Operator: Thank you. One moment please. Our next question comes from the line of Matt Summerville of D.A. Davidson. Your line is open.
Matt Summerville: Hi, just a couple of quick ones. With respect to the performance you saw in contractor, can you maybe just touch on the divergence in the home center channel versus propane and whether you see that trend continuing in ’24, given kind of new product cadence you’re looking for?
Mark Sheahan: Yes, you know I’ll be honest with you Matt, a year ago, somebody might have told me that full year CED is going to be up or down 1%. I think we all would have said, we’ll take that just given all the doom and gloom that was out there in the marketplace, everything from DIY was way overbought to the housing market. It’s going to collapse and crater and all that negative stuff. But as I think I reminded people at one point, that business is made up of a lot of different things, and you’ve got line striping, you’ve got all spray foam, you’ve got protective coatings, which are all kind of more in the professional camp as well as all the pro sprayers that we sell through the professional paint stores. And that side, the pro paint held up probably better than what we would have expected.
And then the other pieces that I mentioned were actually fairly robust with a lot of the infrastructure spend that’s been going on and opportunities to go in and reinsulate homes, for example, with spray foam. So all in all, I feel pretty good about that. I feel like the home center in terms of their inventory levels, has gotten to a point where they’re comfortable and they’re at the level that they’re seeing in terms of foot traffic in the stores from a demand standpoint. So I feel like we’ve already been through most of the pain there in terms of reductions. We do have some new products going in there this year. We’ll see what happens with that. If the level of activity remains where it is, and we do a good job on the new products, we’d actually see some potential growth in the home center in 2024.
We’ll just have to see how things shake out.
Matt Summerville: Got it. And just as a follow-up, how do you guys think about balance sheet optimization, especially to the comment made earlier, this big multiyear kind of CapEx cycle for Graco real starting to roll off in ’24, essentially abating in ’25, and yet you’re sitting here with $0.5 billion in net cash. How should we think about whether or not you guys are likely to step up and get more aggressive with repurchases if the M&A pipeline maybe doesn’t play out as you hope? How should we be thinking about kind of optimizing the balance sheet for Graco?
Mark Sheahan: Well, for sure, top priority would be to do some acquisitions that make sense, strategic ones, and we can add value put points on the board that pay back nice rates of return for our investors. And I think David alluded to the fact that pricing has been a little bit of a challenge here. We’ll see what happens. I like the pipeline, we will be active. That would be my top choice and I think the top choice of our management team. We’ve always had the, I’ll call it, the happy problem of generating more cash than we can plough back into the business. And historically, we’ve taking care of that through buying back our stock and doing some acquisitions. But for sure, it’s front and center in terms of things that we’re keeping an eye on.
We do have $0.5 billion in cash on the balance sheet, but we are a $14-plus billion — or $1 billion market cap companies. So in terms of the overall leverage, it looks big, but again, given the size and scale of Graco, I don’t really view it as a significant problem at this point. I don’t think anyone has a gun to David Lowe’s head or my head saying that we have to deploy that capital, we sure would like to. We’ll do our best to be able to take advantage of opportunities on the share buyback side and M&A going forward. But it’s a great problem to have. The company performs extremely well. We’re fortunate to have this happy problem.
David Lowe: So I should leave well enough alone because that’s a good summary. I’ll just add the two things. Number one, I think we like the flexibility that the position gives us to move quickly when opportunities and such come along. And some of you have heard me talk about before, while I don’t think of our stock as a classic cyclical Wall Street does because of the markets we serve. And what that means is from time to time, without a lot of change in our business, cyclical stocks go on a discount and I think our record over the last couple of decades has been pretty good at buying in most recently in ’22, also in ’20, back in ’15 and ’16 when we were, I think, experiencing a 30% haircut. And it’s nice to know that, that remains a real option for us when the opportunity comes along.
Matt Summerville: Got it. Thank you guys.
Mark Sheahan: Thanks Matt.
Operator: [Operator Instructions] Our next question comes from the line of Andrew Buscaglia of BNP. Your line is open.
Andrew Buscaglia: Hi guys. Just looking at your margins, I think everyone’s kind of trying to figure out if you can exceed the sort of watermark, which is — you guys have had such strong margins this year on low growth. I’m wondering you talked a lot about new products you’re introducing, is there — and you’re always introducing new products, is this a greater kind of new product cycle we’re upon? It seems like you have quite a bit of commentary on that.
Mark Sheahan: Yes, I would say that for sure, new products is oxygen for Graco, right? I mean it’s our primary growth lever. And I really do believe that this year, in the contractor business, in particular, is a strong lineup of new products coming. And we also have decent products in the other business units as well. So if you were to take like an average of a note product year for Graco, this ’24 looks like it could be a little bit stronger than average.
Andrew Buscaglia: Yes, okay. Interesting. And is there a bit more pricing leverage, therefore in contractor versus the other segments, both price cost, but also those new product initiatives — or not initiative, but new product expectation?
Mark Sheahan: I wouldn’t say there’s more pricing leverage. I would say that we are able to charge a nice price for new technology when we bring it to the marketplace. And typically, we’re also looking to maybe reduce some of the costs if we’re replacing a legacy item with something new. But being the first to the customer with new technology is really the name of the game. And if you can do that consistently, like we’ve been able to do, you really can drive more organic growth than, say, other companies that are playing catch up.
Andrew Buscaglia: Yes, okay. And you’re talking — I know acquisitions are your preference. How do we think about margins with new deals? Are these deals you’re looking at, I’m assuming would be margin dilutive, but can you just kind of remind us what your hurdle rates are and what your amputations are for that?
