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 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 2021 Annual Report on Form 10-K, and an 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 Kathy Schoenrock Executive Vice President, Corporate Controller, and Information Systems.

Good morning, everyone, and thank you for joining our call. I'm here today with Mark Hsien and David Lowe. I will provide an overview of our quarterly results before turning the call over to Mark for additional discussion. Yesterday, we reported record third quarter sales of $546 million, an increase of 12% from the third quarter of last year. The effect of currency translation rates was a significant headwind in the quarter. On a constant currency basis, sales increased 17% with growth in every segment and region. Reported net earnings were $116 million for the quarter, and despite a 5-cent headwind from foreign currency, reported EPS was 67 cents per diluted share, an increase of 14%. We expect translation rates to continue to be a challenge for the remainder of the year. At current exchange rates, the full year unfavorable effect of currency translation would decrease sales by 4% and earnings by 8% with a similar impact in the fourth quarter as we experienced this quarter. The gross margin rate decreased 320 basis points in the quarter. While our pricing actions offset increased costs on a dollar basis, The margin rate declined 190 basis points. In addition, foreign currency translation rates decreased our gross margin rate by approximately 130 basis points. With regards to cost, we did see some commodity prices beginning to ease during the quarter. However, they were not enough to offset broad-based inflationary cost increases. Interim price increases were implemented throughout the third quarter. And we will begin to see the full benefits in the fourth quarter and into next year. Our 2022 pricing actions have and will continue to offset the input cost pressures on a dollar basis. Operating expenses decreased 6 million or 5% in the quarter. Reductions from currency translation rates and sales and earning based expenses were partially offset by volume and rate related increases. The adjusted tax rate for the quarter was 19% due to the unfavorable effects of foreign earnings taxed at higher rates than the US rate. We anticipate this trend will likely continue and expect our estimated annual tax rate will be 19 to 20%. Cash flows from operations were 272 million for the year. This was a decrease of 86 million from last year. Contributing factors include increased annual incentive payments and investments in working capital. We have elevated inventory levels, which are reflective of the high backlogs and higher accounts receivable balances due to the overall business growth. Through the end of the quarter, we have repurchased 2.5 million shares for 155 million. We continued to repurchase shares in the first weeks of October, and as the market closed yesterday, we have repurchased 3.5 million shares for $233 million year to date. We also prepaid $75 million of our private placement debt, made capital expenditures of $147 million with $75 million related to facility expansion projects, and made dividend payments of $107 million. Finally, our full year estimates for unallocated corporate expense and capital expenditures can be found in the conference call slide deck on page 10. I'll turn the call over to Mark now for further discussion.

Thank you, Kathy, and good morning, everyone. All of my comments this morning will be on an organic constant currency basis. Sales in the quarter are up mid-teens with growth in all reportable regions and segments. This resulted in record third quarter results in both sales and operating earnings. These gains are generally broad-based with most major product lines experiencing good order tempo throughout the quarter. Some of the increases were likely due to pricing actions taken in the third quarter, which were fully implemented by the end of September. Our consolidated backlog was $440 million at the end of the quarter, which is $65 million higher than at the end of last year and $180 million higher than Q3 of 2021. I was pleased with the overall business tempo and profitability during the quarter. despite continued cost pressures and currency headwinds. We saw some relief in commodity prices. However, they were not enough to offset a broad-based inflationary environment. We anticipate that the pricing actions we have taken throughout the year will offset inflation on a dollar-for-dollar basis. Now turning to some commentary on our segments. Contractor segment sales were up mid-teens for the quarter driven by outperformance in North America. Out the door sales in our propane channel are robust and demand for our protective coatings and spray foam product lines remain strong. Painting contractors are still in demand and they have healthy pipelines of work. Graco's contractor backlog decreased slightly during the third quarter to $90 million but is still 66% higher than a year ago. Availability of certain components remains challenging and is the primary cause for our high backlogs. Going forward, we are keeping an eye on indicators such as housing starts, new and existing home sales, commercial construction, remodeling expenditures, and interest rates. While some of these readings are less favorable than they were three months ago, we have not seen adverse impact to our business at this time. The industrial segment grew 8% in the quarter with positive results in all reportable regions and achieved third quarter records for both sales and operating earnings. Profitability continues to be strong with incremental margin growth of 69% for the quarter and 64% year-to-date. Demand remains solid in all major geographies and key product categories, such as liquid finishing, powder coating, and sealant and adhesive equipment. Backlog is up $25 million compared to the end of last year and $65 million compared to the same time a year ago. The process segment grew 30% for the quarter, again, resulting in records for both revenue and operating earnings. This is the sixth consecutive quarter with revenue growth greater than 20%. Demand remains strong in all regions with continued broad-based growth in lubrication equipment, process pumps, environmental, and semiconductor products. Profitability improved throughout the quarter, resulting in 34% incremental margins despite cost pressures on key components. Moving to our outlook. Demand during the quarter was strong in all segments and regions. We're optimistic that these incoming order rates will continue for the remainder of the year. However, macroeconomic trends affecting many of our product lines and regions remain uncertain. We are committed to our core strategies of launching new products, investing in our manufacturing capabilities, expanding our global channel, and pursuing profitable growth opportunities in attractive niche markets, either organically or through acquisitions. Our backlog is still near record levels, plus the effects of our pricing actions. We remain positioned to have a record year in 2022. We're raising our 2022 revenue guidance to low double-digit growth on an organic constant currency basis with growth expected in every reportable segment. That concludes our prepared remarks. Operator, we're ready for questions.