Good day and welcome to the Graco Incorporated Third Quarter 2018 Earnings Conference call. Today's conference is being recorded and at this time, I'd like to turn today's call over to Ms. Caroline Chambers. Please go ahead, ma'am.

Good morning, everyone. I'm here this morning with Pat McHale and Mark Sheahan. Our conference call slides have been posted on our website and provide additional information that you may find helpful. We saw our sales growth this quarter in all segments and regions with an increase of 10% from the prior year, including 3 percentage points of growth from acquisitions. Reported net earnings totaled $93 million in the third quarter or $0.54 per diluted share. After adjusting for the impact of excess tax benefits from stock option exercises and the non-recurring tax benefit related to the $40 million pension contribution made in the third quarter, net earnings totaled $86 million or $0.50 per diluted share. Unfavorable currency translation reduced operating earnings by approximately $2 million and exchange losses on net assets of foreign operations also increased other expense by $2 million, overall, a headwind of $4 million on pre-tax earnings this quarter. Gross margin rates remained strong, though slightly lower than the third quarter last year due to lower margin rates of acquired operations. Pricing continued to offset material price increases this quarter. Channel mix was unfavorable in the Contractor segment. While tariffs did not significantly affect gross margin rates during the third quarter, we expect to see an acceleration of tariff-related cost increases, which could have an effect of 50 to 75 basis points on gross margin rates in the fourth quarter of 2018. There are a lot of moving pieces and we are working closely with our supply chain to minimize the overall tariff costs for Graco. Looking into 2019, we expect that pricing will fully offset the dollar value of tariffs, though gross margin rates as a percentage of sales could be slightly lower. Our factories are performing well and our year-in year-out continuous improvement projects…

Thank you, Caroline. Good morning, everyone. All of my comments this morning are on an organic constant currency basis. Caroline has covered the details on our third quarter and nine-month earnings adjustments. So, any references to profitability will be on an as adjusted basis. The macro environment continued to provide growth opportunities in Q3 and, despite tough comparisons, we delivered a good quarter with solid organic revenue growth, margin expansion, double-digit earnings growth and solid cash flow generation. Some color around the segments, the Industrial segment delivered mid-single-digit growth in the quarter against difficult comp from Q3 of last year where we had double-digit growth. As expected, there was an increase in finishing systems sales and project activity in the quarter. Business remains consistent with our full-year outlook for 2018. The Process segment delivered double-digit growth in the quarter. Demand continues to be broad-based and favorable across most of our end markets. The Contractor segment delivered mid-single-digit growth in the quarter against a tough comp of high-teens double-digit growth in the third quarter of last year. There was significant variability between geographies, so I'll make a few additional comments on Contractor by geography. In the Americas, Contractor sales were up 8%, fairly consistent with year-to-date results. Out-the-door sales in both the paint store and home center channels remains robust. In EMEA, the Contractor business was up against a huge Q3 of last year, where sales were up nearly 30%. Despite the tough comps, Contractor EMEA was able to post slight growth with good growth in Western Europe largely offset by significant declines in emerging countries. Asia Pacific Contractor was down for the quarter and although up year-to-date, this continues our trend of inconsistent revenue performance for Contractor in that region. Now, I'll make some comments on overall regional performance. EMEA…

Our first question will be from Deane Dray with RBC Capital Markets.

Thanks. Good morning, everyone.

Good morning, Deane.

Good morning.

Hey. Maybe we can start with pricing because that was one of the sensitive spots last quarter where you were consciously holding off on not disrupting the Contractor channel. And it sounds like this quarter, you're talking about the ability to put through price and that's on track. So maybe just talk about how that decision came about and the timing of price increases and how much do you expect to realize.

Yes, Deane. Yes, we don't view it as a sensitive topic. We've got a tempo for our price increases and we do those on an annual basis. It's disruptive to our channel to put through mid-year price increases. And we have continued to be focused on making sure that we put our price increase through in the early part of 2019, as we would have normally planned.

And any pushback on that in terms of how much you expect to stick? And did you quantify the pricing for the quarter, what you expect to get for the year? Any color there would be helpful.

Yes. So normally, we realize 1.5 to 2 points on price on an annualized basis. We anticipate that we'll have to get a little bit more going into next year due to the fact that we've got the pressure on tariffs, but we anticipate that we'll cover the dollar value of the increase in tariffs and material costs with pricing in 2019.

Got it. And we appreciate the precision on the gross margin pressure in the fourth quarter, the 50 to 75 basis points. Is there any way you can separate out how those impact each the tariffs, material costs and FX? That would be helpful.

Yes, Deane. That's mostly just our best guess at this point. A lot of things happen over the course of the quarter that can affect those numbers that could be higher or lower, but it's the order of magnitude, so you can throw it into your model. We've got manufacturing opportunities to make improvements. We're working with our supply chain to hold off impacts as long as we can. So, it's hard to say. We didn't see a lot in the third quarter. We're anticipating that it's coming, so we gave you a number.

Got it. Appreciate it. And just last one on Contractor, maybe some color in APAC, what some of the dynamics in the quarter were there, please?

Yes. It was just down. That was primarily a China issue. We had other countries where we did well. And, again, it's not different than the struggles we've had, the last few years have, in getting consistent growth, particularly out of China. We've been up and down quarter-to-quarter. We'd like to see some consistency there, but, unfortunately yet, we haven't.

I could figure the answer, but since everyone is getting asked, is this related at all to just slowing in China, slower demand, or is this more product line-specific and timing and channel and so forth?

No. I don't think that what's happened with Contractor in China has much to do with what's happening with the economy over there. The penetration rate of spray equipment in China is still pretty low. So, the opportunity for us is to convert people to using equipment from using brush and roller. There's also the dynamic in the marketplace over there of the low-price copiers. But, again, we believe that opportunity for us remains good if we can execute, and that's what we're focused on trying to execute conversion.

Got it. Thanks for all your help.

Thank you. Our next question will be from Brett Kearney with Gabelli & Company. Brett Kearney - Gabelli & Co.: Hi, guys. Good morning. Thanks for taking my question.

Morning.

Morning. Brett Kearney - Gabelli & Co.: Just wanted to ask on your project funnels and the project activity you're tracking, if you could provide by geography. I know you noted in the slide deck some spotty activity in the Asia Pacific region, but overall how your project funnels are looking across the business?

Yes. I think generally what we see in most of our markets is activity that's consistent with our outlook. And orders continue to be good here in the month of October. And we think that we're going to have a decent fourth quarter as our outlook would suggest. Brett Kearney - Gabelli & Co.: Okay. Great. Thank you.

Thank you. Our next question will be from Jeffrey Hammond with KeyBanc.

Hey. Good morning.

Good morning.

Good morning.

Good morning.

Can you just talk about the auto OE? We've been seeing signs of choppiness in Europe, Asia and just kind of this worry of peak auto in U.S. Just how are you seeing spending there?

Yeah. I mean, the activity is okay. Obviously, you can look at the same numbers that we look at, but in general, we're still seeing investments being made and, of course, about 40% of our legacy business is parts and accessories. So, as long as unit volume pulls up, we're going to continue to see orders come in on that piece of the business. But in general, I'd say it's okay.

Okay. And then can you dig in a little bit more about the kind of downgrading the outlook in EMEA and how long do you think that persists?

Yes. Really, what we're seeing there is we're seeing, I'd say, not great growth in Western Europe, but certainly, the pain that we're feeling right now is coming from some of the emerging markets. Of course, South Africa has got its problems. Turkey, we're seeing declines in Turkey, some of the countries in the Middle East we're seeing declines in. So, a little bit of tale of two stories and then we have some concern looking forward into what may happen with Russia. We're still doing okay there, but the team in EMEA is concerned with some of the talk that's going back and forth on the political front that we could see some slowdown happen in Russia. So, I'm not overly concerned about Europe. I don't view that it's getting ready to go into the tank, but I think we're slightly less positive in aggregate than we would have been here three months ago.

Okay. And then just finally, it looks like mix was a headwind in Contractor. How do you think that trends into 4Q and 2019?

Yes. I think it's hard to trend. That bounces around quarter-to-quarter, depending upon which one of the channels or which segment of the product line we happen to ship more of in a particular quarter. So, again there, I view it a little bit more as noise than a trend. And I'm not expecting at this point it to be something that's going to be long term. I think you'll see that move around quarter-to-quarter.

Okay. I'll get back in queue. Thanks, Pat.

Thank you. Our next question will be from Charles Brady with SunTrust Robinson Humphrey.

Hey. Morning, guys.

Morning.

Just back on the tariff question and echo the sentiments, appreciate the quantification there. But if we look in 2019, you've really said it was 100 basis point potential impact on tariffs in 2019. Is that number still an accurate number to go by or has that crept up a little bit? Sounds like the 2018 number has gone up, because it was 50 basis points for second half and now it's a little bit higher than that. So, I'm wondering if 2019 has crept up as well.

Let me just give you a little color on that. Part of the reason why it's creeping up in the fourth quarter is because we had actually so little realized pricing effect in the third quarter. So we brought down our overall estimate for the second half this year.

Tariff effect.

Tariff effect, correct. And then for 2019, it's actually about the same, our expectation, our estimate on the actual tariff cost, but at this point, we're taking a look at our pricing and saying dollar-for-dollar, we should cover it with pricing.

Okay. That's helpful. Thanks. And I just want to switch gears, on the Process business, I mean, that was some very strong results in that, and maybe can you dive into a little bit deeper about what's really driving a lot of that growth? I mean, it's coming off, I guess, a lower year-ago comp, but it's pretty broad-based. I'm just trying to get a better sense of what's really driving the Process growth.

Yes. We have a bunch of businesses in there and looking across all the different product categories and the segments, whether it's our classic air-operated diaphragm pump business, our lube business, some of the businesses that we've acquired, I would just say it's fairly broad-based across a lot of those product categories. And as the revenues have come up there in that segment, their margins are coming up as we had expected. So, they're over 20% now, where a year ago, they were in the teens. And as long as they can continue to drive the top line, there's a lot more room there for them to improve their profitability.

All right. Thanks. One more for me then, just on supply chain, there's obviously some constraints in the supply chain, freight being only one of many, but I'm wondering can you just comment on what you're seeing in terms of supply chain and is that crimping any kind of shipments or how's that holding up?

No, we're fine. I think we have our normal amount of production problems, but nothing unusual.

Thanks.

Thank you. Our next question will be from Walter Liptak from Seaport Global Securities.

Hi. Thanks. Good morning, guys.

Good morning.

Good morning.

Just a follow-up on that Process question, I think some of those businesses are a little bit longer cycle. I guess, we have visibility on some things, like offshore picking up or any other longer-cycle projects. What are you seeing from those?

In the oil and gas sector, for us, we're still seeing more of our improvement happen on the onshore piece. But we're pretty far down the pipeline of a project before we would actually get any business on the offshore stuff, so we're probably not the right people to ask on that. And then, I would just reinforce what Mark said. The rest of the product lines within that category seem to be generally healthy as we look around the globe.

Okay. Good. And then, switching over to Contractor, everything looks pretty good through the end of this year, but I wonder with interest rates coming up, if you've got any thoughts about what next year could look like. I know a lot of this is just rehab on existing homes or that kind of work, but weakness in – potential weakness in the housing construction markets, how do you benchmark that?

So, obviously, nobody really knows. But I have seen some of the comments about concern that the housing market here may be approaching a peak. And we don't believe that. And I personally don't believe that. We've been pretty confident all along coming out of the recovery that we ought to be headed back to 1.5 million. And so, I think that there's still some runway to go. There's still some labor shortages out there. The supply of new homes still remains low. And I think that the concerns that the housing market is falling part are premature and overblown. But that's just my opinion.

Okay. Appreciate it. Thank you.

Thank you. Our next question will be from Matt Summerville with D.A. Davidson & Co. Matt J. Summerville - D.A. Davidson & Co.: Morning. Thank you. A couple first clarifications. Can you remind us when you look at the EMEA region how much revenue is being driven by emerging markets? And then secondarily, the tariff comments you made regarding 2019, is that inclusive of the step-up that we could see beginning January 1, or do your comments not adjust for that?

So I'll take the EMEA piece first. We generally don't break out the West versus East. I'll just say that they're both important. And Caroline can maybe address your 2019 tariff question again.

So, we've looked at that. We haven't (20:37) considered that when we're taking a look at what the overall effect could be. But again, there's a lot of moving pieces and including exactly where we source particular products and the tariff rates, et cetera. So, it's still – at this point, still really an estimate. Matt J. Summerville - D.A. Davidson & Co.: Got it. And then I apologize if I missed this, Pat. In your prepared remarks, did you comment as to the performance in the propane versus the home center channels in the third quarter? And maybe talk a little bit about how the new product pipeline in particular for Contractor looks for 2019. And if we have – should be expecting some major launches either in the first or second quarter of next year?

Yes. So, the out-the-door sales in both channels here in the Americas were good. So, we feel pretty good going into Q4 and into next year that we still got some opportunities there. In terms of the new product pipeline, that division has historically done a really nice job of launching pretty exciting new products every year and we like what we've got coming for 2019. So, we think we're pretty well-positioned from a new product launch standpoint in 2019 to continue our momentum as long as the end markets give us something to work with. Matt J. Summerville - D.A. Davidson & Co.: Thank you.

All right. I'm showing no further questions in the queue at this time.

All right. Thanks, everybody, for your time joining the call this morning and we'll get back to work and we'll talk to you again the end of January. Thanks.