Generac Holdings Inc (GNRC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Generac Holdings, Incorporated earnings conference call.

My name is Regina and I will be your operator for today.

At this time all participants are in listen-only mode.

Later we will conduct a question-and-answer session.

(Operator instructions.) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn your conference over to your host for today, Mr.

York Ragen, Chief Financial Officer with Generac.

You may proceed, sir.

Thanks, Regina.

Hello, everyone.

Good morning and welcome to our third-quarter 2010 earnings call.

I'd like to thank everyone for joining us this morning.

With me today is Aaron Jagdfeld, our President and Chief Executive Officer.

We will begin by stating that we'll make a number of forward-looking statements on our call today.

Certain statements made during this presentation, as well as other information provided from time to time by Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see our earnings release or our SEC filings for a list of words or expressions that identify such statements and the associated risks.

In addition, we will make reference to non-GAAP financial measures during today's call.

Additional information regarding these measures, including a reconciliation to comparable US GAAP measures, is available in our earnings release and SEC filings.

I will now turn the call over to Aaron Jagdfeld.

Thanks, York.

Good morning, everyone.

We're pleased with our operating results for the quarter, as we were able to deliver double-digit year-over-year net sales increases, substantial net income growth and strong free cash flow generation.

The year-over-year net sales improvements came from all products across our business.

In addition to our operating results for the third quarter of 2010, we have executed on a number of actions to grow our business for the long term.

During the third quarter of 2010 we introduced our CorePower Series home standby generator.

This product launch represents the lowest opening price point for a fully automatic home standby system in the market, with a retail price of $17.99.

By continuing to close the gap between the retail price point of a similar wattage portable generator and a home standby system, we believe we can further accelerate the penetration of home standby generators in US households.

Also, in October 2010 we announced the execution of a licensing agreement to be the exclusive licensee for Honeywell-branded standby and portable generators.

This agreement will allow us to expand our distribution focus to target select contractors and distributors of HVAC and security systems together with our channels that are currently underpenetrated by Generac.

Our market research shows that the Honeywell brand has tremendous recognition in these channels and we believe that it will enable us to increase awareness and reach potential buyers by leveraging this well respected name.

We have also recently announced plans to reenter the market for residential and contractor-grade pressure washers.

This is a product category we know quite well, having led the market for pressure washers in the 1990s before the sale of our portable products business in 1998.

Reentering this market will enable us to leverage our existing customer base, supply chain, and engineering expertise.

We anticipate these products will be available late in the first quarter of 2011.

While we don't expect pressure washers to have a significant impact on our sales mix or profit margins in the near term, we see attractive growth opportunities in this market as we build our distribution and product offering.

As we have discussed in the past, we have several key initiatives targeted at driving penetration of home standby generators through increased awareness, availability and affordability in the product category.

Despite some very challenging headwinds, we believe we are making progress towards this goal.

Our direct marketing initiatives, post-outage campaigns and display units at retailers continue to improve awareness of home standby generators.

Additionally, as we have previously stated, making our products more available by building out our residential distribution remains a priority for the Company.

We are on target to add between 300 and 400 new dealers again this year in addition to adding new shelf space at retail for our residential products.

Affordability is also an important component of our residential strategy, and the launch of our CorePower home standby product represents the latest move to make the category more affordable for homeowners.

With regards to our commercial and industrial products, as you'll recall, last quarter we indicated that we had seen a bottom forming in demand for our C&I products.

In the third quarter of 2010, for the first time in six quarters we are now seeing positive year-over-year growth as the commercial and industrial markets begin to strengthen.

Earlier this year we launched our redesigned industrial diesel product line powered by Fiat Powertrain engines, which have been very well received by our distribution partners and the end markets they serve.

In addition to these new products, we are looking forward to several more product launches for 2011 that we believe will enable us to continue to improve our share of the North American commercial and industrial power generation market.

Outside of North America we continue to make progress in adding distribution for these products with an emphasis on Latin America.

I will now turn the call back over to York to discuss third-quarter results in more detail.

York?

Thanks, Aaron.

Looking at the results for the third quarter, net sales for the third quarter of 2010 totaled $160.7 million, an 11.4% increase compared to $144.3 million in the third quarter of 2009.

As Aaron mentioned, this year-over-year increase was driven by improved demand for both our residential and industrial/commercial products.

Looking at net sales by product class, then, residential product sales increased 12.6% to $101 million in the third quarter of 2010 compared to sales of $89.7 million in the third quarter of 2009.

This increase was driven by our initiatives to increase awareness and availability of our residential products, coupled with a shift in buying patterns by our distribution towards more in-season buying.

The initiatives to drive penetration that Aaron just discussed are helping to offset declines in demand resulting from the challenging economic environment and the lack of major outage events over the last couple of summers.

As a result of these headwinds our distribution partners are more conservatively managing inventory levels across our sales channels.

We saw this in the second quarter of 2010, where many distribution partners changed their buying patterns and reduced stocking levels going into the peak selling season.

This change favorably impacted the third quarter, as distribution shifted to more in-season buying versus preseason buying.

Looking at our industrial and commercial products, net sales increased 7.6% to $49.6 million in the third quarter of 2010 from net sales of $46 million in the third quarter of 2009.

Improvements in our focused end markets and expansion of our distribution are driving this year-over-year increase.

Particular areas of strength include backup power for healthcare, municipal and education-related facilities, as well as telecom-related applications.

Sales of our standardized light commercial generators are also up year over year, as this product offering provides a value proposition over comparable customized industrial generator sets.

In addition, we continue to broaden our distribution of these products, both domestically and internationally.

Looking at our gross margins, gross margins for the third quarter were 41.9% of net sales compared to 44.7% of net sales in the third quarter of 2009.

Rising commodity costs and increased sales mix of lower kilowatt products were the main factors that contributed to this 280 basis point reduction in gross margin versus last year.

In the third quarter 2009 pricing for Generac's key commodities were at recessionary low points.

Since then pricing for copper, steel and aluminum has increased substantially.

While we hedge a small portion of our copper purchases, the resulting fluctuation in commodity costs has negatively impacted our gross margins in the third quarter of 2010.

We are currently evaluating our pricing strategies in response to this increase in commodity levels.

From a sales mix standpoint during the third quarter, we experienced a higher sales mix of lower kilowatt residential products versus prior year.

This sales mix change is also negatively impacting our gross margins, but to a lesser extent than commodities.

Our lower kilowatt residential products typically have lower gross margins than higher kilowatt residential products.

Operating expenses for the third quarter of 2010 were $37.6 million, a 10.9% increase over the third quarter of 2009 and included $13.1 million of noncash intangible asset amortization and $1.7 million of noncash share-based compensation expense.

As a reminder, as we have said on previous calls, the intangible assets on our books were generated solely from purchase accounting associated with the CCMP change in control transaction back in November 2006.

Generac has grown organically over its 51-year history.

As a result, the intangible amortization expense reflected in our income statement is strictly a function of the CCMP transaction and not M&A activity conducted by the Company.

Also as previously discussed, the $1.7 million of share-based comp expense during the quarter relates to stock options, restricted stock and other stock awards that were granted in conjunction with our February 10, 2010 IPO.

US GAAP requires that the value of the share-based compensation awards be expensed over their corresponding vesting periods.

Excluding these noncash expenses just discussed, operating expenses for the quarter increased $2 million year over year as a result of new public company administrative costs, higher engineering and product development costs, and higher variable operating expenses on higher net sales versus prior year.

Taking into account the changes in gross margin and operating expenses just mentioned, adjusted EBITDA was relatively flat on a year-over-year basis, decreasing less than 1% to $45.7 million in the third quarter of 2010 as compared to $46.1 million in the third quarter of 2009.

EBITDA margins declined to 28.5% during Q3 2010 versus the 31.9% margin achieved in Q3 2009 when commodities were at recessionary trough lows.

Net income for the third quarter was up sharply from the prior year at $23 million in the third quarter of 2010 as compared to $14.3 million in the third quarter of 2009.

Q3 2009 included a $1.2 million gain on extinguishment of debt related to certain debt buyback transactions completed during that quarter.

Adjusted net income as defined in our earnings release was up 35.3% year over from $27.1 million in Q3 2009 to $36.7 million in Q3 2010.

Lower interest expense contributed to this increase in adjusted net income.

Diluted net income per share was $0.34 per share during Q3 2010.

Adjusted diluted net income was $0.55 per share for the quarter, both of which included $0.025 per share of shared-based compensation expense.

As a reminder, pre-IPO per-share data is not meaningful as the equity structure of the Company pre-IPO was not comparable to the equity structure of the Company post-IPO as a result of the corporate reorg that occurred in conjunction with the IPO in the first quarter of 2010.

Now, looking at our cash flows for the third quarter of 2010, cash flows from operations were $36.5 million in the third quarter of 2010 compared to $24.3 million in the third quarter of 2009.

This year-over-year net increase in cash flows from operations is attributable to lower interest costs paid during the quarter versus prior-year quarter, coupled with a decline in cash used for working capital purposes as compared to prior-year quarter.

Through September 30th, prior-year 2009 included more cash used for working capital, as we were ramping up our portable generator stocking for the first time since reentering that market in 2008.

Capital expenditures of $1.3 million for the third quarter of 2010 were comparable to prior-year Q3 2009 and prior-quarter Q2 2010.

As we had mentioned in our second-quarter call, we estimate CapEx run rate to pick up in the second half of 2010 and into 2011 as we execute on certain product development and cost reduction initiatives.

In the fourth quarter of 2010 we expect CapEx to be approximately $2 million higher than the last few quarters, depending on timing of certain progress billings.

With regards to taxes, as previously discussed, we currently do not pay federal income taxes and expect cash taxes to remain minimal for the balance of 2010 and into 2011.

This is clearly a significant driver towards our strong free cash flow generation.

Free cash flow was $35.2 million in the third quarter of 2010, a 51.1% improvement year over year from $23.3 million in the third quarter of 2009.

On a last-12-months basis, cash flow from operations less CapEx, or free cash flow, is $106.7 million, a free cash flow yield of 12% on our current market capitalization.

From a capital structure standpoint, as you recall, following our IPO in February 2010 the outstanding balance on our first lien credit facility had been reduced to $731.4 million and the second lien term loan had been terminated.

The first lien credit facility incurs interest at LIBOR plus 250 and comes due in November 2013.

It is also prepayable without any penalties.

In addition, we currently have $300 million notional amount of interest rate swaps in place, that swap LIBOR fixed at a blended rate of 1.5% for two years.

Our ratio of consolidated debt less consolidated cash versus our last 12 months' adjusted EBITDA was 3.8 times at September 30, 2010, a decrease from the 4.0 times ratio as of June 30, 2010.

Our strong cash flow generation during the quarter contributed to this reduction in leverage.

Additionally, we have no borrowings outstanding under our revolver, which has approximately $145 million of availability net of outstanding letters of credit.

With that, I'd like to turn the call back over to Aaron to provide some additional comments on outlook.

Thanks, York.

Looking to the fourth quarter of 2010 we expect to see continued year-over-year sales growth for our industrial and commercial products as we realize the benefits of our expanded distribution network and a continued recovery in key end markets.

However, we expect headwinds in our residential products to more than offset the growth in our industrial and commercial sales.

As discussed in our review of the third quarter, our customers shifted more of their purchases of residential generators to the peak selling season this year, which benefited our sales in the third quarter.

Additionally, customers continue to manage their inventory positions conservatively and as a result we do not expect the same level of inventory stocking in the fourth quarter of 2010 that we experienced last year.

Despite this, we remain confident in the macro trends facing our end markets and our ability to execute on our strategic plan to drive long-term growth in our business.

Our strategic plan is comprised of four major growth objectives.

The first of these strategic objectives is to increase penetration of residential standby generators in US households.

Today these products are installed in only 2% of single-family homes.

To improve this penetration rate we have several key initiatives focused on adding distribution, increasing the level of direct marketing to potential buyers, and a continued drive to reduce the installed cost and corresponding price points of these systems.

Our second strategic objective is to increase our share of the North American industrial and commercial products market.

We believe that we have opportunities to gain share through a further broadening of our product offering and a focus on building relationships with contractors and engineers.

Our third strategic objective is to diversify our demand through the introduction of new products and services that will allow us to leverage our brand, our customer base, our supply chain, our engineering expertise and our manufacturing footprint.

As we have said on previous calls, sales of our products are almost entirely to North American customers.

Our fourth strategic objective is to increase our international sales.

Near term we are concentrating our efforts in Latin America by developing a dedicated sales team focused on adding new distribution and building our brand in these countries.

We believe the execution of our strategic plan and the corresponding initiatives we have been working on the last several quarters will continue to drive sales growth and significant cash flow generation for our business.

Given our strong free cash flow generation, we have significant financial flexibility.

As stated before, we prioritize the use of our cash first to fund our strategic initiatives and, second, to return to our stakeholders, including paying down debt.

We continue to evaluate these priorities with our board.

This concludes our prepared remarks.

Thanks again for joining us today.

At this time we'd like to open up the call to questions.

Operator?

(Operator instructions.) Jeff Hammond; KeyBanc Capital Markets.

Just trying to get my arms around the fourth quarter a little bit more.

I mean, historically you're flat to up sequentially.

It looks like you're saying down year over year.

Maybe frame how substantial you think and a range down year over year.

And then, just how should we think about absorption and do you think inventories come in through year end?

And I guess this kind of destocking process, does that carry into early '11?

Yes, Jeff.

As we said, we don't issue specific guidance, so, I mean, giving you a range on the fourth quarter is not going to be something we're going to be able to do.

But we've seen a bottom form in the C&I business.

We see that up in terms of the third-quarter results as you've seen.

We like that trajectory going into the fourth quarter.

The residential products, because of the situation I described in terms of the customer base there being a lot more conservative with their inventories, as well as just some stocking programs that did not repeat in the fourth quarter of this year versus last year, really presents a challenge to us.

I mean, we're very optimistic about the baseline business underneath residential.

We like where we're going with that program.

As far as how it's going to react or how 2011 will be impacted by that, at this point we're executing on our initiatives and we're optimistic about 2011.

Yes, this is York, Jeff.

I think from an absorption standpoint I think -- you made a comment that historical seasonality shows Q4 being up over Q3.

I think there, depending on certain years, Q3 typically is our highest quarter historically and then Q1 being our lowest quarter and then Q2 and Q4 fight it out there.

So that's from a historical standpoint.

From an absorption standpoint -- and our production rates basically follow that trend as well.

So you would tend to see that absorption down a bit versus Q3.

Okay.

And where do you -- where would you like to see inventory levels at the end of the year?

We believe that our inventory levels as it relates to residential standby are adequate.

And, again, I think that when you look at where we've got our biggest challenges on inventory it's going to be in our portable generator products.

Obviously without an active weather pattern here in the third quarter we've got higher inventory levels there than we were planning for.

We expect to -- as we did last year, we expect to sell those down going into 2011.

So clearly that will impact some of our production rates to some degree there as we work off that inventory.

But the inventory levels at retail for our case are -- at least at the residential standby side, they don't stock.

So there's really no inventory there to speak of, very little.

On the portable generator side, I think all the retailers will tell you that they feel pretty good where they're at right now.

They're also pretty well loaded up after the season and not having that been pulled through with some kind of major event.

Okay.

And then switching gears, just in terms of the entry into the pressure washer market, can you talk about how that's going to be different or the same as kind of the portable generator reentry?

Can you frame maybe the market opportunity for us?

And when do you start to introduce product?

Do you have launch customers set up?

Yes, so the product will launched in the -- it will be available for shipment in the first quarter of next year.

From a market standpoint, that's a market that -- on the gas pressure side and that's the market we're going into here -- the gas pressure market is anywhere in between 1.1 million and 1.2 million units per year.

It's in excess of $400 million in terms of the dollar size of that market, again, for gas pressure washers.

We're -- as you well know, Jeff, I think that this is a product category that has traditionally been sold at retail.

There is some dealer component of it, but it's primarily a retail-based product.

We think there's some opportunity there to pick up some retailers.

But you know how retailers are.

They have line reviews that are set schedules.

You generally don't win a line review the first time you go through it.

So I think we're being very conservative on how it's going to impact the Company's results, certainly for the first year, maybe even into the second year.

As far as how the launch is going to go, it is going to be very comparable, our reentry into this, in terms of the way we entered portable generators.

We see that there's a limited set of manufacturers in this market in North America.

In fact, it's really the same manufacturers who are doing portable generators, by and large.

And so we see good opportunity there to leverage our relationships with our customer base, certainly our brand, somewhat our expertise in products that are engine-powered, like a pressure washer, these gasoline pressure washers.

So in that regard it is very similar to portable gen.

Great.

Thanks, guys.

[Til] Mulrooney; William W.

Blair.

I'm calling in for Brian Drab.

I've got a question regarding your residential results, and clearly, up 12.6%, you clearly had a good quarter.

How much of that do you think your CorePower residential product, your new product, impacted those results and how do you think that will go going forward?

So the CorePower System actually we shipped a few units at the end of the third quarter, but not many at all.

We're now ramping up production here in the fourth quarter and we'll ship more.

But it takes time.

Similar to my comments, Tim, on pressure washers a moment ago with retailers, you've got to get product placed on the shelf.

We already have -- at most major retailers we have a four-foot section in the power generation bay with our existing home standby, so to have most retailers commit to an additional two to three feet of space to display this product will be difficult.

We think that this is -- what we'd really like to do in terms of strategically with this product category is displace maybe a portable generator at retail.

Because, again, our theory with this product is that we really want to get portable generator buyers to trade up into this category.

And we want to do that by compressing the delta between a similar sized portable generator and the CorePower.

So by getting that price delta compressed we feel that we can offer a pretty compelling value to people who are currently shopping for portable generators.

But it did not have a meaningful impact on Q3 and will not have a meaningful impact on our results this year.

But it's an exciting product launch for us and it really gives us an opportunity to test the elasticity of demand with a lower price point in the market.

Okay.

So some potential upside here going into 2011.

Also, in terms of -- do you expect gross margins to be hurt as bad in Q4 by commodities as they were in Q3 year over year?

Tim, this is York.

I think we're not giving, again, specific guidance with regards to Q4.

But I think what I can tell you is if you go back to Q4 2009 or even further, as I mentioned, Q3 2009 we were at recessionary trough lows with commodities.

So you look at Q4 2009, commodities came up pretty dramatically off those lows in Q4 2009.

And then you couple that with the stockings that we saw in Q4 2009 that we're saying won't necessarily repeat in Q4 2010.

There was a mix shift towards lower kilowatt products there.

So Q4 2009 margins did come off and you saw that in our results.

So if you put that all together, while comping Q4 2009 margins will be tough, you put those two drivers it'll make comping probably easier than Q3.

So we were off 280 basis points in Q3.

We shouldn't see that level of decline year over year in Q4 for those reasons.

Okay.

Thanks very much, York.

Thanks, guys.

Steve Saunders; Stephens.

First, on the commodities it sounds like you're still evaluating whether you'll take some price increases, but it certainly seems like the trend in the base commodities would support that.

So I'm curious if you're seeing anything in that regard from your competitors in terms of pricing increases.

Yes, certainly on our C&I side, the commercial and industrial side, Steve, some of the major competitors have announced price increases for next year, for 2011.

So we're kind of evaluating right now how we want to position ourselves vis a vis the market.

We want to understand how the market feels about those price increases.

I think on the commercial and industrial side, traditionally that's been an easier market to get price in and, again, mainly because the big buys lead them -- lead that, so we generally follow.

On the residential side, we continue to evaluate how much price we want to move there.

As we've said, one of the core tenets of improving our penetration of residential standbys is affordability.

So ostensibly improving -- or increasing price there, we want to make sure that we're doing that in a way that is thoughtful.

And what you'll typically see us do is try to use new product innovations or new SKUs to help us achieve some of that price increase, particularly with retailers.

But that's all currently under evaluation for 2011 at this point.

Okay.

And then, maybe sticking with C&I, it sounds like you were seeing some early signs of some positive trends in telecom.

I wanted to see if you could talk a little bit more about that.

Yes.

From an end market standpoint, the telecommunications market for us, we've traditionally been a leader in that market.

They've had a tough couple of, call it, maybe six, seven quarters here of they put the brakes on CapEx spending as it relates to the build-out of those -- not only build-out of some of their sites but certainly with backup power.

And so they've been very conservative with that.

We're starting to see that heal, not recover.

So we're optimistic about what that will mean for us in the future as we continue to maintain -- in our minds we continue to maintain a very strong position as a supplier to that industry.

From other end markets that we see healing out there and doing better, continue to be in the healthcare space, municipal spending, so things like fire stations, wastewater treatment plants, police and fire rescue type of buildings, as well as educational -- schools, administration buildings, things like that.

That spending remains -- it seems to be coming back quicker maybe.

Or maybe it has not dropped off quite as much as some of the other markets.

The retail markets, nonres construction for retail and some of those other markets are going to take a while longer.

Those are much more tied, in the end game, on a macro basis to housing.

And so I think you'll see some of those markets take longer to come back.

Okay.

And then congratulations on the Honeywell announcement.

I wanted to see if you could maybe drill down a little bit more and talk about sort of their relative channel strengths versus yours and what kind of incremental opportunity that opens up, understanding it's over the kind of intermediate to long term.

Yes.

We're really excited about this.

I mean, it gives us an opportunity -- as you guys know, we private label under a couple of different labels.

And we've gone after some electrical components manufacturers that we do private labels for.

We've done traditionally private label arrangements solely for the purpose to give us additional access to markets where we feel that we don't have penetration to the level that our brand would be able to give us penetration.

And so Honeywell really represents a continued step in that direction.

Yes, the Honeywell brand our research shows that it's very well respected, very well known in particular in two markets which we feel continue to be underpenetrated today.

One which is the HVAC space and the other is in the security, home security market.

And so what we're really after there is that we'd really like to see the addition of some more distribution partners in HVAC and security.

Today our residential dealers that we're adding, over 80% of those dealers are electrical contractors.

And so for us, HVAC distribution really still represents a fairly small slice of the pie when it comes to distribution.

I think, as we've looked at it in the past, what we think -- because we've gone after that market in the past with another brand.

And to be frank, that other brand, that was a true private label arrangement where we were selling to a corporate who was selling to a distributor who was then selling ultimately to the dealer.

This is a different program.

We're actually licensing the Honeywell name.

We'll control the distribution in this case.

And we feel a lot more optimistic about being successful in that arrangement than -- in terms of invoking control and our ability to be successful there.

So we're excited with that.

And then on the portable generator side, there was a prior manufacturer that had this label already, so they have already built a fairly decent distribution pipeline there.

We don't expect to walk in and just take that from them entirely, but we do believe that the Honeywell brand, certain retailers ascribe value to it in terms of brand recognition at the consumer level.

And so we're optimistic that it gives us an opportunity, both in portables and in home standbys, to further penetrate some markets where today we feel we're underpenetrated.

Okay.

And then last question for York.

I know you're not going to get real specific and I think you made some comments that give us some additional color here in terms of increasing CapEx, but can you talk generally about the free cash flow outlook in the fourth quarter versus the third quarter?

Just what are some of the moving parts that you did not mention?

Yes.

I think from a working capital standpoint I think typically what we had done, some dating of programs with our vendors and so some of that spend or trade A/P will get paid for in Q4.

And we'll sell off our portable inventory more so throughout the quarter and into the first half of 2011.

So you'd probably, given the working capital there, you'd probably see a smaller trend downward in that free cash flow number versus Q3 2010.

Okay.

Thanks very much.

(Operator instructions.) Mike Halloran; Robert W.

Baird.

Sticking on the inventory stocking patterns, could you just maybe talk a little bit about how you think that plays out going forward?

Do you think that your client base is going to maintain that level of lighter inventories and just stock in season?

And, if so, kind of how does that impact with what the normal sequential would look like through a normal year?

Yes.

Mike, it's a great question.

And obviously the seasonality in this business, as you guys have seen, can be a bit tricky.

A lot of it depends on the kind of season that you had the year before, really, in terms of what happens the following year.

If you have a strong season, as we did in, say, the second half of 2008, the first half of 2009 tends to -- and as you saw -- tended to have a stronger preseason buying component to it.

The second half of '09 didn't have a real strong season at all and, as such, that buying shifted to more in-season buying here in 2010.

And that's impacting our third-quarter results, as we mentioned.

As far as what we see going into 2011, I think you can probably take a cue from 2010 that way in that we didn't really have a strong season in the second half of 2011 (sic).

So what we'll do is we'll continue to satisfy the demand, end demand, with the current products that we have in inventory, as will our customers, the products that they have in inventory.

So I think it's going to feel a lot like 2010 did, maybe, in the first half.

Certainly there's things that can impact that.

Beyond that, I would tell you that I think the economy in the first half of 2010 maybe where it will be versus the first half of 2011 -- might be in a better place first half of 2011 over '10, but we'll see.

Housing certainly is slow to recover, if recover at all.

And that impacts demand for those products in particular on the residential side.

So I think that's probably the best way to think about it.

That's fair.

That's all I had, guys.

Thanks.

Jeff Hammond.

Just a follow-on on maybe early look into 2011.

Just absent, I guess, storm activity and absent kind of the macro, what do you -- where do you see growth kind of regardless of -- in terms of kind of traction from new products?

Maybe you can talk about commercial momentum, et cetera.

Where do we see growth kind of absent a big turn from a macro perspective?

I think, Jeff -- I mean, it's a great question.

And obviously we're looking very hard at our 2011 plan right now.

I would tell you that as we look at that plan, without getting into the specifics of it, but I think you can look towards our results here in the third quarter to kind of give you some amount of a key into that in terms of the continued recovery in C&I.

Barring any retrenchment there, we don't -- we see those end markets continuing to just further heal into 2011.

We are going to need on the residential side -- the consumer -- we're going to need to see the consumer improve.

I mean, unemployment levels are still far too high.

We sell -- you know, this has been a frustrating couple of years.

I mean, we sell a product that's a big ticket consumer discretionary, right?

You put that on top -- this has probably been one of the worst economic environments for that type of a product maybe ever.

And coupled with the fact that that product, aside from being a big ticket discretionary item, is tied to residential investment, which has also been probably maybe the worst ever.

With the high unemployment rates and everything else going on there, we're actually really very pleased with our results on residential.

We think that some of the things we've been doing there to broaden the awareness of the product, right, our direct marketing efforts there, some of the things that I mentioned in the prepared remarks, continuing to expand distribution, which is a very -- is a large focal point for us.

And then some of the things like the introduction of the CorePower System, that gives us hope that we will continue to offset some of those other major economic headwinds going forward into 2011.

But I'll tell you, it's been tough.

And on top of all those economic headwinds, we really haven't gotten any major outage events, which, like it or not, it's a component of our business.

We like the fact that we're growing the baseline business, is the way we feel about it.

And that's something that we feel good about.

And the growth drivers in the business are -- I kind of talked about them in the prepared remarks.

But we feel very good that we're executing our initiatives now.

We feel like we've got a good team in place here to continue to do that.

We feel like we've got our strategic plan in place that, for the next three years here, that is going to deliver on some growth in spite of those headwinds.

There are challenges, but we've certainly been, I think, successful in neutralizing them at the very least here in the last several quarters.

Absolutely.

Is there a way to rough numbers quantify what you think this in-season stocking maybe helped third quarter versus maybe hurt second quarter?

That's a tough one to --

I think the way we're looking at it is if you combined the two quarters together, we're up --

Q2 and 3.

Q2 and Q3.

We're up modestly.

I don't think we can necessarily -- we don't necessarily ask if they're -- when we take an order if it's a preseason order or in-season order.

So it's a little challenging to quantify that.

But if you take the two quarters combined you're still up modestly.

And so therefore that -- given the combined effect, we still feel good, given some of the headwinds we're seeing.

Yes.

And then final q- -- just on this Honeywell relationship, does that replace the prior private label you have or is that complementary?

And maybe just where does the other private label stand?

Yes.

The other private label in the HVAC space for some- -- for is something -- that's a program we're winding down currently.

It's been winding down, quite frankly, as the private label partner there has been focused on kind of retrenching in their core markets with their core products.

They've not focused on this category as much over the last couple of years as a result of the housing downturn in particular.

So we feel that this program will be a replacement for that program, but we also believe that it'll be incremental because it's going to help us not only offset kind of some of that lack of focus of the prior partner, but also going to help us invoke more control, as I mentioned before, in terms of kind of owning the distribution more directly for that brand.

Okay, great.

Thanks, guys.

This concludes the question-and-answer portion of today's call.

I'd like to turn the call back over to management for closing remarks.

Great.

Thanks, Operator.

This concludes our prepared remarks.

Thanks again for joining us today and we'll talk to you on the fourth-quarter call.

Thank you.

Ladies and gentlemen, thank you so much for your participation on today's conference.

This concludes the presentation and you may now disconnect.

Have a wonderful day.