Generac Holdings Inc (GNRC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to 2011 Generac Holdings Earnings Conference Call.

My name is Karma, and I'll be your coordinator for today.

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

(Operator Instructions).

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

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

York Ragen, CFO.

Please proceed.

Hello, everyone.

Good morning and welcome to our first quarter and 2011 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 SEC filings.

I will now turn the call over to Aaron Jagdfeld.

Aaron?

Thanks, York.

Good morning, everyone.

Overall, our first quarter net sales were down approximately 5% compared to prior year.

As we look within our results, it's clear that there were two very different dynamics occurring in our business during the quarter.

We experienced strong 15.6% year-over-year sales growth from our commercial and industrial products during the first quarter of 2011, and we continue to see momentum from our C&I products as these markets recover and backlog builds.

Although momentum has continued to build within our C&I products, their strength was not enough to overcome a 17.6% year-over-year sales decline for our residential products.

As we highlighted on last quarter's call, the first quarter of 2010 included a high level of severe outage events.

These severe outage events did not repeat to the same level during the first-year quarter.

As a result, we saw a decline in lower kilowatt portable generator sales during the period, which represents the primary driver in our year-over-year residential sales decline.

In addition, as discussed on last quarter's call, we entered the year with a higher level of channel inventory, as our distribution partners reacted favorably to our pre-winter season stocking promotions in the fourth quarter of 2010.

This higher level of channel inventory had a residual impact on first quarter 2011 residential product sales, as distribution worked through stocking levels during the quarter.

While the environment for US residential investment continues to be challenging, we believe year-over-year sales trends for these products will accelerate from current levels starting in the second quarter of 2011 as we execute on our growth initiatives including the launch of our Honeywell-branded generators and our new power washer product line.

Although our results for the first quarter of 2011 were softer year-over-year, we remain confident in the strong cash flow generation of the Company.

Our competence is evidenced by making an additional $24.7 million prepayment of debt in April 2011 for a total of approximately $100 million in the last five months.

We have maintained a disciplined capital allocation with regards to uses of cash.

Since our IPO, we have prepaid $459 million of debt and remain committed to reducing our leverage.

I would now like to spend a few minutes discussing our markets and describe some of the trends that we saw in the first quarter.

First, with regards to our commercial industrial products, given that we have spent less time discussing the markets for these products, I'd like to take a moment and explain them and the products, our competitors, and our go-to-market strategies in more detail.

We serve the commercial and industrial standby power generation market with a broad product offering.

We offer a standardized light commercial gas generator product line that ranges in output from 22 kilowatts to 150 kilowatts as well as a full line of customizable gas and diesel industrial generators with outputs ranging from 20 kilowatts to 1 megawatt that can be connected in parallel series to produce outputs up to 9 megawatts of power.

Our generators are installed in many different applications, including data centers, retail buildings, telecommunications applications, health care facilities, municipal and institutional buildings and manufacturing applications.

Demand for standby power generation in North America has traditionally been satisfied by diesel generators.

In 2010, we launched a new platform of diesel generators powered by Fiat power train engines for which we have an exclusive supply arrangement in North America.

Although diesel-powered generators remain the dominant choice for standby power, gas-fueled generators are increasing in popularity.

We offer one of the industry's largest gas generator product lines powered by a variety of automotive and truck-based engines, which we optimize for use in power generation.

We distribute our C&I products through a number of channels.

The primary channel of distribution is our independent industrial dealer channel, which is comprised of approximately 60 dealers in the United States and Latin America.

These dealers develop relationships with local commercial electrical contractors, specifying engineering firms and national account buying offices and provide sales and service support to these customers.

Building solid relationships with local specifying engineering firms is an important part of our strategy, as these firms, both on a local and national level, play a key role in the design phase of most commercial projects and are responsible for developing the specification for backup power when necessary.

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

We also go to market with our C&I products through direct corporate relationships with our national account customers.

We believe our direct and national account focus provides us a competitive advantage as we demonstrate a high level of corporate and field support for these customers.

The North American market for commercial and industrial generators is highly competitive.

Our leading competitors are primarily diesel engine manufacturers who also have divisions that manufacture and assemble generators.

As we do not produce diesel engines, we primarily compete in the C&I market on innovation and value.

Our modular power systems, natural gas fuel systems, Bi-Fuel systems, and Gemini generators, which house two generators in a single [imposed] system are all examples of the innovation we bring to the C&I market.

In addition to innovation, our ability to be the low-cost producer of commercial and industrial generators is a result of our focus on value engineering, global sourcing, and lean production capabilities, which has allowed us to consistently be the price leader in the industry.

Over the last three quarters, we have seen double-digit year-over-year growth from our C&I products led by the recovery of a variety of end markets including telecom, health care, and data centers.

The increase in the first quarter of 2011, in particular, was driven by improved demand for our larger modular power systems as well as strong shipments to national account customers.

Additionally, our overall closure rates have improved over the last few quarters as end customers have sought additional value in innovative solutions.

Looking forward, as we execute on our strategic objective of gaining industrial market share, which is a component of our powering ahead strategic plan, we intend to further expand our C&I product line as we look to increase our addressable market.

In addition, increasing the breadth of our product offering, we'll continue to add distribution both domestically and internationally as a way to improve or market share.

Now turning to our residential markets, although our first quarter results were challenging primarily as a result of lower portable generator sales year-over-year, we continue to believe that significant growth opportunities exist for us with our residential products, particularly with regard to residential standby generators.

As we have discussed previously, our powering ahead strategic plan includes the key objective of growing the residential standby market.

We remain focused on several key initiatives targeted at driving penetration of home standby generators through increased awareness, availability, and affordability in the product category.

Despite some challenging headwinds, we believe we're making progress towards this goal.

Our direct marketing initiatives, post-outage campaigns and display units at retailers continue to improve awareness of residential 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 have 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 core power 7 kilowatt home standby product later in 2010 represents our continued efforts to make the product category more affordable for homeowners.

In addition to growing the market for residential standby generators, our powering ahead plan also includes the objective of diversifying our end markets through the introduction of new products.

As previously mentioned, we launched our new power washer product line late in the first quarter of 2011.

We are excited about the long-term market opportunity for these products as they will enable us to leverage our brand, our customer base, our supply chain, and our manufacturing footprint.

We are currently discussing placement of power washers with our distribution partners.

However, as we have stated previously, many of these product line reviews are for the 2012 selling season.

As such, we don't believe that power washers will materially impact our results in 2011, but we remain optimistic about the potential for these products as we build out distribution.

With that, I'll turn the call back over to York to discuss first quarter results in more detail.

York?

Thanks, Aaron.

Overall, as Aaron mentioned, our total net sales for the first quarter 2011 were $124 million, a 5.2% decline compared to $130.7 million in the first quarter 2010.

Looking at net sales by product class -- net sales for our commercial industrial products were $44.3 million in the first quarter of 2011, a 15.6% increase from $38.3 million in the first quarter of 2010.

This is the third consecutive quarter where we have seen double-digit, year-over-year growth rates for our C&I products.

As Aaron mentioned, end market verticals that are driving the recovery are health care facilities, data center applications, and telecom markets.

Improved closure rates on larger systems for our industrial dealer network, continued program acceptance for our private label arrangements, and increased capital spending by our national account customers have also driven the year-over-year growth for our commercial industrial products.

Our residential product sales were $69.2 million in the first quarter of 2011 versus $84 million in the first quarter of 2010, a decline of 17.6%.

The majority of this decrease relates to a decline in lower kilowatt portable generator shipments as a result of fewer power outages in the first quarter of 2011 as compared to the first quarter of 2010.

Although we had significant snowstorms during the first quarter of 2011, these storms were not comparable to the damaging ice storms that occurred in the first quarter of 2010.

In addition, as mentioned during last quarter's earnings call, in the fourth quarter of 2010, we saw an increase in seasonal stocking by certain of our distribution partners in anticipation of an active winter storm season.

This incremental seasonal stocking helped to exceed expectations for residential product sales in the fourth quarter of 2010 but resulted in an unfavorable residual impact in the first quarter of 2011, particularly with regards to home standby generator sales.

Our other product sales were $10.5 million, up 24.8% from prior year.

Other product sales make up our after-market services parts, sales of engines to OEMs, and RV generators, each of which grew on a year-over-year basis.

Looking at gross margins, gross margin in the first quarter of 2011 was 38.1% of net sales, a 120 basis-point reduction compared to 39.3% in the same period last year.

The majority of this margin decline relates to rising input costs due to rising commodities and a weakening US dollar.

These rising input costs have impacted our margin on a like basis as we work through pricing resets with our suppliers and turn our inventory levels.

In reaction to these rising input costs, we have implemented selected price increases during the first quarter of 2011.

However, due to realization [legs] associated with quotes, backlog, and customer pricing resets, these price increases will not begin to be fully realized until the second quarter of 2011.

In addition to price increases, we've been working on a number of cost reduction projects that will have a meaningful impact.

The cost reduction projects include the automation of certain manufacturing processes and substitution of certain materials.

We believe these projects will begin to offset rising material costs in the second half of 2011.

Now looking below gross margin, our operating expenses for the first quarter of 2011 were roughly flat with the prior year at $36 million.

Stock compensation expense increased year-over-year in the first quarter of 2011 by $800,000.

In the prior year, certain stock awards were granted in conjunction with our IPO on February 10, 2010, and, as a result, we began recording stock compensation expense.

The current year quarter now reflects a full quarter of stock compensation expense.

The stock comp expense increase was offset by a $1 million reduction in amortization of intangibles as certain indefinite lived intangible assets became fully amortized during the quarter.

The remaining nominal year-over-year increase in operating expenses was primarily driven by additional infrastructure added to support our powering ahead, long-term strategic plan.

Adjusted EBITDA of $27.5 million in the first quarter 2011 decreased from $31.8 million in the same period last year.

As previously mentioned to clients, an overall sales volume and reduced gross margins impacted profitability.

Net income for the first quarter 2011 increased to $4.8 million compared to $2.5 million for the first quarter of 2010.

Included in prior-year net income was a $4.2 million noncash charge related to deferred financing costs, which were required to be written off as a result of the prepayment of a portion of our debt following our IPO.

Adjusted net income, as defined in our earnings release, which excludes this write-off of deferred financing costs, decreased 15% to $17.1 million versus $20.2 million in the prior year.

The decrease in adjusted net income was attributable to reduced income from operations as previously discussed, partially offset by reduced interest expense.

Interest expense decreased in the first quarter of 2011 to $6 million compared to $8.5 million in the same period last year.

The decline in interest expense is attributable to the debt prepayments that were made during 2010.

Diluted net income per share was $0.07 per share during the first quarter of 2011.

Adjusted diluted net income per share as reconciled in our earnings release was $0.25 per share for the current-year quarter.

As a reminder, pre-IPO per-share data is not meaningful as the equity structure of the Company prior to the IPO was not comparable to the equity structure of the Company post the IPO.

Looking at our cash flows for the quarter, free cash flow, defined as net cash provided by operating activities less capital expenditures, was $11.1 million in the first quarter of 2011, representing a decrease of $5.8 million compared to the same period last year.

This reduction in free cash flow was a result of reduced profitability and increased working capital needs offset by reduced cash interest paid during the current-year period.

Compared to prior year, working capital levels were higher at the end of the first quarter 2011 as a result of higher residential generator inventories.

In addition, in the first quarter of 2011, we invested additional working capital ahead of the launch of our new power washer product line.

As a reminder, from a seasonality standpoint, the first quarter of our fiscal year is typically our lowest quarter with regard to sales, EBITDA margins, and cash flows.

Given our growth initiatives and given typical seasonality, we would expect sales, EBITDA margins, and cash flows to increase sequentially from Q1 2011 run rates.

From a capital structure standpoint, we have $657.2 million of term loan debt outstanding and $90 million of consolidated cash and cash equivalents as of March 31, 2011, resulting in $567.2 million of net debt at the end of the first quarter of 2011.

Our last 12 months adjusted EBITDA through the end of the first quarter of 2011 was $151.9 million, resulting in a 3.7 times net debt to LTM adjusted EBITDA leverage ratio as of March 31, 2011.

This compares to a 4.1 times net debt leverage ratio as of March 31, 2010.

Subsequent to quarter-end, in April 2011 we used $24.7 million of cash on hand to make a voluntary debt prepayment on our first lien credit facility.

From a capital availability standpoint, we have no borrowings outstanding under our revolver, which has approximately $145.5 million of availability net of outstanding letters of credit.

With regard to certain guidance items for 2011 that we gave during our last earnings call, we are reaffirming guidance for those items including our full fiscal year 2011 guidance for interest expense of $26 million to $29 million, which includes approximately $2 million for deferred financing cost amortization, cash taxes of $500,000 to $1 million, depreciation expense of $7.5 million to $8 million, amortization expense of $48 million to $49 million, stock compensation expense of $7 million to $7.5 million, and capital expenditures of $11 million to $13 million.

I'd now like to turn the call back over to Aaron to provide additional comments on our 2011 outlook.

Thanks, York.

On last quarter's earnings call, we indicated that we anticipate overall moderate sales growth for our business in 2011 as compared to 2010.

We continue to believe that moderate year-over-year top-line growth will occur in 2011.

However, given the trends we have seen in our first quarter 2011 results, we believe our sales mix will be more heavily weighted towards our commercial and industrial products for the balance of 2011.

Solid orders for our large industrial systems and robust capital spending prospects from our industrial national account customers, has led to our increased expectations for 2011 sales of C&I products.

Looking to the remainder of 2011, we believe that commercial and industrial product sales will continue to see double-digit year-over-year growth rates.

Our residential product sales assumptions for 2011 included a normal seasonal level of power outages in the first quarter 2011 winter season.

As we have discussed, outages in the first quarter of 2011 were below seasonal norms and, as a result, we are reducing our sales assumptions from lower kilowatt portable generators for 2011.

The reduced level of outages in the first quarter has resulted in adequate channel inventory levels as we head into the second quarter.

These channel inventory levels have been reduced somewhat by the recent tornado activity last week in the South.

Although we are cautious about the level of reordering that retailers will commit to ahead of the summer storm season.

Our outlook on residential product sales is also impacted by further declines in home values, persistently high unemployment, and concerns about inflation that are putting pressure on consumers.

As a result of these headwinds, we anticipate that residential product sales will be roughly flat with prior year for the remaining three quarters of 2011.

Our outlook on residential product assumes no major hurricane-related power outage events in 2011.

We believe we will continue to make progress on our strategic growth initiatives that will drive future growth for residential products including adding distribution for our new power washer and Honeywell-branded products, continuing to expand our residential dealer network, and a more focused approach to direct marketing of our residential standby generators.

We expect these initiatives to contribute throughout the year with higher growth rates in the second half of 2011.

From a gross margin standpoint, we have witnessed commodity inflation over the past few quarters in many of the basic inputs we consume, such as steel, copper, and aluminum.

Additionally, the weakening of the US dollar has led to material cost increases from our suppliers outside the US.

Both of these factors have and will continue to have an impact on our material costs in 2011.

In reaction to these rising costs, we have implemented selective price increases ranging from between 2% and 6% across most of our products midway through the first quarter of 2011.

These price increases have been accepted by all channels and will begin to be fully realized in the second quarter of 2011 as we work through quotes backlog and pricing reset lags through our distribution channels.

As York previously mentioned, we have also initiated certain cost-reduction projects focused on automation and certain material substitutions that we believe will generate significant material cost savings.

We anticipate that the cost savings will begin to be realized in the third quarter of 2011 and will be fully realized by the end of the fourth quarter.

While we expect that price increases and cost reductions will mostly offset rising material costs in the second half of the year, we do expect a short-term negative impact to margins.

Lastly, with regards to margins, we expect that previously mentioned sales mix shift towards more consumer -- more commercial and industrial product sales to have a modest, unfavorable impact to overall gross margins.

However, as a result of our lean operating model, we believe we will still be able to deliver best-in-class EBITDA margins, which is a critical component of our attractive free cash flow.

Combining our best-in-class margins with our asset [light] model, favorable tax attributes and low-cost debt structure, Generac is well positioned to generate significant free cash flow in 2011.

As we look forward, our improved balance sheet has allowed us to focus on our long-term growth strategy.

We are committed to our powering ahead strategic plan and are making the necessary investments in the business today that we believe will drive the growth of the Company tomorrow.

As we execute on our strategic initiatives, we believe growth will accelerate and drive incremental shareholder value in the future.

This concludes our prepared remarks.

Thank you, again, for joining us on our call today.

We look forward to speaking to you again on the second quarter call in August.

At this time, we'd like to open it up for Q&A.

Operator?

(Operator Instructions) Brian Drab, William Blair.

Just a couple of questions.

Do you feel like the severe weather that we've been seeing in the South might have any impact on demand for your products?

Well, as we said, I mean, we make generators.

So when power outages happen, the first thing that sells in a power outage is portable generators, Brian.

So we've seen, certainly, these events down South.

Typically, tornadoes in and of themselves don't have a material impact on results because they are very localized and the damage is actually pretty catastrophic.

And in this case, the damage is catastrophic, but they're very widespread, the area of damage.

So, actually, there's more power outages as a result, and we're seeing this really help our retail channel partners, in particular, kind of clean out their inventory levels down South.

You know, coming into the quarter our inventory levels were high coming into the first quarter.

Coming into the second quarter, we kind of felt that they were adequate but probably a little bit high seasonally.

This will certainly help clear out portable generators.

The follow-on demand for residential standby should occur as we would normally see in an event like this, and it's a much more prolonged impact.

It's usually -- it can be anywhere from three to six months, depending on the severity of the outages to upwards of two years in a particular market.

But we certainly would expect this to have an impact at some level, certainly, on portable generators and longer-term on residential standby.

Okay, great, thanks.

And just a couple more questions.

On the marketing front, we recently were discussing your new program where you have the activation code that helps you more directly put in place some targeted marketing.

Right.

Can you give an update on any early feedback from that program?

Yes, we've been accumulating a wealth of data on where our products are being installed regionally, regardless of the channel they're sold through.

And that information that we've got -- we're gathering, we are now starting to disseminate that.

We're working with a third party group that we've contracted with to help us understand the demographics of the households that are buying these products.

And all of that information we're distilling down into marketing test plans.

And those marketing test plans are being used to really kind of evaluate the efficiency of certain types of marketing.

So some of that is test plans to do more direct mail.

Some of it is test plans to do telemarketing.

Some of it is test plans perhaps to do more door-to-door type of marketing.

So we're testing a number of different vehicles to reach potential buyers of these systems as a result of this data we've collected.

I think it's still -- it's far too early -- we're in the test stages.

We certainly anticipate being able to give some additional updates on this I think as we get further into the back half of this year, Brian.

We're really only about -- we've accumulated about six to nine months' worth of data at this point, and we'd really like to get a full-year cycle because of the seasonality that occurs with products just to understand more the trends that are occurring regionally as well.

Okay, great.

And then can you just give us a quick update -- sorry if I missed it -- but on the power washer market?

Sure.

Yes, power washers, we launched that here at the very end of Q1.

We started having our first products roll off our production lines in Whitewater, Wisconsin.

And the early returns are that our distribution partners like the product, but most of them are already set for the 2011 selling season, which we were aware of.

But right now we're involved in many of the line reviews.

Those schedules occur -- each retailer is a little bit different, but a lot of those line reviews are happening now or will happen here in the next couple of months for the 2012 selling season.

So, as we've said before, we don't believe that power washers will have a material impact on our results here in 2011, but we're much more optimistic that we'll get placement of those products for the 2012 selling season.

Steve Sanders, Stephens, Inc.

Aaron, first, maybe a big-picture question on the domestic C&I side.

What percent of the market is currently using natural gas, and how do you think that plays out over the next few years?

Yes, it's a great question.

The majority of the market is diesel.

It's over 90% satisfied by diesel generators.

Gas generators have -- they've become more popular here in the last couple of years.

The reality of it is they're still a small niche part of the market.

The growth rates for gas are higher than they are diesel, and a lot of that is the result -- and I think we've talked about this on calls previously -- a lot of that is the result of the fact that the stringent EPA requirements and other emission requirements around diesel engines have led to a greatly increased cost level of those products.

And so when it comes time to make a decision and particularly when you're talking about the option standby generator market, so this would be generators for small businesses, in particular, where the purchase of that generator really needs to have a return on the investment so that that business owner can make a good decision in going forward with that purchase.

As the prices of diesel generators have gone higher, obviously the ROI of a gas generator looks much more favorable as compared to diesel.

So the first piece cost, in fact, is quite a bit less for a gas set, and that's really what leads to that higher ROI.

So, Steve, I think that on a macro basis, we're much further ahead here in the US with gas because of the infrastructure that we have here and the natural gas supply that we've got as a country.

So in terms of gas prices, it's an affordable fuel here.

But I think what we like is the fact that gas is starting to assume its rightful place as a clean fuel, as a green fuel, and is a much more popular choice to wean the country off of its dependence on oil.

And we're starting to see the same effect globally as well.

There are some areas of the world where natural gas is much more prevalent, and we believe that the same trends could occur in those areas of the world relative to nat gas generators becoming more popular over time.

Although it's, again, still a very niche market.

Right, right.

And then a follow-on there.

I think you've made some additional resource commitments in the Latin America market.

I just wanted to see if you were seeing any encouraging signs about the funnel there.

Yes, the big focus there is about signing up distribution.

Our team is really -- we've got a team now with a sales office, and that team is -- their number-one goal here this year is to get distribution onboard.

There is a process when you add -- and these are industrial distributors that we're adding -- there's a process when you add an industrial distributor.

It takes a while to get them onboard.

The onboarding process, the learning curve in terms of -- not only their learning curve on the product but just getting their name out in the local market, building those relationships that we talked about here in our prepared remarks with the specifying engineering firms in the local market, takes time.

The electrical contractors in the market takes time.

So we really wouldn't expect to probably see any kind of meaningful impact from Latin America until probably something -- hopefully, we'll start to see some things later this year and into -- as we go into 2012, but it's really about building out that distribution, first and foremost.

Okay, thanks for that.

And then can you give us a quick update on Honeywell?

And then, York, how should we think about free cash flow for the year and maybe relative to what you did in 2010?

I'll address the Honeywell, and then I'll kick the free cash flow question to York.

With Honeywell, also launched at the very end here of Q1.

Our first products are out there.

Again, the purpose of that program -- we love the Generac brand.

We think the Generac brand in power generation is a very strong brand.

But we also know that in certain -- to enable us to get access to certain other channels of distribution, like HVAC or security home automation, that the Generac brand maybe doesn't carry the same amount of weight.

The Honeywell brand, we believe, will help us penetrate those particular channels on a much more aggressive basis than we could with the Generac brand.

And so we're in the process, very similar to what we talked about with Latin America, we're in the process of signing distribution at this point.

So we're encouraged, though, by some early excitement, certainly, from the distribution partners we have signed.

We've been showing the product at some local -- at some tradeshows in those markets -- the HVAC and the home security and home automation markets.

And I think people are favorably reacting to that, as a product category.

And, again, this is about increasing awareness.

Getting out there and trying to find different ways to reach homeowners with this product.

And we believe the HVAC channel still remains a very viable channel for it.

We just think that we needed a different brand to really go after that aggressively, and we think Honeywell is going to be very successful, in the long run, for us.

Okay, thanks for that.

And then free cash flow, York.

Yes, Steve, I think, as we said, we still remain confident in our free cash flow.

This business generates a tremendous amount of cash flow with the margins that we have.

Our low-cost debt structure where we'll be paying, roughly, like I said, $24 million to $26 million of cash interest during the year.

We don't, given our tax attributes and our tax shield, we shouldn't be paying -- we should only be paying nominal taxes.

So if you walk through the pieces of cash flow with regards to EBITDA, given moderate growth, we believe we still are optimistic on our moderate growth -- year-over-year growth rates.

That should translate into some level of EBITDA growth.

But, as I said, interest -- cash interest, as I mentioned, is going to be, roughly, the $24 million to $25 million low amount of cash taxes.

We talked about $11 million to $13 million of CapEx.

I think, if you go through the pieces, pretty quickly you can see that you'll get to somewhere at least relative to 2010 levels.

Okay, okay.

So I think we can connect most of the dots.

I just wanted to make sure working capital was not expected to be a substantial drag relative to 2010.

It shouldn't be a tremendous drag.

No, I mean, it might be-- it should small.

Jeff Hammond, KeyBanc Capital Markets.

So if I have it right, there seems to be three, kind of, challenges on the gross margin.

One, commodity inflation; two, the weaker US dollar, which I guess takes your transaction costs up; and, three, the negative mix on commercial industrial.

Can you give us, kind of, order of magnitude how those stack up?

What's the biggest headwind and down to the smallest?

Yes, I think if you're looking at the biggest headwind, I think mix is probably the biggest headwind because, as we talked about on the commodity and currency side, once we get our price increases and our cost reduction projects fully realized here in the second half of the year, we believe that we'll mostly offset the currency and commodity impact with those.

So I think the thing that stands alone, then, is the mix impact with, as we believe, a higher mix of C&I product relative to residential versus prior year.

That should have a slight unfavorable impact in terms of prior-year margins.

So just looking at this 120 basis-point gross margin compression -- that should kind of be the worst of it as we go through the year?

It shouldn't be significantly different from that.

I think, as you look through the full year, that's probably about right.

And then SG&A was running flat in the quarter.

Is the idea to kind of hold the line on SG&A, just given the sluggish growth?

Yes, I think we'll, obviously, be monitoring the top line and invest prudently.

We have our strategic plan that we are investing for in the future, but given the top line we are prudent with regards to those investments.

Yes, I think the best way to think about that, Jeff, is that we have a strategic plan that would require investments over the next several years to achieve our desired outcome.

And we don't want to materially move off of that.

But, in the short run, we know that as commodities have gone up and as this mix shifting, we kind of -- this is helping us focus on our spending in terms of op expenses to make sure that we remain vigilant.

And we look for areas where there's maybe some additional opportunities to try and cut costs to offset any investments we want to make in our strategic plan.

But we're going to remain very cautious on our spending levels and op expense until we -- as we kind of go through the year here.

Okay, and then on inventories, you gave us a good picture of channel inventories, and we don't have a long history.

But if I look at your inventories last year, 4Q to 1Q were down $15 million or so, and we saw a ramp this year.

What do you consider normal?

How do you think about your -- the inventories that you're holding?

I would say that given the fact that we did have limited severe outage events, I would say that what we're holding is elevated.

I mean, we've got portable levels from a summer storm season from last year that didn't materialize.

So we're going to work through those, and I would call portable inventory elevated, and --

With portables, there's not been a major event here in almost a year.

So other than what we just experienced here down South, I think anybody in this industry would be holding probably more inventory than they want to be holding at this point coming into the season.

Yes, and as Aaron mentioned, what happened at the end of April with the tornado activity should help that, but, again, we're -- at least with channel inventory, and we'll work down our home standby inventory throughout the summer storm season here.

Right.

Okay, and then the last finer-point question -- interest expense, I think you're still guiding $26 million to $29 million.

You did $6 million, I guess this quarter, you're paying down some debt.

How are we not coming in lower than that $26 million to $29 million?

The high end of the -- the $26 million to $29 million included $2 million of noncash deferred financing amortization.

So call it $24 million to $27 million.

And the high end of that range was assuming if we layer in some additional interest rate swaps.

That would cause our current run rate to go up.

We haven't done that as of yet, so you're looking more at the low end of the range from a cash standpoint there, absent any interest rate swap activity.

Okay, but your deferred -- your amortization is in the $6 million that's hitting your income statement, is that right?

It is in there, yes.

Okay.

Yes, again, there's some -- I think -- some of those assumptions are assuming higher interest rates from current levels, obviously.

Brian Meier, Robert W.

Baird.

Hey, guys, just a few questions here.

First off, just let me make sure that I'm interpreting the sales guidance correctly.

You're calling for flat year-on-year growth in residential over the next nine months.

And I just want to make sure -- that's kind of in aggregate as opposed to each quarter, specifically, correct?

That's in aggregate.

That's a fair point.

I think, obviously, as some of our strategic initiatives kick in here, it gets -- ramps a little bit more in the second half, I would say.

Right.

Okay, that's what we figured, just making sure.

And then, secondly, on C&I, obviously, a nice quarter there, good growth.

I'm curious what the book to bill looks like and whether or not the orders are still accelerating?

And kind of on that note, what backlog looks like sequentially and maybe year-over-year as well?

Yes, we've been careful not to give that kind of specific guidance, Brian, just in terms of backlogs and order rates.

We can tell you that we're very pleased with -- this is basically the third quarter in a row where we've had double-digit growth in C&I, and as our guidance states, I think we're anticipating that's going to continue through the balance of the year here.

So we're very pleased with that part of our business.

There's some great things happening there in terms of our -- us being able to work with our national account customers, in particular, who, I think, are feeling a lot better about their businesses.

Whether you're talking about telecommunications customers and eventually that will spill over into retail as non-commercial -- or excuse me -- non-residential building, commercial building comes back further.

Health care data centers continue to just be -- everybody wants to do cloud computing, which there's a lot of buildout in our data centers going on.

Backup power is obviously a key part of building a facility like that.

And so we see that strength continuing here as we commented on in our guidance.

Got you.

Are there any areas within C&I that really aren't hitting on all cylinders yet?

It seems like you're seeing pretty broad-based strength.

I'm just curious if there's a weak spot still?

Yes, I think if there's a weak spot -- so let's talk about that, because it's been pretty strong the last three quarters.

And I think it was even stronger last year.

We look at the municipal and institutional side of things, in particular, municipals.

I think some of the stimulus spending may have been influencing the speed of some of those projects and the spending on those projects, and that's an area we're kind of anticipating is going to slow down here.

It's not a huge part of the mix of C&I, but it's one kind of vertical end market that I would point to that could -- we could probably see some type of a slowdown or a little bit of weakness in.

I'd offset that, though, probably, by saying that last year in the -- if you look at the last two quarters last year, the increases we saw there, there wasn't a lot of pickup in the retail side of things.

And I think that, again -- the C&I business is a late-cycle business.

Generators are typically the last item put in place in a construction cycle on a building.

And as we would see retail buildings starting to pick up and buildouts starting to pick up for retailers here and commercial applications, I think that that's -- there's a potential there that could help us not only offset some of that municipal business but depending on how strong the recovery is.

And I think all of that is muted, of course, by where is the consumer's head at relative to spending.

But I think right now we're optimistic that there will be a recovery in that retail construction cycle, and that will benefit us at some point down the road.

(Operator Instructions) Jerry Revich, Goldman Sachs.

Aaron, you touched on the Honeywell standby generator progress.

Can you update us on progress on taking over the portable shelf space?

Or is that delayed by the inventory situation that you discussed earlier?

Yes, portable gen -- that's been a really interesting business for us.

We've been pleased.

We reentered that market about two and a half, almost three years ago now.

And we've been actually pretty amazed at the amount of retail reception -- distribution partner reception to our product line.

We've built out very quickly a very deep product line on portable gens, and we believe that as it stands right now, we're one of the top players in the market for portable generators, as we said.

Now, clearly, as our comments indicated, the first quarter was a tough quarter for portable gens and, unfortunately, portable generators are -- it can be a bit of a volatile business.

And, as I said, it's typically quite a bit more weather-dependent, and it's probably the one segment of our business that you're going to see move around a bit.

And, unfortunately, it happened in a quarter where, seasonally, that's our low quarter is the first quarter.

So I think it's exacerbated -- you know, the results here for residential maybe to the downside.

So we still have a lot of really high hopes for portable gens.

We've got a tremendous amount of channel that we've built and a lot of distribution that we've built.

So when those events do happen, we're going to be able to really capitalize very strongly on them.

Honeywell, we have the Honeywell program for both portable and home standby.

We've started to place some of those products at retailers.

It's going to be positioned differently, obviously, than the way we positioned the Generac brand.

As I indicated before, as it relates to home standby, it's really about going after the HVAC channels.

On the portable side, it's really just being able to differentiate with another brand within either some of the same retailers where we go to market today or different retailers where we don't have presence.

But, either way, we're pretty excited about the portable generator business and the long-term prospects for that for us.

And, to be clear, I think the prior manufacturer had, what, around 400-plus basis points of market share?

When do you think, based on the line reviews that you're seeing, when do you think you can take over that shelf space?

Can you give us a sense for how that's going?

Yes, got it.

And so I think because the first quarter was the tougher quarter, the prior manufacturer was still selling their inventory.

So the ability for us to load into retailers behind them have been delayed somewhat.

And so that's a very valid point.

I don't know that we -- our model anticipates that we're going to get all 400 basis points in terms of share.

Some of that will be -- maybe not with Honeywell.

We may get some of it with both the mix of our Generac-labeled product as well as Honeywell as well as other competitors who will pick up a piece of that slack.

But we would expect that to grow into the second half of the year as that partner kind of sells out their inventory.

The previous provider sells out their inventory, and retailers look for us as a new supplier.

And are you able to provide us a sense for months of supply or any similar metric for your distributor inventories for both portables and residential standby or any other metric that you'd be comfortable quantifying for us?

No, not that we'd be comfortable quantifying.

I mean, inventory levels at retail are always tough to gauge, first and foremost.

Obviously, we know what we have in our inventory -- retail -- inventories at distributors are sometimes tough to gather and, particularly, when you're talking about home standby, we've got over 4,000 points of light out there, and that's a little bit different to figure out just exactly what's in the market.

We do know that typically home standby generators are not stocked en masse.

As we said in our prepared comments, we believe the inventory levels, as we go into the second quarter here, we believe they're adequate.

I would tell you, for portable gens, they're probably -- prior to the storms down South, they're probably still, seasonally, a little high with our channel partners.

Home standby may be a little bit as well.

But I think with the storms down South, that should at least help clear out those inventory levels on portables, in particular, and should lead to potential opportunities to load in for the summer storm season here.

Although, again, we believe retailers -- they've been extremely cautious with products like portable generators, pressure washers, really any engine-driven powered products.

Retailers have -- the last several years have really been very tight-fisted, I guess I would use the term, to describe their inventory management practices here with those types of products.

That's helpful.

And on the pricing and lower product cost discussion, can you give us a sense for how big the contribution you expect from each, relative to one another?

And also can you comment on what parts of the business we should be looking for pricing?

I think C&I is an obvious one.

But can you talk about your ability to push pricing in portables and the standbys as well?

Thanks.

Yes.

This is York.

I think, as I mentioned in the prepared comments, on the pricing side we rolled those out.

Really, Q1, mid-Q1, it was really a range from 2% to 6% with 6% probably being higher on the C&I side, and 2% more on the resi side.

I think, from a cost production standpoint, I would say that we see some meaningful reductions with regards to some of the automation equipment that we're implementing as well as, really, more out into the latter part of this year, some substitution materials.

That probably could outpace the amount of pricing.

But, like I said, at the end of the day, by the second half of the year, we should mostly be offsetting the commodity impacts with those.

So --

Okay, thank you.

And then was your question about future pricing ability, Jerry?

York, my question was what are you getting across the product range.

So, as your point, you are getting at least 2% on every single product and 6% for C&I?

Or are these price increases that you're getting, some products are 2%, some are zero?

That's probably --

I think that's probably a fair statement.

There weren't many products in our portfolio that didn't get a price increase this year.

We are under contract, where we have national account contracts in place, and obviously pricing is either set by the contract or is fixed.

And so we have to honor those contracts.

So there could be certain products for certain national account partners that didn't get an increase because we either -- that increase period is later this year or possibly a year out.

So there are some products that didn't see it, but those would be the products that would really be under contract for pricing at a certain fixed level.

And we have no questions at this time.

I would now like to turn the call back over to management for closing remarks.

All right, thank you very much.

We appreciate your attention this morning, and we look forward to talking to you on our second quarter call.

Thank you.

This concludes the presentation for today, ladies and gentlemen, you may now disconnect.

Have a wonderful day.