Graco Inc Q3 FY2025 Earnings Call

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. 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.

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 noncash gain from a reduction in the fair value of contingent consideration related to last year's acquisition of Corob. 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 $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 noncash 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 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. 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 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.

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. 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. 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 EMEA, 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. 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.

Our first question comes from Deane Dray of RBC.

Can you provide an overview of the end markets and regions, highlighting the performance that stands out compared to expectations, both positive and negative? Additionally, could you share your thoughts on the forward outlook, including leading indicators, day rates, and what you observed in the last six weeks of orders?

Yes. I think we are continuing many of the themes we've discussed throughout the year. In the industrial end markets, I wouldn't describe the demand as strong, but there are still orders coming in, with specific opportunities in areas like vehicle service and our process pump segment, which have both performed well. Additionally, in our liquid finishing segment, many customers are transitioning from air-operated to electric systems, creating opportunities for us. Demand varies based on the type of customer and the specific end market. The North American market has seen increased caution from customers due to changes in the tariff situation, which has affected some end markets. We are hopeful this situation improves. Looking back to the end of last year when we developed our plans, we anticipated a more stable environment in North America than what we are currently experiencing. Our teams are working hard and finding opportunities, but overall, the market is not robust. China, however, has shown resilience for us this year after declining in previous years, which has been a positive development. Demand varies by end market, with the mining industry, particularly in Asia Pacific and to a lesser extent China, performing relatively well. Traditional industrial markets in China, including adhesives, sealants, liquid finishing, and powder businesses have also held up. Overall, China has been a pleasant surprise for us after a couple of challenging years. Another notable surprise has been the uncertainty in some of our industrial business end markets, especially concerning home affordability issues in North America. We are hopeful for relief as interest rates decline. The market has been challenging; last year saw the lowest housing sales in the U.S. since 1995, and this year is even lower. Increased home sales would benefit us, as selling homes leads to hiring contractors for painting, repairs, and remodeling, which is vital for our contractor business. We expect improvements as the demand stabilizes and volume growth returns. Our financial situation is strong, with high profitability, good incremental margins, and robust cash flow, so we are well positioned for better days ahead in the contractor sector.

And the leading indicator looks, stay rates, October, et cetera?

When we look at the rates and what we see coming out from some of those indicators, they're pretty flat, I would say, 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. 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 previously talked about.

Yes, it's still a pretty sluggish environment, Deane. We're hopeful it will improve, but I don’t think our results are too bad considering how hard the housing and construction industry has been affected. I'm not pleased that we're slightly down organically in Contractor. However, given the challenges in that market for a while, the team has handled it admirably.

I would just add that a significant portion of that market, as Mark mentioned, is remodeling activity, which is affected by the slow resale market. This impacts both our Pro Paint and Home Center sides of the business. This year was projected by the forecasting group at Harvard University to see growth in that category, but that hasn’t materialized. I believe this hinders us, and we hear similar sentiments from our channel partners on both the Home Center and paint materials sides of the business.

And then just a 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? Are they all sticking and you expect this to fully offset the tariffs? What's the time frame there?

Yes. 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. So we didn't actually start to really have those take effect until late in the third quarter. But I would say sort of low to mid-single-digit kinds of increases across all the business units in 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 January.

Our next question comes from Mike Halloran with Baird.

Can you clarify what you mean for the fourth quarter? Is this primarily due to the pricing adjustments that will take full effect then? Are you observing anything fundamentally in the demand outlook that gives you more confidence for the fourth quarter, especially since the growth trajectory appears to exceed typical seasonal trends? I want to ensure I understand what factors are influencing your positive expectations for the fourth quarter as indicated in your guidance.

Yes, we have maintained our guidance. It seems that we will likely be at the lower end of that guidance when we reach the end of the period. We probably won't achieve the high end of the low single-digit guidance. Year-to-date, we are down about 1%. However, we believe that our recent pricing actions have stabilized order rates, which have improved somewhat in the third quarter compared to earlier in the year. There are some segments of our business performing better than others, and we anticipate an easier comparison in the fourth quarter with the Contractor business. When we combine all of this, our forecasts suggest we will hit somewhere in the low single-digit range.

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.

Exactly. Yes. I think that's fair.

In response to the second part of Deane's question about when price cost will turn positive for your company, is it expected to happen with the price increases you mentioned for the first quarter, or will that situation stabilize by the end of the fourth quarter?

Yes, 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 Corob acquisition, our margins were actually up in Q3. So we are doing okay on the price cost. We'll see that roll through here in Q4 as well.

Our next question comes from the line of Saree Boroditsky of Jefferies.

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 price increases in North America in January. So just maybe talk through your ability to push through price in that segment versus the others.

Yes, it's good, but we are mindful of our relationships with large channel partners, and conversations typically take place around this time of year. They begin at that level. We chose not to push for price increases midyear, which I believe is appreciated since some of our competitors did. Therefore, we fully expect to implement some pricing changes at the beginning of the year with our larger channel partners. We did increase prices in the Contractor segment, particularly in the spray foam, high-performance coatings, line striping, and texture businesses. So, we have raised prices in Contractor, specifically targeting those other industrial categories around September.

And 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.

Thank you for the update. It seems you've adopted a slightly less negative outlook on APAC and expansion. Could you provide some insights on what you're observing there and the main reason behind this change?

Yes. 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. 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 will 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 kind of a fine-tuning of where we see things at here as we make our way through the year.

Our next question comes from Bryan Blair of Oppenheimer.

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, how has the more market and customer-centric framework helped your team to navigate 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? Just curious what 'proof points' you could call out?

Yes, thank you for the question. On the One Graco side, it's still early days, but we are definitely seeing significant margin improvements from the cost initiatives we implemented last year. The industrial incremental margins serve as a solid benchmark for our progress, and we're on track with our targeted goals from last year. Our teams are collaborating effectively, particularly with distributors who are now able to offer multiple product lines that they previously could not. This has resulted in increased activity in the MRO business due to distributors carrying various products and showing strong interest in our lubrication products. We're also achieving better penetration in international markets like Mexico, where we had been more cautious about who could access products like our Quantum pumps. We're now opening up those opportunities and seeing positive results. While it’s still early, we’re encountering the usual challenges that come with integrating multiple business units and regions, but I am encouraged by our progress. Feedback from customers and distributors has been very positive, as they appreciate our efforts to eliminate barriers that previously limited their access to various product categories. It's about ensuring they are trained and have the right opportunities, which will allow us to fully open those channels for them. On the M&A front, we have a solid pipeline and are actively engaged with several companies. We have successfully made some acquisitions this year, including the Color Service acquisition announced during the quarter, and there are additional opportunities we are excited about. However, pursuing M&A remains secondary to our organic growth strategy. We aim to focus on technology-based businesses where we see growth potential and can add value, and we're aggressively pursuing these opportunities at Graco. I hope to see some developments in the next 6 to 12 months, and I believe we are in a good position.

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

Yes. I believe Corob is performing as we expected, and our goal is to maintain the revenue levels we saw from them last year. We're pleased with how things are going. There have been no surprises; they have a strong business and management team. We're excited about how we can collaborate more effectively in North America, especially with larger channel partners like Home Centers and the Pro Paint segment, where their market penetration is not as strong as their competitors. Regarding Color Service, it’s a new addition to the Gema Powder business. A leadership team managing our SAT vertical lines business in Italy is overseeing it. Although it’s still early, they have ideas on how to incorporate the best practices that the Gema organization has developed over the years into the Color Service business model. We're looking forward to this opportunity as well. It's a promising technology business that addresses customer needs and handles materials that matter, aligning well with our objectives.

Yes. And 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, tire market. And 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.

Our next question comes from the line of Andrew Buscaglia of BNP Paribas.

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? 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?

Yes. 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. So 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. So going back to these are materials that people care about. They're 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 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, and that's really been a nice recurring theme for that group. But it started with the product and the technology.

Motivating these dealers that Mark mentioned is the fact that, along with their used car activity, service is a very profitable area for them. Anything they can do to expand the share of wallet for either customers or manufacturers during the early years of a new car service period is very appealing to them.

Your free cash flow has been showing impressive conversion recently. You are likely to exceed 100% free cash flow conversion this year, marking the second consecutive year of such performance. Historically, you've typically converted between 80% to 90%. Is this the new standard moving forward? What factors are contributing to this, and how sustainable is this trend?

Yes. I can't say whether this is a new normal, but it is something we are focusing on. Cash is important, and we are urging our teams to avoid overusing the balance sheet regarding inventory and accounts receivable. The One Graco initiative has helped streamline our operations, where previously each division had its own factories and warehouses. Consolidating these operations has led to significant improvements. While it's still early to fully assess our potential for further enhancements, we are giving it considerable attention because we recognize that this is a crucial metric and a value creator for the company. We take this matter seriously and remain committed to driving improvements. David, do you have anything to add?

No, I think an important point is that we didn't take the steps as a strategy to drive operations. But as we talk to our operating team, quarter by quarter, they're finding opportunities to eliminate duplication in activities and establish these centers of excellence we've discussed before. This not only can improve quality and service levels, but it also has the potential to save money on the factory floor by eliminating those duplications.

Yes. The only other thing I might add, too, just as I was thinking about it is over the last 5 years, we've added a lot of production capability here at Graco. We've expanded multiple facilities. We've broke 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. 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 being able to really close a factory here and move all the production into these new state-of-the-art facilities is pretty exciting, plus all the overhead cost, infrastructure, things of keeping a factory up and running will go away.

Our next question comes from Joe Ritchie of Goldman Sachs.

I was curious about the additional disclosure you provided this quarter regarding backlog because I have not typically considered your company as one that has a backlog. I wanted to gain a clearer understanding of what you intended to communicate by sharing that information.

Yes. 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. But 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 Gema Powder side, on some of the sealants and adhesive systems that were being sold during that time period. 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. 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. 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. And that was obviously when the supply chain crisis happened and all those orders come flying in and inflation is hitting and everyone is putting their orders in ahead of time. So we've really unwound that now over the last 2.5, 3 years, 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 Gema Powder business, which is more project-based.

Got it. That's super helpful. And do appreciate that context. And I know, look, I know that you guys don't give guidance outside of your expectations for growth for the entire year. 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, of late, you really hadn't seen a lot of growth across Contract 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. And so any kind of qualitative or quantitative comment would be helpful.

Well, 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. And 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.

Yes, I would just like to emphasize that we are strong operators at Graco. We do a great job of ensuring that our teams focus on not wasting resources. Looking ahead to next year, our primary goal will be to closely monitor and manage our expenses effectively. We hope to benefit from some of the pricing actions we've taken. Additionally, since half of our business is linked to commercial construction and housing markets, any improvement in those areas, as David mentioned, could significantly boost our volumes and positively impact our overall performance.

Our next question comes from Jeff Hammond of KeyBanc Capital Markets.

This is Mitch Moore speaking for Jeff. First, considering the current macroeconomic environment with many changing factors, I would like to know how we should approach the anticipated price increases for early 2026 in the Contractor segment. Additionally, has the recent pricing action affected your perspective on implementing another price increase in the coming months for the other segments?

We are not going to comment on the pricing levels with the Home Centers and the Pro channel since those negotiations are ongoing. I prefer not to say anything that could jeopardize those discussions. I expect we will achieve what we are proposing, which will be reasonable and based on input costs. We are very transparent and share all relevant information with them, and we consider market pricing as well. We anticipate these changes will take effect around January. As for other business units, I will leave that to our teams. If we see the opportunity to increase prices again in 2026, we will, but we are mindful of the significant pricing activity in our end markets over the past few years. It remains competitive, and while we may implement some targeted price increases, we also recognize the need to be cautious due to the current pricing landscape, including our recent actions.

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

I don't think we can quantify that because it’s quite challenging. However, I can tell you that in the Home Center channel in North America, which is the main channel for those products, their business is significantly down. It's difficult to say if we are down more or less than our competition; I just know it is down. Their foot traffic and business activity have decreased. This relates to turnover, affordability, and remodeling; those markets have been mostly flat or declining, and I believe we are experiencing that in that channel. It's hard to determine if we are faring better than our competitors, but I am not pleased that we are down.

Yes. The premise is that each company has a somewhat different manufacturing footprint. Sometimes they prioritize price, and other times they have no choice but to accept the situation. This idea applies across most of our niche businesses, including liquid finishing, where major manufacturers have very different global footprints. There is often a deeper story to explore. However, Mark's main point is absolutely correct. In the short term, there are switching costs that tend to make our relationships more stable. But looking at the bigger picture, long-term pricing needs to align with what the market can handle.

Our next question comes from the line of Matt Summerville of D.A. Davidson.

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?

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, some additions in the paint category, some in the line striping category and some in the texture category. But it's a good pipeline. It should help drive some demand. Yes. So I'd kind of a normal year next year in terms of what we're seeing.

And then 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?

Yes. I think they are quite smart. I don't believe they have a lot of inventory that they need to liquidate or manage. They seem to be managing it according to the business levels they are experiencing.

Our next question comes from Walter Liptak of Seaport Research.

I 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 maybe in Industrial, some of those capital projects, is there a lot of quotes out there? Could they get released? And then 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 percent or so of organic growth just from your own kind of strategic changes?

Yes. I think that I'll take the second one. That's what we're driving for is 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. I think it translates into growth for us vis-a-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 percentage thing, but that is definitely the reason why we did it.

I'll address your first question regarding investment. Given the diverse markets we serve, it's challenging to make broad generalizations. We typically identify a few positive developments alongside some disappointments. In terms of quotation activity and project discussions, we sometimes see indications that major customers are investing in new projects, such as paint or sealant lines. We have strong quotation activity in traditional Graco markets, like farming and construction equipment. Despite the challenges of the last few years, the automotive sector, both legacy and EV, has consistently invested. As for some of the niche markets we cater to, like commercial aerospace, we occasionally receive small orders and hear about potential investments that are promising for the upcoming year. However, there are markets that have softened, particularly in construction and industrial areas that cater to construction, such as windows, doors, furniture, and some appliances that could leverage two or three of our business units. Regarding construction, our long-held view remains unchanged: we are still underbuilt. There is a generation of potential homeowners, and if we see improvements in affordability starting with mortgage rates, we are optimistic. When these dynamics improve, we expect significant housing construction along with considerable remodeling and repainting work that will benefit us.

Okay. Okay. Great. I appreciate the kind of thoughts on that macro. Maybe another one that's on 2026. When you think about the One Graco and there's a profit component of it a margin component that you talked about as well as the organic growth component, which one is 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?

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

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

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

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