fourth quarter. Industrial sales were flat in the quarter, as strong finishing system sales in both North America and EMEA were offset by heavy declines in Asia Pacific. Revenue in the Americas was higher for the second quarter in a row led by the timing of finishing system sales along with increased activity across the liquid finishing and sealants and adhesive businesses. The team remains positive as quoting activity remains stable. However, CapEx investments are being delayed as end users are taking a wait and see approach. Moving on to the process segment. Sales are down 12% compared to the same quarter last year, primarily due to continued weakness in the semiconductor and mining markets, along with a slowdown in vehicle service business. The decline in sales volume is the primary driver of the decrease in profitability, with decremental margins of nearly 60% for the quarter. Moving on to our outlook. Overall, conditions remain challenging as we continue to experience soft demand trends in many of our core markets. We're encouraged by the increased order activity so far in the fourth quarter, and we have confidence in our new product lineup. However, it's still too early to know if these order rates will continue to the end of the year. As a result, we're maintaining our full-year revenue guide of low single-digit decline on an organic, constant currency basis. That concludes our prepared remarks. Operator, we're ready for questions.