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 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 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 forelooking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in item 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 Knudson, Vice President, Controller, and Chief Accounting Officer.

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 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 82 cents 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, excluding the impact of excess tax benefits from stock option exercises, and this contingent consideration fair value gain adjusted non-GAAP net earnings was 73 cents 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. 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 1GRACO 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. 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. A 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 to $38 million and $50 to $60 million for the full year, respectively. I will now turn the call over to Mark for further segment and regional commentary.

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. 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 and 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 probe, paint, and the home center channels. 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. 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 in 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, games 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. 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.