Generac Holdings Inc (GNRC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to fourth-quarter and full fiscal 2010 Generac Holdings Inc. conference call. My name is Lamita and I'll be your coordinator for today.

At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn this call over to your host for today's call, Mr. York Ragen, CFO of Generac. Please proceed, sir.

Hello, everyone. Good morning and welcome to our fourth-quarter and full fiscal year 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 will 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 risk factors.

In addition, we will make reference to non-GAAP 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 our SEC filings.

Before we begin, I would like to point out that we have posted supplemental materials to our IR website to help people follow along with our prepared comments.

I will now turn the call over to Aaron Jagdfeld. Aaron?

Thanks, York. Good morning, everyone. We are very pleased with our fourth-quarter 2010 results as we continue to generate strong cash flow while delivering year-over-year net sales and net income growth.

Overall, our total sales grew 4% in the fourth quarter resulting in 1% growth for the full fiscal year 2010. The resilience of our residential product sales during the fourth quarter was evident as sales outpaced the cautious expectations we discussed with you on our last call. Our Commercial and Industrial Product sales further recovered in the fourth quarter of 2010, also outpacing expectations due to strong shipments to our national -- industrial national account customers.

As a result of our strong free cash flow generation of $104.9 million during fiscal 2010, we also made a significant debt prepayment of $74.2 million in the fourth quarter. At December 31, 2010, we had $579 million in net debt on our balance sheet as compared with $930 million in net debt as of December 31, 2009.

Our successful IPO in February 2010, together with our strong cash flow generation, have given us significant financial flexibility to execute on our strategic growth plans. Our improved leverage has enabled us to further invest in our future through new product introductions, direct marketing and product awareness efforts, and added organizational infrastructure.

Further, our strong cash flows will allow us to create shareholder value through additional debt reduction and affording us the ability to take advantage of other external opportunities as they may arise.

I will now turn your attention to slides four through seven in the supplemental materials posted to our website as I take a few moments and discuss Generac's strategic plans in more detail. With regards to our long-term growth plans, which we refer to as our powering ahead strategic plan, we believe that positions us very well for growth in the future.

As you can see on slide four of the deck, the four key growth objectives that comprise powering ahead include growing the residential standby generator market, gaining industrial market share, expanding our product offering to diversify our end markets, and expanding into new geographies.

Our first strategic objective is detailed on slide five and is to grow the residential standby generator market by focusing on increasing the penetration of US households. As you are aware the current macroeconomic environment for these products is challenging with recent market data showing that US residential investment as a percentage of GDP remains near all-time historical lows.

As our business is still very much dependent on North America, the pullback in US residential investment has presented a significant headwind and is not expected to recover in the near term. Despite this environment, we were able to grow presidential product sales in 2010, marking the third consecutive year of growth in this category.

As we enter 2011, US residential investment continues to lag the overall global economic rebound. And as a result, we will continue to temper or short-term growth expectations for these products.

Slower growth notwithstanding, we believe we have a number of initiatives in place designed to drive increased demand for our residential standby generator products. The initiatives center around driving increased awareness, availability and affordability for these products.

Residential standby generators are still a relatively new category of products and continue to suffer from low level of awareness with homeowners. As we have discussed previously, penetration rates for this category are very low with approximately only 2% of US households owning an automatic home standby generator.

Our efforts to increase awareness of these products are centered on increasing our direct marketing efforts, outage response to advertising and preseason marketing campaigns. Our direct marketing efforts remain the most promising method of increasing awareness in the category as we continue to collect information regarding current owners of these products, including where these generators are physically located as well as detailed demographic data.

We believe that we can use this information to more accurately pinpoint perspective buyers and market to them on a more direct basis. Broader awareness campaigns occur in the form of advertising in local markets four of period of time after an outage has occurred, or in the case of markets where outages are known to occur more frequently on a seasonal basis, we time our advertising efforts ahead of that season.

We have also recently added a new senior marketing executive to our management team to lead our efforts to improve the awareness of residential standby generators. In addition to increased awareness, increasing the availability of these products also plays an important role in growing the category.

We are continually improving on our residential dealer network by adding new distribution in underpenetrated markets and by developing existing dealers through constant sales and service training, thereby improving the experience for our end customers.

In 2010, we ended the year with over 3,700 dealers in our network, a net increase of nearly 400 dealers. In addition to our residential dealer network, we believe that significant opportunities exist to reach potential customers through several other channels of distribution, such as home builders, HVAC, home security and home automation.

In 2011, we intend to penetrate these channels with a separate product line marketed under our previously announced licensing arrangement with Honeywell. We have also successfully added shelf space at several new retailers, thereby further increasing the points of light where people can purchase our residential standby generators.

Lastly, increasing the affordability of our residential standby products continues to play a significant role in expanding a category. As the market leader with the broadest product offering and the largest distribution network, we are focused on continuing to improve the affordability's products as an important driver of growth.

As we have previously discussed in the fourth quarter of 2010, we began production of our new CorePower system, a lower cost economy focused fully automatic home standby generator that has helped Generac reduce the market's opening price point to $1,799. We believe that further closing the retail price gap between a portable generator and an automatic home standby generator is an important factor in building greater appeal for these products and in breaking down the misconception that automatic standby generators are unaffordable.

In addition to reducing the entry-level price point for the generator itself, we believe that opportunity exists to further reduce the installation cost for these systems. We are focusing our R&D efforts on innovative ways to cost-effectively connect a residential standby generator to the home, as we look to drive the total cost of ownership for the systems lowers.

The second strategic objective in our powering ahead plan as detailed on slide six of the deck is focused on gaining industrial market share. In the fourth quarter of 2010, we continued to see momentum building and the demand for our commercial and industrial generators with sales increasing 16.9% over the fourth quarter of 2009. In addition to the recovery in end markets for these products, we have a number of initiatives we believe will help to increase our market share. We are focused on improving our distribution for these products through selective upgrades and additions in North American markets, where we are underrepresented, and through the expansion of our private label programs, which are primarily focused on the penetration opportunity for commercial gen sets.

Additionally, at the end of the fourth quarter, we completed the purchase of our industrial distributor in the Atlanta, Georgia market. While not part of a broader strategy with regards to our industrial products, we believe this opportunistic acquisition will allow us to better educate ourselves on the distribution for these products and extend what we've learned for the benefit of other industrial distributors in our network.

In addition to our distribution-related initiatives, as a matter of improving our share of the commercial and industrial market, in 2011 we will be focused on a higher level of engagement -- engagement with the engineering firms responsible for specifying backup generators. These engineering firms, both on a local and national level, play an important role in the design phase of most commercial projects as they are responsible for developing the specification for backup power when necessary.

By improving on our relationship with these firms, both directly and through our local distribution, we believe that we can further demonstrate the value and innovation that Generac can bring to their projects.

Product development will also continue to be a core part of our commercial and industrial growth strategy. In 2010, we introduced an entirely new platform of diesel generators powered by Fiatpowertrain engines, for which we have a North American exclusive for use in power generation products. For 2011, we have several additional product development projects underway, which we believe will contribute meaningfully to our growth of these products in the future and which will increase the addressable market for our distribution.

We believe these initiatives, coupled with the broader end market recovery, will drive the continued growth for our commercial and industrial products going forward.

Our third strategic objective described on slide seven is to expand our product offering to diversify our end markets. Today, our product portfolio is focused almost exclusively on emergency backup generators. We believe that we can effectively leverage our brand, supply chain, manufacturing capabilities and our distribution through the introduction of new adjacent products and services. In 2010, we made significant investments in engineering and product development to expand our product portfolio and position the Company for future growth.

Our first significant initiative to diversify our end markets was announced last quarter as we indicated that we will be reentering the market for residential and contractor great pressure washers late in the first quarter of 2011. Having been a market leader in this product category in the 1990s before the sale of our portable products business in 1998, we are very familiar with this product line.

While we don't expect pressure washers to have a significant impact on our sales mix in the near term, we see an attractive growth opportunity in this market as we build out our distribution and product offering. As we monitor the success of our pressure washer product launch, we are actively evaluating other products and services which we believe could further diversify our end markets.

Our fourth and final strategic objective is to expand into new geographies. Currently, only 2% of our sales are from outside of North America. However, we believe there are significant opportunities in other geographies where we can leverage our existing products, both residential and commercial.

We have increased our international focus in the fourth quarter of 2010 by building a sales team to target the Latin American region. We have added a Vice President of Latin American sales to lead this effort from our newly opened sales office in Miami, Florida. In 2011 we will aggressively target Latin America, and we will further evaluate additional expansion opportunities in other regions of the world and resource our sales and product development efforts accordingly.

We believe that with the successful execution of our powering ahead strategy, we can grow the residential standby market, gain additional industrial market share, diversify our end markets and expand into new geographies, thereby positioning Generac for long-term future growth.

With that, I will now turn the call back over to York to discuss fourth-quarter and full-year 2010 results in more detail. York?

Thanks, Aaron. Turning your attention to slide eight of the supplemental materials posted to our website, I will now touch on our financial results.

Looking at the results for the fourth quarter 2010 closer, as Aaron mentioned, net sales totaled $161 million of 4.6% increase compared to $154 million in the fourth quarter of 2009. For the full-year 2010, net sales increased approximately 1% year over year to $592.9 million as compared to $588.2 million in 2009.

Fourth-quarter residential product sales decreased 1.7% to $99.9 million compared to sales of $101.7 million in the fourth quarter of 2009. For the fiscal year 2010, residential product sales of $372.8 million were approximately 1% higher than $370.7 million in 2009. The quarterly decrease in residential product sales was largely the result of certain retail customers approaching their inventory levels for lower kilowatt generators more conservatively compared to the fourth quarter of 2009.

Offsetting this decline, we saw an increase in seasonal stocking by certain other distribution partners in anticipation of an active winter storm season. This incremental seasonal stocking helped to exceed expectations for residential product sales in Q4 2010.

For the full year, we are pleased that our residential product sales increased, albeit slightly, in light of the current US residential investment environment and with limited major outage events over the last two years. Our initiatives to grow the residential standby market that Aaron previously discussed has helped to offset the headwinds that we faced during 2010.

Fourth-quarter commercial and industrial product net sales increased 16.9% to $52.4 million compared to $44.8 million in the fourth quarter of 2009. For the fiscal year 2010, net sales were down 2% to $183.6 million; but despite strong momentum in the last six months of the year, as we witnessed considerable improvement in demand from certain end market applications, telecom, healthcare, and data centers, in particular, our increased distribution of these products through our power solutions dealer network in North America, our private label arrangement and our new international partners has also driven growth in the second half of 2010.

Looking at our gross margins, gross margins for the fourth quarter decreased to 39.6% of net sales compared to 41.3% in the same period last year. Similar to last quarter, but to a lesser extent, rising commodity costs contributed as a 170 basis point reduction in gross margin versus last year.

As mentioned on our last call, pricing for Generac's key commodity inputs -- steel, copper, and aluminum -- were at recessionary low points in the latter half of 2009. The rebound of commodities from these levels has continued to negatively impact our gross margin in the fourth quarter of 2010.

As we enter 2011, we intend to use a combination of selective price increases and cost reduction programs to mostly offset rising input costs. Below gross margin, our operating expenses for the fourth quarter of 2010 were $37.6 million, a 9.6% increase over the fourth quarter of 2009. For the full fiscal year of 2010, operating expenses increased 7.1% to $147.1 million compared to $137.3 million in 2009.

Non-cash stock-based compensation expenses totaled $1.7 million in the fourth quarter of 2010 and $6.4 million for the full year 2010 and accounted for much of the increase in operating expenses. This stock-based compensation expense was recorded throughout 2010 to account for the time-based vesting of equity awards granted in conjunction with our IPO in February 2010.

The remaining increase in operating expenses for both the fourth quarter and the full year were driven by incremental engineering and product development investments and increased administrative costs associated with operating as a public company.

Taking into account our additional year-over-year sales growth, offset by commodity increases and operating expense investments, adjusted EBITDA for the fourth quarter 2010 decreased 3% to $42.7 million compared to $44.1 million in the same period last year. For the full-year 2010, adjusted EBITDA decreased 1.8% to $156.2 million compared to $159.1 million in 2009. As a percentage of net sales, our EBITDA margins remained very attractive at 26.4% for the full-year 2010.

Net income for the fourth quarter increased 55.8% to $18.6 million compared to $11.9 million for the fourth quarter of 2009. For the full year, 2010 net income increased $56.9 million -- to 56.9 million compared to $43.1 million in 2009, a 32.2% increase.

Adjusted net income as defined in our earnings release increased 27.2% in the fourth quarter of 2010 to $33 million and was up 38.6% for the full-year 2010 to $115.9 million. The increase and adjusted net income was attributable to the lower interest expense versus prior year offset by non-cash stock compensation expenses and reduced adjusted EBITDA compared to 2009.

Diluted net income per share was $0.28 per share during the fourth-quarter 2010. Adjusted diluted net income per share, which includes stock compensation expense, was $0.49 per share for the quarter. 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's post-IPO. As a result, prior EPS figures are not meaningful for comparison purposes.

Looking at our cash flows for the fourth quarter of 2010, cash flow from operations was $31.4 million, a 6.4% increase from $29.5 million in the same period last year. For the full-year 2010, cash flow from operations totaled $114.5 million, which was 53.4% increase from $74.6 million for 2009.

Reduced cash interest payments were the predominant driver of the year-over-year improvement in cash flow from operations. A reduction in working capital usage also contributed to the full-year 2010 cash flow improvement as well.

With regards to taxes, as previously discussed because of our significant tax amortization and net operating loss carryforwards, we currently do not pay federal income taxes. These tax attributes have significant value to the Company and help contribute to our strong free cash flow generation.

Capital expenditures for the fourth-quarter 2010 totaled $5.3 million compared to $1.6 million for the same period last year. We'd indicated in our call -- last call -- that the CapEx run rate would increase in the fourth quarter of 2010 and into 2011 as we execute on certain product development and cost reduction initiatives. Capital expenditures for the full-year 2010 were $9.6 million versus $4.5 million in 2009.

From a capital structure standpoint, as you recall, in the first quarter of 2010 we used $221.6 million of proceeds from our IPO, together with $138.5 million of cash on hand to prepay $360.1 million of principal on our credit facilities. In addition in the fourth quarter of 2010, we used cash on hand to prepay an additional $74.2 million of principal on our credit facilities in an effort to continue to reduce our leverage.

The net result of these pre-payments is that we now have $657.2 million of outstanding debt on our first lien credit facility. Our second lien credit facility has been paid off and terminated, and we have $78.6 million of cash on hand, resulting in a total net debt balance of $578.6 million as of December 31, 2010. This compares to $930.2 million of net debt as of December 31, 2009.

Our ratio of consolidated net debt versus our last 12 months adjusted EBITDA is 3.7 times as of December 31, 2010, a significant decrease from the 5.8 times ratio as of December 31, 2009. As Aaron previously discussed, this improved leverage has allowed us to make significant investments in the business that will help drive growth for the future.

As a reminder, we currently have no borrowings outstanding under our revolver which has approximately $145.7 million of availability, net of outstanding letters of credit.

I would now like to walk through some guidance items to help model out our cash flows and earnings per share for fiscal 2011. A list of these items is included on slide nine of the Supplemental Materials posted to our website.

In 2011, we expect interest expense to be in the range of $26 million to $29 million, which includes $24 million to $27 million of cash interest and approximately $2 million for deferred financing cost amortization. The low end of this interest expense estimate assumes an average interest rate of 3.7% on our outstanding debt balance of $657 million for the rest of the year, which takes into account our interest rate swap contracts that we currently have in place and assumes 1% LIBOR from Q2 to Q4 2011 on our floating outstanding debt balance.

The high end of the range would assume higher LIBOR rates in 2011 or the layering of additional interest rate swap contracts during 2011.

Our cash taxes for 2011 are expected to be approximately $500,000 to $1 million, given our favorable tax attributes. Depreciation expense in 2011 is forecast to be approximately $7.5 million to $8 million. In 2011, our amortization expense is expected to decrease to approximately $48 million to $49 million as certain of our [definite live] intangible assets become fully amortized.

Our stock compensation expense in 2011 is forecast to increase to approximately $7 million to $7.5 million, given a full year of being public and assuming a certain amount of new equity war -- grants.

Finally in 2011, our capital expenditure spending is budgeted to increase to approximately $11 million to $13 million as we continue to invest in higher return product development cost reduction and expansion projects.

With that, I'd like to turn the call back over to Aaron to provide some additional comments on our 2011 outlook.

Thanks, York. Looking ahead to 2011, we are focused on executing on our long-term powering ahead growth strategy. For the 2011 fiscal year we anticipate overall moderate sales growth for our business.

While we do not expect a near-term recovery in US residential investments and we are not forecasting an impact from any major outage events, we still expect to see topline growth from our residential products in 2011. This growth will be the result of several new product introductions and from increased domestic and international distributions.

In addition to our base initiatives to increase awareness availability and affordability of automatic home standby generators, our specific initiatives with Honeywell, pressure washers and Latin American expansion will help support our outlook for residential product sales growth during 2011.

From a seasonality perspective, the second half of the year has historically been stronger than the first half of the year, a trend that we expect to continue in 2011. As a reminder, our prior year 2010 first-quarter results included strong portal generator sales as a result of ice storms that caused several significant power outages impacting hundreds of thousands of people.

Although we have had a hard winter so far this year, particularly with respect to snowfall totals, the first quarter of 2011 has not yet had the same level of outage events as the prior year. This could result in a difficult comparison to prior year results for our portable generator sales to the extent that major outages don't occur during the balance of the quarter.

As a result, we expect growth rates for residential product sales will increase throughout the year, due in part to the potential for difficult comparisons for portable generators in the first quarter, coupled with our expectations for continued weakness in the residential recovery during the year and also due to the ramp of our specific growth initiatives throughout 2011.

For our commercial and industrial products, we anticipate improved demand trends will continue as certain end markets such as telecom, data centers and healthcare continue to lead the recovery for these products. We believe we are well-positioned to capitalize on the improved demand in these segments, particularly with our light commercial and national account customers as they increase their level of purchasing in 2011.

Additionally, expansion of our domestic distribution and establishing a presence in other markets outside North America will also contribute to topline growth in our commercial and industrial products in 2011, thereby increasing our overall share of the C&I market.

With regard to margins, we expect higher input costs in 2011 compared to 2010 as a result of rising commodity prices, a weakening US dollar and inflationary increases in other expense categories. We have already taken steps to offset much of these higher costs we are seeing through selective price increases and through the use of cost reduction projects.

We will continue to monitor the cost of our raw materials and other inputs and we intend to react accordingly with additional actions as necessary. Through the combination of pricing and cost reductions, we believe that we can maintain our attractive gross margins in 2011.

Regarding operating expenses for 2011, we will continue to make prudent investments in our operating infrastructure to support our long-term strategic growth plans. These include further increases in our engineering and product development resources and increases in our sales and marketing spending to drive our powering ahead growth strategies.

We will be able to leverage this incremental spend in the out years of our strategic plan as growth rates accelerate. Given our best in class margins, capital-efficient business model, favorable tax attributes views and attractive capital structure, we believe Generac will continue to generate significant cash flow in 2011.

We are confident in our cash flow generation, given our historical financial performance. This confidence is evidenced by our debt prepayments that we have made in 2010. I refer you to slide 10 of the supplemental materials for a historical view of our cash flows over the last four years.

Our improved capital structure provides us ample flexibility to execute our strategic plan, including new product development, international distribution and marketing investments. As you have seen, Generac's internal reinvestment needs are typically well below our cash generation. So we expect to have the capacity to evaluate tuck-in acquisitions and additional debt prepayments as well.

This concludes our prepared remarks. Thank again for joining us today. We look forward to updating you on our strategic initiatives as we progress through 2011.

At this time, we would like to open up the call to questions. Operator?

(Operator Instructions). Mike Halloran from Robert W. Baird.

So, first on the distribution network, any reason that the pace of expansion can't continue there? And you know when you look at a broader -- I'm sorry, pace of expansion continued from where what you have seen in 2010 and 2011, but then on a broader question, when you think about important of expansion points and where you guys are spending more time, has expansion of the distribution network moved down in the order of importance for your organization and all as you start looking at a lot of these other avenues? Or is it still pretty front and center for you?

Yes. That's a great question. We believe the distribution and -- the expansion of the distribution of those products is an important factor in continuing growth there. As far as the pace at which we believe we can add dealerships to that network, we are confident that we can continue on this pace, the 2010 pace, we believe we can continue that in 2011.

As far as kind of prioritization of added distribution in the grand scheme of growing the residential market, I would put it on an equal footing, if not at the top of the list -- for me, anyway -- of things that drive growth in this category. And there are a couple of reasons. And I'll just touch on those.

The first one is that, like it or not, there's an incredible amount of churn in small contractors, small contracting businesses, electrical contractors in particular which make up 80% of that network typically have a business lifespan of about seven years. So unfortunately, you are going to see a certain percentage of dealerships just go away. They are absorbed into other dealerships or they go out of business on a year in and year out basis. So it's really important to stay on top of their acquisition as we call a here, which is the adding of new distribution, stay on top of that effort just really to replenish dealerships that move out of the network.

And then the other significant statistic there is as we found over the years is that you just -- as much as you would like to be able to prequalify dealers when you put them into your network, finding that true entrepreneurial spirit, the one dealer that really understands the category and understands the opportunity that is residential standby is difficult to find. Many dealers get into this opportunistically either because their market is -- there is a demand surge in their market or some other level of interest.

We are trying to show dealers that they can build a sustainable business model around residential standby generators. But in the end, it is still a small percentage of dealers that end up going on to really get the category from an entrepreneurial standpoint.

And so, that's an important factor for us is, we've got to -- in other words, we have got to -- you have got to look for a lot of dealers. You've got to sign up a lot of dealers to find the one or two or three or four or however many that is that are -- they really kind of get it and get the opportunity.

Makes a lot of sense. And then on the commercial industrial side.

You've talked about pretty favorable trends from the data center side from the telecom side in the fourth quarter. Maybe you could talk a little bit about what your customers are telling you for 2011, some of their expectations for continued strength and I will leave it at that.

Yes. And so we did see those trends pick up, as we mentioned, in the back half of 2010. Our expectation is for 2011 for those to continue. I can tell you that we will just talk telecommunications companies for a second. Great customer base for us. We are the primary supplier to all the major wireless carriers for backup power.

Certainly those, many of those major carriers put the brakes on on capital spending with regards to our category of products here over the last couple of years, which resulted in a pullback in our C&I business. That was kind of the driver going down and that's kind of been the driver coming out. As far as visibility going into 2011 I can tell you that they've indicated that there will be more CapEx spending for them as businesses in 2011 than there was in 2010.

What they can't tell us is, will more of those CapEx dollars be flowing to backup generators?

You know, based on everything we see in terms of indication from our discussions with the purchasing groups of those companies as well as the operations groups of those companies, all indications are that indeed that is going to continue here. What we saw in the fourth quarter is going to continue into 2011, so we're pretty excited about that.

We think on the data center side it's -- the whole cloud computing phenomenon has been driving obviously data center buildouts. The -- that's not something that we see as a trend slowing down anytime soon. Technology continues to be the one bright spot in the consumer sector here; and I think as a result, even for businesses that are using cloud computing and using as a result data centers to host the clouds, we like what we see in data centers.

Healthcare, that one I think is going -- it is going to take some time to see where that plays out. We like the strength that healthcare has been on. You know, that didn't slow down as much during the downturn and whether it can sustain in 2011 or 2012 and in the out years of our plans is, I think that's -- we have got to take a wait-and-see attitude on that.

Great. Then last one on the raw materials side. When did you guys push through those selective price increases and then also maybe talk a little bit about what kind of lag you normally see from when you push the price increase through and when it actually starts sticking?

With regards to pricing, those price increases, selective price increases went through here in Q1. From a realization standpoint on the C&I side, obviously, that will go through a little bit longer leadtime. So you'll start seeing that in Q2 with regards to the resi side. More so on the dealers and wholesale and whatnot, that will be effective immediately and then maybe a little bit longer on the retail side.

So, we are pleased -- we have implemented our increases. And we are pleased with that -- the reaction to that.

Great. I appreciate the time.

Brian Drab from William Blair.

First question. I don't know if you can give us any more color on your comment around moderate sales growth expected for 2011, but when you guys say moderate or -- should we be thinking low single digit or mid-single digit? I guess not upper single digit?

Yes and it's a great question. You know we've been pretty specific -- pretty specific in terms of not giving quantitative sales guidance and we're going to stick with that. We are trying to give you a steer and I know we are not putting any color around percentages because that would be giving quantitative sales guidance.

But I can tell you that I think if you kind of break it down a little bit further, just to kind of think about this, with our -- in our prepared remarks we talked about really not seeing, we are not expecting any major recovery to occur yet in the residential investment -- in residential investment as a category. And we are not planning any major outages in our numbers either for residential.

So, and then given our remarks on the C&I business, I think that the takeaway there is that we expect at least for 2011 that C&I was going to outpace residential in terms of growth. But again, the term we're using is moderate to describe the topline.

Okay and then just looking at the power washer opportunity. You said that you are expecting that to really ramp up later in 2011, is that right?

Yes. We actually are going to launch those products -- we are manufacturing those here in the States actually at our Whitewater, Wisconsin facility and we will go online with production of those products here in about another month. And it's -- whenever you introduce a new product, in particular, a product in the consumer market, it takes a while to get around. Retailers have a specific calendar and cadence with respect to product line reviews.

And so you need to get into those line reviews on their time. You know, there may be some opportunities for some special promotions to test the market test of these products, but we're really not expecting it to factor into our results until the back half of this year and, really, quite frankly probably more into 2012 than 2011, given that it is a seasonal category. And so generally the spring and summer season are when you're going to see sales of those types of products and without major distribution established at this point for those products, it will be something that we would look to the 2012 season to probably be where we start seeing some meaningful results there.

Great. What I was trying to get at is, is there any upside to your growth expectations for 2011? It sounds like an exciting new opportunity if you even just got $6 million in sales, it would add another percentage point to your growth rate for the year. But it sounds like we should maybe expect something late in 2011 but it's more 2012 opportunity.

Yes. There's a potential [for outside add] surprises in that but I will tell you at this point we are being very conservative on -- in what we are expecting for 2011.

Great. And then just one more quick question. You mentioned that stock comp expense for 2011 is expected to be in the $7 million to $7.5 million range. What was it in 2010?

Again we IPO'd to on February 10 of 2010 so we are missing a month and a half of stock comp expense in 2010. It was $6.3 million. Yes -- (multiple speakers)

So the $7 million to $7.5 million represents a full year and then you know, obviously, there will be some additional grants that can occur as we put together our long-term incentive, packages and plans here.

Yes, $6.363 million. Yes.

Great. Thank you.

And yes so the full-year impact is the biggest increase and then it's a small loan.

Jerry Revich from Goldman Sachs.

Good morning. Can you update us on the HVAC dealer penetration? Was that a big part of the dealers you picked up in the fourth quarter and just rough order of magnitude in your business plan for 2011? Is that the biggest part of the new dealer opportunity you alluded to in the prepared remarks, Aaron? Thank you.

It's actually --. It actually still represents a fairly small -- the HVAC contract represent a very small percentage of our -- of those 3,700 dealers. It is only about 8% to 10% depending on -- you know, some guys cross over into other categories, but that's actually --. So for the fourth quarter it didn't have a meaningful -- HVAC dealer did not have a meaningful impact on the dealer additions we talked to.

We are really excited, though, about that in 2011. The fact of the matter is that we are going to use our -- this Honeywell licensing arrangement, we believe that our testing has shown that the Honeywell brand has not only tremendous recognition in general, but great recognition with homeowners as an HVAC-related product.

Most of the thermostats in households today have the word Honeywell on them. And as a result, most homeowners perceive that the HVAC equipment in their home is manufactured or in some way tied to Honeywell. As a result, we believe that that is going to be a powerful thing in helping us draw new contractors, HVAC contractors into the category.

And I think the beauty of that is that HVAC contractors, when you think about it, HVAC contractors are in your home more often than electrical contractors. So the typical homeowner is probably going to have a furnace or an air-conditioning system tuneup once a year, twice a year, something on that order. And so, the -- you kind of have your HVAC -- you know who your HVAC contractor is.

You don't necessarily have the same familiarity with your local electrical contractor unless you need a repair or something. So we think the potential exists to utilize that kind of in-home presence with the HVAC dealers to help promote the awareness of the category. You know, with leave-behind pieces with -- explaining to consumers that -- and homeowners that there is a product that is affordable and is available to help them back up their furnace or their air-conditioning system, which is obviously a primary driver in northern climates. Without heat, you have frozen pipes and down in the southern climates but without air-conditioning aside from being completely uncomfortable, you have the potential for toxic mold growth to establish itself pretty quickly.

So we like the HVAC space for 2011. But it didn't have a meaningful impact yet on 2010.

Helpful. The timing around the product line used with your retail partners for both the Honeywell branded portable generators and the pressure washers, can you give us an update? And can you talk about how the production ramp of the Honeywell branded portable generators is going? Thanks.

Yes. So the Honeywell, I'll talk to that first. With Honeywell, we are obviously -- the cadence for product line reviews is different for each retailer. With Honeywell we've got a little bit more of an opportunity to step outside of the normal PLR calendar in that there was already a supplier in the market using the Honeywell license for portable generators. That license was obviously -- they lost that license, we picked that up and, as a result, we got some retailers that are out there -- I don't want to use word scrambling, because as we mentioned in our prepared remarks, inventory levels for portable gens are still more than adequate in retail channel because there just has not been a major event -- there wasn't a major event in the fall season. And there hasn't been one yet, really, in the winter season.

But they will need a supplier to step into that role when the time does arrive and call it spring/summer season. So we think there is an opportunity with the Honeywell where we have been under discussion here with many retailers on rolling that.

That product itself will be coming off our product lines here in the next 30 days. So for our home standby generator -- we have got two products that are going to have that. Home standby generators are going to have that Honeywell brand which is a new product on the market; and then the portable generators will follow on probably about 60 days after that in the kind of call it late spring season in terms of delivery.

Now with pressure washers, as I mentioned to a previous caller, that product line -- those product line reviews are a little more set and certainly there are some very well-established competitors in the marketplace. And they do a very good job with their product offering and, again, I think that is why we've probably tempered our enthusiasm for the product category in [year one] here.

But that being said, those product line reviews typically will happen beginning here in the spring and rolling through the summer months and maybe some of them even until late fall, all in preparation for the 2012 selling season. So we anticipate Q2, Q3 to be the times where we would be sitting down with retailers to discuss specific product offerings.

Thanks. And lastly, can you talk about the number of refresh products that you have in your residential lineup this year compared to last year? If I remember right in the last cycle that's where you were able to make up for the raw material inflation. Is it a similar opportunity here?

Yes. In 2010 from new products, we introduced an updated version of our home standby. We had the CorePower product that we talked to you about although that was pretty late in the year, late Q3. And we had some new portables and then our entire new diesel product line on the C&I business.

For 2011, again we have the Honeywell and pressure washers which we just talked about. But there are some additional products that we look to in 2011 on the C&I side, but they are probably a little bit later year. You know, there's some product specifically for some telecommunications customers.

But again that -- those would really be already kind of -- we've already kind of spoken to that in the ramp of telecom from a C&I standpoint. So I don't know if I'm answering your question, but --.

That's helpful. Thank you.

Zach Larkin from Stephens Inc.

Congratulations on the quarter.

Thanks Zach.

I just wondered if we could dig in maybe a little more on the CorePower product and if you could give us some detail on how that has been received by your distributors, buy end customers, and I know there has been a lot of talk on not wanting that to cannibalize existing products, but if -- using it to potentially upsell and how that has been going as well?

Yes. I think that we like where we are at so far with that. It really didn't launch until late Q3 so we've really got the fourth quarter to kind of look at in the first part of 2011 to talk to. I think we'll probably have some firmer viewpoints on that as we had round the corner on another quarter or two to really understand what it's doing.

At this point, all indications are that that is not having a --. It's not having a cannibalistic approach or a cannibalistic effect, I should say, on our lower KW standby products at this point. All -- the initial testing that we did with the product and a lot of the feedback that we have gotten from -- in particular our dealer base is that it's a great product to lead with for them when they talk price points with consumers.

Because -- in my prepared remarks, I mentioned this. There's this long-standing misconception that a residential standby generator is a $10,000 or more purchase. And the reality of it is, it is simply not. This product is a $1,799 retail price point. A solid installation could cost another $1,000 to $1,500. So all in you can get into this product category for under $3,000 now.

And that I think is an exciting selling point for distribution. And so, distribution has been using it to really get people into the category to start talking about residential standby. Because residential standby is a more researched purchase, I don't think we will have, I really -- I don't think right now what we've got through the fourth quarter is enough to really say what the impact is.

Because we like what we've seen so far, I will tell you that. It's been on point with our expectations thus far and we like where it's trending going forward. Whether it is cannibalistic or not, I think we'll have to keep a very close eye on as we move forward here.

Great. That's helpful. And also just wondered if you could provide us a little more color on the international opportunity if there is specific geographies in Latin America that you are going to be hitting more aggressively than others? And what your sense is early on as to the appetite in those marketplaces for the end product?

Yes. We are we are very excited about Latin America. It is interesting. We have actually had distribution in Latin America for a long time. We've really, I think, undersold ourselves with respect to one, our focus on it corporately. I just don't think we've -- we haven't focused on Latin America from a sales effort. We've had some distributors down there who we kind of let go on their own and sell the product.

I think there are markets in Latin America, to answer your question, that we think are potentially more exciting for us. Brazil is a market that we think has got a lot of potential. When you look at the World Cup coming in 2012, and I think the Summer Olympics in 2014, certainly going to be quite a bit of infrastructure buildout in Brazil on a go-forward basis, not to mention just the support that they are going to need for their emerging economy and the pace that they are growing at.

We think there are opportunities there. And in particular, as they build out kind of a more higher wealth middle class, residential standby generators, power, the grid in South America and in Latin America in general, is spotty. There are countries where it is better than other countries, but in general businesses and homeowners are kind of used to power interruptions.

And when you have an emerging economy like you have in Brazil as an example, and you have people who are coming into wealth and household incomes that are rising as quickly as they are in those emerging markets, people look at products like this to safeguard themselves against that type of interruption. Businesses, as well.

And so we are very excited about it. You get into a lot of the South American economies, in particular, some of the -- Venezuela comes to mind with some of the hydro interruptions from earlier last year, I think, put a spotlight on the impact of power outages have on economies and kind of general. So we are very excited about that. We have resourced this pretty heavily here as a company for the first time in our existence and we have also got some products now that -- we've got some product development efforts underway.

Because as you can imagine, those markets have needs for products that are a bit different than we have in North America. North America is a very regulated market so our products are governed by EPA, they are governed by the California Air Resource Board or CARB. They are governed by CPSC, by UL. The list goes on and on in terms of the types of regulatory environment we sell our product under. And in those other countries around the world, the regulatory environment is just not the same.

And so as you -- I guess what I'm indicating is that those tech -- typically the products are put together by low-cost assemblers that don't have to meet the same level of regulatory specifications that we have to meet here in the US. So we are developing products from a [D] content standpoint that would better fit some of those markets.

But again, we like our commercial sets and our residential sets. We really don't have a lot of competition so far in those markets. And we think that there is, even with the existing product that we have, we think there is lots of opportunity.

Thanks very much. That's helpful.

Brett Hoselton from KeyBanc Capital Markets.

Good morning. In regards to your comment around 4Q seasonal stocking in resi, I understand that there was some anticipation of winter storm activity that maybe helped those inventory levels. Can you talk about where on the low-voltage site you are in the destocking process with some of their retail partners? And then does the channel seem pretty full back to normal and how does that carry into early 2011 and the selling season?

That's a great question. We typically will run promotional events ahead of major seasons. So we do them in the spring, late spring as the hurricane season starts to build, awareness builds and then we did them again in the fall season, Q4 typically, ahead of -- for the Northeast and Midwest markets in particular for -- ahead of those seasons.

Again, our goal is to get product into the market so that it is available when those events happen. So with respect to the smaller kW products or as you mentioned -- the low kW products which we refer to as portable generators, those products, I would tell you that we've not had an event to really clear out the channel at this point.

There have been some spotty events. You know we had some, obviously, some major winter storms here but they just haven't been power outage producers. They've been snow producers which has had kind of an interesting effect. It hasn't really taken out power in a lot of areas. It's been pretty sporadic and actually short duration which doesn't move the needle necessarily on -- dramatically on portable gens. There's some opportunity for some fill-in there. But I think those inventories are pretty adequate.

But actually the snow has had an interesting effect on the opposite side with our residential installed systems which, when you have got two feet of snow on the ground, it is pretty difficult to install a product outside the home. So it actually tends to slow down installations. And we see that through some of our data here in the first quarter, although we still think that inventories are -- even though they were built in Q4, we have seen them -- we've seen that trend reverse here in Q1.

So we believe that inventories are in pretty good shape on the residential installed products, those higher kW products, going into Q1, Q2. But the portable gens it is going to take some kind of an event or a strong preseason buy-in by retailers in the Q2 timeframe to really move those products through.

Great, that's helpful. Then, circling back to commercial and industrial, I know in the back half of the year you saw double-digit growth. How should we think about that moving into 2011? Is that type of rate sustainable? And then, two, do you have any type of market share goal for 2011? I know you indicated that you are looking to grow some share. Could you maybe provide a little color?

Sure. I think from a seasonality perspective on the C&I side, obviously the first half of 2010, as you saw and as we reported C&I was still down. And then, as of the second half of 2010, we saw the rebound. So I think obviously just from a seasonality perspective, the first half of 2011 there will be easier comps just because of the softer 2010. And then as you get into the second half of 2011, it gets into a bit tougher comps, albeit we still believe growth overall for the entire year.

And from a market share perspective, as we've said in previous calls, our market share in the C&I business is pretty humble. We are blessed with and have built up a formidable position with market in terms of market share on the residential side with over 70% share of that market at this point. But much more humble share on the C&I business. We are up against some very large companies there in Caterpillar and Cummins and Kohler, as an example, that do a fantastic job with their distribution and their product offerings in covering the market.

We peg our share on the C&I somewhere below 10% today. And as far as a target going forward, we think there's room to double that share a percentage. We like what we've got in terms of product offering on our commercial side of products which is our light commercial products, which are underneath 150 kW and really geared towards small businesses that heretofore haven't been looking at power generation as a way to protect their revenue streams or protect their inventories or their business model.

You know, I think that it -- in particular when you look at our national account customer base, we have a good model there to serve as national accounts nationwide with strong distribution, with a pricing model that we believe works for national account customers and support model that works for them.

And as a result, we have really taken a lead position in certain segments like telecom on that. And we see a lot of growth in -- I would be hard-pressed to find anybody that is going to tell me that the telecom market is not going to grow. Telecom and wireless devices, handheld devices, cell phones, call them what you want to call them, the penetration of those devices only continues to increase and the bandwidth necessary to transport data across those bandwidth -- or against those, across those devices that need also continues to increase.

And as more critical communications go down across those wireless signals, the requirement to have a strong backup solution, a disaster planning and a backup solution for when power goes out, that is ever-increasing as well with these carriers. So, we really like where we are positioned there for the long run.

Great. And I appreciate you taking my questions. That's all I have.

Thanks, Brett.

Steve Tusa from JPMorgan.

Good morning. I'm just wondering what the -- I guess I'm not sure if this was asked before, but the -- just what you are seeing competitors on a -- from a pricing perspective out there, the discipline?

Yes. So from a competitive pricing perspective we have seen our larger competitors in particular on the C&I side of the business announced price increases quite a bit earlier this year. In fact, some of them were late Q4 and into Q1. So that is on the major competitors that announced those things had come out and done that.

What's the magnitude? I know in commercial HVAC it has been somewhere in kind of the 2% to 4% range. I mean what do you think? What is the magnitude here?

Yes. The magnitude is very similar. We were hearing 2% to 5% in a lot of cases from -- on the C&I side and, obviously, that was earlier before commodities have really run up. So I'm not sure if that means that some of those competitors of ours are going to make additional pricing moves at some point this year. But for us, we are moving in similar cadence there with the price increases on our C&I business.

And on our residential business, as far as competitors go, you know, because we are such a major part of that market our belief there is that other competitors -- our competitors in that market are kind of waiting on us to see what we were going to do. And most of those price increases for us in that market were affected here in Q1. So we are going to watch very closely to see what competitors do.

You know, we know that their products have a lot of steel, copper, and aluminum in them as well. So we believe that, in fact, we believe that our price increases are fairly modest, relative to our ability to take costs out through substitution of other materials as well as cost reduction projects.

Great. There've been a lot of good questions so I don't have any further. But I want to thank you guys for giving a little guidance there. The detail is very helpful. Thanks.

Thanks a lot. Take care.

Thanks, Steve.

Willis Taylor from Gagnon Securities.

It's Willis and also Neil Gagnon. I have two questions. On a data center side, are you finding the data centers spending more money for backup and different needs than they had in the past?

The data centers have always -- you know that model, the data center model has always been one of having a backup power solution. And one of complete redundancy. In fact, the only examples of the kind of redundancy required in data centers that we find in other end markets and other segments would be in telecom. Large, large central office switching centers that they have -- instead of one generator, they even have -- they have a backup to the backup.

Data centers are very similar. Their model has been the same for a long time.

What we see there is that there are just more data centers being built. What we really like is that our modular power system technology, our MPS technology, has been pretty well-received with those types of customers. Because it is an N+1 strategy out of the box. What we do differently from our competitors with larger installations like that is that our generators can be hooked together in sequence without the requirement of some of the more expensive switch gears that have been required in traditional models.

And that really reduces the cost of that and creates a much more -- aside from redundancy creates the ability for scalability. And so data centers are generally built, that model is they are built to house a certain size of servers that obviously, initially they don't fill in with. But over time, they had servers.

So what we are allowing them to do with our MPS technology is only put in the number of generators they need on the front end of the project to back up the servers that they are going to have initially. And as they grow the data center over a three- to five-year period, they are able to just put down more of our generators and link them together very easily with the existing products.

And so, the engineering groups that work on those data centers have really kind of -- they like the MPS solution that we brought them and it's been, I think, one of the highlights here in terms of us being successful with that strategy.

Okay. So is your modular approach different than your large competitors here?

It is. Our modular approach is different. It's unique. It's patented. It's been around the last 10 years. We've had that in place and it basically allows us to more cost-effectively combine multiple generators to create a common single output. And that is a technology that is proprietary to Generac. It is onboard the generator. So it's a -- and it's a very -- it is a significant value play in terms of being able to provide engineers and operators and N plus 1 strategies and scalability strategy out of the box.

Second question. You told us that you weren't building in an expansion in the residential market. But what would happen if housing starts doubled? New housing starts doubled from where they currently are? How would that manifest itself to you?

Yes, so, housing starts -- we've said this before. I think we really like the fact that -- we like a couple of things. One, we continue to be impressed with the resilience as of this category even in the downturn. For three consecutive years we've grown the residential standby in a time when residential investment has been down. Other big-ticket discretionary purchases of which, arguably, a generator could be considered have been down. And down big. Not just down slightly.

And so, we think that the growth is really the result of a couple of things. One being just the tremendously low penetration rate of these products in US households, being less than 2%. The percentage of sales that go into new construction for us is somewhere on the order of less than 15%.

And so, it's -- we think if you can do math, right? I mean, you double the housing starts and there is a significant -- there is a meaningful bump there that -- and some of that, I will qualify that by making sure -- it depends on what type of houses are started. Right? I mean, is it going to be the kind of house that is going to need a generator in terms of geography, in terms of the value of that home, in relation to the value of the generator, the demographics of those housing starts.

But we really like the fact that even though we are at a -- just a historic trough in terms of housing starts, we are still growing this category.

Good. Good answer. Thank you.

This concludes the question-and-answer session. I would like to turn the call over to Aaron for closing remarks.

We certainly appreciate everybody's attention today. We appreciate your time. Again, we are very pleased with the way our fourth quarter came out. We are very pleased to be focused on our powering ahead strategy for the long-term growth of the Company.

As we said this is a very attractive investment for a lot of reasons, and we certainly are looking for to updating you as we go forward in 2011 on our progress. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the, presentation. You may now disconnect. Have a great day.