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. I will now hand the conference over to John Bauer, Director of Investor Relations. John, please go ahead.

Good morning. I'm here with Mark Sheahan, our President and Chief Executive Officer, Sanjiv Gupta, Chief Financial Officer and Treasurer, and Chris Knutson, Vice President, Chief Accounting Officer and Controller. We welcome you to our conference call to report Graco's fiscal 2026 third quarter results. Before we begin, I'd like to remind everyone that certain statements made during this call may be forward-looking and are subject to risks and uncertainties. Please refer to the Safe Harbor Statement included in our earnings release and earnings presentation as well as our SEC filings for additional information regarding these risks and uncertainties. I will now turn the conference over to Mark Sheahan.

Thank you, John, and good morning, everyone. Before turning to our quarterly results, I wanted to just highlight the technology agreement we announced yesterday with our ETM business and ABB. Under this agreement, ABB will license ETM's patented transverse flux motor technology for use in data center cooling towers, heat rejection systems, and related thermal management applications. The agreement builds on our existing collaboration with ABB in industrial applications and it creates an opportunity to participate in one of the fastest growing infrastructure markets in the world. As demand for AI, cloud computing, and high density data centers continues to grow, cooling performance is becoming increasingly important to energy efficiency, reliability, and operating costs. We believe ETM's direct drive motor technology is well positioned to address those needs by reducing mechanical complexity and improving the overall system performance. Just as importantly, ABB's decision to expand its relationship with ETM and Graco is a strong validation of the technology, the team, and the commercial opportunity ahead. By combining ABB's global scale, customer relationships, and manufacturing capabilities with ETM's differentiated technology, we have a unique opportunity to create value in a large and growing market while further demonstrating the long-term potential of the ETM platform. Current development timeline, the companies are targeting the first data center installations by the end of 2029. Now turning to the quarterly results. We delivered another strong quarter with record sales of $586 million, an increase of 8% compared to last year, including organic growth of 4%. The growth was broad-based with all three segments and all reportable regions contributing. Importantly, the growth was supported by improving order activity Organic incoming orders increased 7% in the quarter and they were out 4% year to date. Backlog as of October 16th, excluding acquisitions increased $51 million or 18% from the beginning of the year. That provides us with improved visibility as we enter into the fourth quarter. During the quarter, we completed the acquisition of Elko Meltan, which expands our precision adhesive dispensing and quality assurance capabilities. We're excited about the meaningful revenue and operating synergies available across the combined businesses. Our integration priorities are to enable cross-selling through our complimentary customer relationships and channels, to leverage procurement and manufacturing capabilities, and to preserve customer service and business momentum. We're targeting expansion of Elko Meltan's EBITDA margin from the high teens to the mid-20 range within three years of closing. Turning to the segments. Our contractor segment delivered sales growth of 5% including acquisitions and organic growth of 2% with growth across all of the regions. Results were led by professional paint in the Americas where customer adoption of new products like QuickShot 2 and Pearl Reach contributed to healthy sell-through in key channels. The results reflected strong commercial execution and growing demand for our products. Infrastructure spending and commercial construction activity are also contributing to the segment's momentum. Across the segment, bookings increased 7% in the quarter and 2% year-to-date, supporting demand entering the fourth quarter. The industrial segment delivered 11% sales growth in the third quarter, reflecting contributions from the core business and acquisitions. Growth was led by project activity and powder finishing systems, while customer spending on maintenance and repair remained strong. We also saw increased adoption of electric technologies including the quantum pump in process manufacturing applications and continued growth in automatic lubrication. Overall demand remains steady with year-to-date bookings up 1%. At the same time, customers continue to take a measured approach to certain larger capital projects resulting in longer decision cycles in some applications. Expansion market segment, sales increased 8% during the quarter, Semiconductor delivered the strongest quarterly revenue in several years as customers invested in advanced manufacturing capacity and more complex production processes. These requirements are expanding the range of applications served by our high purity and precision technologies. Environmental also delivered double digit growth during the quarter. Bookings in this segment increased 62% in the third quarter, and they're up 44% year to date. Turning to the outlook. We expect fourth quarter revenue of $610 to $640 million based on current order trends and backlog. Order activity supports our outlook, although demand conditions vary across our markets and larger project schedules can shift revenue between periods. Our priorities are to convert orders into shipments, advance new product adoption, manage cost pressures, and capture acquisition synergies while maintaining customer service. With that, I'll turn the call over to Sanjiv to provide more detail on our financial results for the quarter.

Sanjiv Gupta Thank you, Mark, and good morning, everyone. I'll provide some additional detail on our third quarter financial performance, profitability, and cash flow. We reported record Q3 revenue of $586 million. As we discussed last quarter, our third quarter revenue guidance was $580 million to $600 million, excluding VALCO melt-on. On a comparable basis, third quarter revenue finished slightly below that range, primarily within the industrial segment, reflecting the timing around larger capital projects, including longer decision cycles and some projects being delayed or pushed out. Importantly, we are not seeing broad-based deterioration in demand as indicated by order trends. Our fourth quarter outlook reflects current business conditions and the timing of converting order activity and backlog into revenue. Our outlook does not assume an acceleration in demand during the fourth quarter. With that context, let me turn to profitability in the third quarter. Adjusted operating earnings came in at $161 million and adjusted earnings per share grew 5% to $0.81. Realized pricing was able to offset higher net input costs and we maintained good expense discipline while continuing to invest in our strategic growth initiatives. Adjusted operating margin was 27% of sales, down nearly 180 basis points from the prior year quarter, primarily due to the product and channel mix, including a higher mix of powder finishing system. This was partially offset by disciplined cost management, with operating expenses down approximately $3 million, excluding acquired expenses, amortization, acquisition-related costs, and the prior year contingent consideration benefits. Contractor operating earnings at $71 million rose 5% with stable margins versus last year. Excluding Valco melt-on and related costs, operating earnings for industrial were flat at $74 million with margin down nearly 1% from the same quarter last year due primarily to product and channel mix discussed earlier. Expansion markets operating earnings at $11 million increased 5% on semiconductor strength despite the tough comparable to the prior year, which included upfront license fee in our electric motor product application that did not repeat. Turning to cash flow, we generated 463 million of operating cash flow year to date, representing 116% of adjusted net earnings. We continue to deploy capital in a balanced manner. For the year to date, we repurchased shares for 467 million Pay $145 million in dividends, invested $436 million in acquisition, net of cash acquired, and invested $48 million in capital expenditures. Even after funding these investments, we continue to maintain a slightly positive net cash position. In summary, our third quarter performance reinforces the strength of our operating model and cash generation. We remain well positioned to invest in strategic growth opportunities while maintaining a disciplined approach to capital allocation and long-term shareholder value creation. That concludes our prepared remarks. Operator, we are ready for the questions.

Thank you. The question and answer session will begin at this time. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Mike Halloran with Baird. Please state your question.

Hey, good morning, everyone. Hi, Mike. Hey, so could you unpack the contractor piece a little bit for me? You know, maybe by channel with on the more traditional resi commercial side, what you're seeing with the foam business and any signs of deceleration. in growth rates, not necessarily environment, maybe that too, but any signs of deceleration or worsening trends in any of those sub-areas within that segment?

Yeah, I think we are pretty happy with the performance in Q3, and obviously organic growth now two quarters in a row is nice to see in that business, and we got a lot of that growth really through the pearl paint channel, and it was also nice to see growth across the regions, but I would say that the level of activity that we're seeing lines up pretty well with how we thought things would play out with commercial activity and the product application that you mentioned, Mike, still doing well for us. And that has to do with, obviously, the infrastructure build out and things that are happening. Despite the backdrop of the residential housing market, which has been with us here For a while, we didn't really see a market deterioration when it came to that level of activity. But I'd characterize it as pretty upbeat, pretty positive. The team's working well. They got a couple new products that hit the mark with the customers that we sell to, and things are in good shape as we enter into Q4.

No, appreciate that. And maybe a similar question for the industrial segment. Some of the sub areas within there, how are those tracking? And then acceleration, deceleration with any pieces that you would find noteworthy on that side as we head into 4Q here.

Yeah, I would say that the top line, pretty strong performance, up 11% growth, both from underlying businesses and M&A. A lot of the Non-M&A growth came out of the powder finishing side of the business as you know project activity was a really important contributor there and on the legacy make Graco side kind of the maintenance repair spending remained pretty healthy. We are also seeing some improvement in the adoption of electric technologies like our quantum product and we're also seeing growth in the automatic lubrication side of the business as well so Year-to-date bookings are still kind of flattish, up about 1%. But overall, we feel like the business is positioned pretty well to recover as some of the legacy industrial markets start to recover. We did see some bookings improvement as we made our way through the quarter. Without getting too cute, I would say that the back half of the quarter, the bookings growth was a little bit stronger than What we were experiencing earlier in the quarter, and that's kind of continued here in the Q4 as well. So very profitable business. We're excited to get it back on a growth trajectory, and there's some green shoots there.

Thanks, Mark. Appreciate that.

Yep.

Thank you. Our next question comes from Brian Blair of Oppenheimer. Please state your question.

Thank you. Good morning, everyone. Hey, Brian. Following up on Mike's questions there, it sounds like underlying demand trends are generally unchanged. Your team is executing pretty well. I'm trying to get my head around the growth moderation that's implied in Q4. If we take a stab at Belco Meltan, top-line contribution looks like slattish organic growth year on year. Expansion markets face a pretty easy comp and there's tremendous momentum in semiconductor. So contractor and or industrial are implied to slow quarter on quarter. Your prepared remarks suggested that there is still a measured approach to capital spending, some uncertainty on the industrial side, less so in terms of the trend with contractor. but if you could provide a little more color you know and what you're seeing now and what's baked in directly and in terms of the Q4 guide you know for the big segments that would be very helpful.

Yeah I appreciate the question so I would just start out by saying that the headline outlook is a little bit softer than where things were previous to our announcement but there is underlying demand and there's really no deterioration in the underlying demand if anything it's maybe picked up here a little bit recently. But I think that as we are looking at how we might finish out the year, I think we're being appropriately cautious given the short cycle nature of the business. And we really haven't done anything significant when it comes to taking backlogs way down or things like that. We're really kind of basing the outlook based on how we see orders rolling in here. in Q4. I would say that the differences between the two is really we have seen a bit of an acceleration on the organic side in contractor in Q2 and now in Q3. And I think that the industrial, at least the legacy Graco industrial businesses remain kind of sluggish. As I said, the bookings are up 1% year to date. We kind of continue to see some I think sluggishness as we wrap up here in, you know, 2026. And, you know, hopefully we see a little bit of an inflection as we get into 27. But all that stuff factored into what we put out there for a guide here in Q4. Okay.

Appreciate the color. Your team has obviously been, you know, quite a bit more active on M&A over recent past. And we know that's been a multi-year initiative. If we think about your current pipeline, slide five references over 100 names in the active pipeline. How does the scale composition focus areas of the pipeline now compare to 12, 24, 36 months ago? How are you thinking about near-term actionability of the pipeline and Given where your stock is trading, I'm sure your team is following the tape today. How are you prioritizing M&A versus repurchase activity currently?

I think on the capital allocation, we're going to be very similar to what we have been doing, pretty balanced between returning cash to the shareholders through buybacks, and I think as you indicated we are looking at the stock price. So it is an attractive opportunity. We will be buying stock for sure. But at the same time, we do have a very deliberate M&A strategy. We highlighted it in one of the slides in the deck. So we do have a pipeline. We do have specific areas we have identified. So those are the opportunities we are going to go after. And I think our cash generation, our balance sheet, allows us that flexibility to do both. and that's what we'll do. So I think to answer your question, given where the stock is, we're going to be buying it as well as we have a healthy pipeline and we are pretty, I would say, focused on what areas we want to target, the high growth areas to diversify our revenue base and that's what we're going to do.

Yeah, I'd probably just add that if you were to contrast what the pipeline looks like today versus maybe a couple of years ago, I think that we have maybe more names in there now that are in faster growing end markets where we believe that if we can deploy capital, it improves the overall growth profile for the company. So some of the ones that we have highlighted that we already are in there, like semiconductor space, and anything in and around wastewater, water management stuff that our QED business does. Those are a couple of the target areas and I would say we've beefed up the pipeline there a little bit, Brian, compared to what it would have been a couple of years ago.

Understood. Thanks again, guys.

Yep.

Our next question comes from Jeffrey Hammond of KeyBank Capital Markets. Please state your question.

Hey, everyone. This is Mitch Moran for Jeff. Good morning. Hey, Mitch. You guys talked about price covering commodity inflation. I guess overall with commodities and everything else, what was the overall price cost in the quarter and just any forward view of that?

Yeah, price cost was flat in the quarter for us. and, you know, I would think that for the rest of the year, given there's only 13 weeks left, it's kind of the way that I would look at Q4 as well.

Okay, that's helpful. And then, you know, this, I think the initial ABB installations, you said, you know, targeted by the end of 2029. I guess in the interim, what milestones should we look for and, you know, is this something we might see more of?

Yeah, I don't know that there will be a lot. For sure, if there are, we will call them out for you. I think this is a long-term strategic relationship that we have with them. We did have another licensing agreement with them a year ago, and they are going to be launching some of our motors into the marketplace next year. Those are targeted more at conveyor systems and factories, that kind of a thing. but I think that the punchline really is that they're a very large well-respected global manufacturer of motors and motor technology and for them to actively embrace what we have they've seen it in action in a number of Graco products and in some of our other customers products I think it's it's a nice potential revenue stream for the company. It gets us a little bit more entrenched in a market where there's just all kinds of capital going in there. I don't need to tell you guys that. And that doesn't look like it's going to change much over the next five to seven years.

Great. Thank you.

Our next question comes from Matt Somerville of DA Davidson. Please state your question.

Thanks. I was hoping you could first maybe do a little bit of a different kind of deeper dive on industrial, really focusing on what you're seeing from a geographic and end market standpoint with bookings. I realize you talked across some product lines, but I'm curious what kind of the walk around looks like from an end market perspective, and then I have a couple follow-ups.

Yeah, I don't know that we have a lot. Obviously, we sell through a third-party channel, so it's kind of hard for us to tell, but I would say generally speaking across the board, there aren't any significant major differences in the different product categories that we have in the industrial business, and I would say for the geographic as well. I think the overall message here is that it's been kind of flattish and up maybe a little bit in terms of volume here year-to-date, and that's kind of what we're expecting for the rest of the year, but I don't know if Chris or Sanjiv, if you have anything you want to add to that.

I would say, like, if you just look at the Q3, within the industrial segment, the growth was across all the geographies, so it was pretty healthy. I think it was more subdued in, I would say, U.S., but overall, globally, it was pretty healthy, especially in Q3. On a go-forward basis, I think our range is really signaling are assuming certain continuation of this delay in the capital activity. That's what we are reflecting in our outlook. But base case would be really the order trends really stay at the same level. So I would say, as Mark indicated, we are seeing some healthy uptake, but our baseline or our outlook doesn't really reflect that. It's really assuming continuation of the order trends as we had seen before.

Okay, talking about two other quick ones. First, does Valco have a structurally different potential margin profile relative to core Graco? I know you gave kind of a three-year view from high teens to mid-20s. Is there something structural that will prevent it from kind of hitting kind of the Graco average, number one? And then number two, can you talk about the home center piece of contractor. I don't believe that came up. Thank you.

Yeah, I would say what we wanted to just highlight was the short-term EBITDA margin potential that we're targeting after doing a lot of work and looking at specifics like what can we do to source differently? What can we do with their factory to make things flow better? What kind of capital can we put in there to make them more efficient? So we gave it over a three-year time period, but The only real difference in terms of the structure compared to like a Greco industrial business is that they do sell direct. But they have very good direct sales presence. Their teams, I think, are fully staffed. They can handle more revenue across that base of salespeople and sales expenses that they have. So I don't really see anything and so forth. So, you know, typically what these things wind up doing, Matt, is, you know, over a few years you get the quick uptick, but then after that we find other ways and we leverage the volume better as we go forward. With regard to the home center, it wasn't It wasn't a great quarter. I think it might have been down a little bit, but maybe the guys have more detail on that that they can share with you. But the overall numbers were good in contractor, and sometimes you do have one channel up, one channel down. There's nothing fundamentally different in that channel that's happened. It's just the current environment that we're in there, and we are pretty encouraged with The growth and where the growth is coming from, the paint store stuff and the commercial side of the business, protective coatings, foam, those types of product lines do carry higher margin rates. So I think we're cautiously optimistic that as we close out the year that the overall demand trends remain intact and we'll see some growth in contractor in Q4. Thanks, Mark.

Yep. Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touch-tone telephone. Our next question comes from the line of Andrew Biscaglia of BNP Paribas. Please state your question.

Good morning, everyone.

Good morning.

I was hoping you could give us some color on just on the dilution in that industrial segment as it pertains to Valco. It seemed a little I don't know, heavy year. It's hard to parse out based on Q3 because it was kind of a sub quarter. But going forward, would you say like a few hundred basis points of dilution and expect 2027 to be sub 30% for the full year for those margins?

I'm looking at my financial experts here.

So I think we called it out. I think excluding Valco, the industrial margins were 33%. and if you look at period over period, it was only down 100 basis point and that is primarily because of the mix we talked about overall within the segment with the powder finishing systems. I would say on a go forward basis, like if you adjust out the Valco specific cost, we should be at that run rate as well.

Yeah, I think one thing I would just point to is that, you know, call it a high teens Ebitda Margin Business. You've got the revenue. So that's what I would plug in right now. And I think over a three-year period, you're going to see that expand to kind of mid-20s. There is noise in the quarter, for sure. I mean, we had a lot of one-time costs and other things that flowed through that probably made the numbers look worse than they actually were. And as Sanjiv said, if you were to strip out Belco, the underlying profitability of our industrial businesses was actually pretty good at 33%. Yeah.

Okay. That's helpful. And then, you know, you kind of, you know, just another modeling question while I got you the kind of, you guys are typically doing unallocated corporate expenses around like 40 million a year. I imagine that should go up a little bit with Belco. And then similarly, any color on interest expense would be helpful. Thanks.

I will just say that we have a giver and guide for and so forth. And then we have the unallocated corporate. It might go up a little bit, but for the most part, the unallocated corporate relates to stock compensation expense. So I don't think that that's going to be a significant headwind for us or a significant cost adder next year. From an interest expense standpoint, you're going to see that kind of shift around. We're going to see more interest expense as we do have now debt on the books. We do have cash of $140, but we will see, you know, where we've carried a lot of interest income, we'll start to see that transition into more of that debt cost.

And I would say, for our modeling purposes, I think, as we have indicated, based on our capital allocation strategy, we are going to be using our balance sheet as appropriate, so we can't really give you an exact number.

Thank you.

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

All right. Well, thank you, everyone, for participating in today's call. And I look forward to seeing you here in Q4. And I hope you have a good rest of the day. Thanks a lot.

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