Generac Holdings Inc (GNRC) 2011 Q3 法說會逐字稿

Good, ladies and gentlemen, and welcome to the Q3 2011 Generac Holdings Inc.

earnings conference call.

My name is Kirsty and I'll be your operator for today.

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions).

As a reminder, this call is being recorded.

I would now like to turn the call over to Mr.

York Ragen, Chief Financial Officer.

Please proceed, sir.

Thanks, Kirsty.

Good morning, and welcome to our third-quarter 2011 earnings call.

I would 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 certain non-GAAP measures during today's call.

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

I will now turn the call over to Aaron.

Thanks, York.

Good morning, everyone.

Overall, we were very pleased with our third-quarter 2011 results, as we delivered strong year-over-year net sales and net income growth.

Total net sales increased 49% year over year to $239.3 million.

Residential product sales were up approximately 61% compared to third quarter 2010, mainly driven by widescale power outage events during the quarter.

Our commercial and industrial product sales continue to deliver significant growth, increasing 27% year over year, as shipments to certain national account customers grew in the quarter.

With regard to our residential product sales during the third quarter, we experienced record shipments of portable generators following a series of severe weather events that impacted the Midwest and East Coast and led to lengthy power outages.

Our efforts over the past three years to build a leading position and a broad distribution network in the market for portable generators were important factors in allowing us to participate in the sharp spike in demand for these products.

In addition to our record shipments for portable generators, we also saw demand for our home-standby generators increase in the quarter, and we expect that demand will continue to grow over the next several quarters as we expand our marketing efforts and further expand our dealer network to increase the distribution of our products throughout the affected regions.

The increase in home-standby generators was also impacted, to a lesser degree, by the successful launch of our Honeywell-branded generator line targeting the HVAC distribution channel.

On a personal level, I want to also take a minute and acknowledge the efforts of our employees during these outage events.

Our teams worked nearly around-the-clock during the height of these storms, shipping product to our distribution partners, taking calls from consumers and dealers with product-related questions and even providing critical technical support through teams that were deployed directly into the affected areas.

For the past three years, we have been focused on reshaping the culture of Generac with an initiative that we call Customer First.

Through this initiative, we have asked all of our employees to think about the customer impact of their actions and their decisions and to make sure that we are putting the customer first in everything we do.

I am extremely proud of the efforts of our teams both before and after these events, and their actions demonstrate to me the progress we have made towards a more customer-centric culture at Generac.

Understanding the needs of our customers and providing world-class service and support for their products is paramount to our success today and in the future.

Now turning the discussion to our commercial and industrial products, we again achieved double-digit year-over-year growth, with shipments of our C&I products increasing 27% over the third quarter of 2010.

This quarter's C&I shipments were impacted favorably by the timing of several larger shipments to certain of our telecom national account customers.

As we have previously discussed, the timing of shipments to our national account customers can vary from quarter to quarter.

I will discuss our outlook for the fourth quarter towards the end of our prepared remarks, but we do believe these higher third-quarter national account shipments will have somewhat of an impact on our C&I numbers in the fourth quarter as these customers focus more of their attention on the installation of these generators in the next quarter.

Beyond the telecom market, we continue to see increased quoting activity in other end-market verticals, such as industrial and healthcare.

Commercial projects that include an optional standby generator have also seen increased quoting recently in the wake of major power outages.

Offsetting the strength in these verticals has been a slowdown in spending on municipal- and government-related projects.

In addition to our strong performance with our C&I product sales during the quarter, in early October, we completed the acquisition of Magnum Products, LLC.

As the leader in the light tower market and a strong up-and-coming player in the mobile generator space, we see Magnum's product line as having significant growth potential, both in the United States and internationally.

Magnum's reputation for quality and superior customer service, as well as its culture of speed and flexibility, is directly in line with Generac's core values.

Magnum is a excellent strategic fit for our business, as it provides us an entry point into new adjacent power products, as well as access to new markets including construction, energy and government-related spending.

It has been nearly one month since we closed on this acquisition and our focus is on the integration process, which is progressing well at this point.

We're excited about the great opportunities that lie ahead to collaborate with the Magnum team to improve both companies.

Through Generac's global sourcing and vertical manufacturing capabilities, we will work to strengthen Magnum's supply chain as well as achieve greater efficiencies in their manufacturing operations.

Additionally, we will be working closely together to capture revenue synergies by levering both the Generac and Magnum brands and cross-selling products through our respective end markets and geographies.

As we mentioned during our acquisition call last month, we expect cost synergies to begin phasing in during fiscal 2012.

We look forward to updating you on our progress to integrate and grow Magnum as we move through 2012.

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

York?

Thanks, Aaron.

As previously mentioned, net sales for the third quarter of 2011 were $239.3 million, a 49% increase compared to $160.7 million in the third quarter of 2010.

Looking at our net sales by product class, residential product sales increased 60.5% to $162.1 million in the third quarter of 2011 from net sales of $101 million in the third quarter of 2010.

As Aaron noted, our residential product sales were driven by a sharp increase in demand as a result of the major power outages in the Midwest and East Coast that impacted millions of people during this year's third quarter.

Immediately prior to and during the outage events, demand for portable generators increased significantly.

Given our growing share in the portable generator market over the last few years, we were able to help accommodate this surge in demand by shipping a significant amount of portable generators to the impacted regions.

After the outages, we have seen an increase in demand for our home-standby generators as more people become aware of an automatic solution for back-up power.

The awareness created by the outages typically drives prolonged demand for home-standby generators, and we expect this demand will grow over the next several quarters as homeowners look to protect themselves from future power outages.

Looking at our commercial and industrial products, net sales increased 27.4% to $63.1 million in the third quarter of 2011 from $49.6 million in the third quarter of 2010.

The outperformance in C&I product sales during the quarter is mostly attributable to the timing of capital spending by certain of our national account customers.

As Aaron noted, capital spending patterns for these accounts can vary from quarter to quarter.

In the third quarter of 2011, we saw significant year-over-year growth for these customers due to the timing of their capital spending requirements.

Additionally, the overall trend of our C&I markets improved during the quarter as certain end-market verticals continued to recover and our industrial dealer quote-to-order conversion rates remained strong.

Our other product sales category improved to $14.1 million in the third quarter of 2011, an increase of $4 million from prior-year third quarter.

This product category is comprised of the sales of aftermarket service parts, loose engines to lawn and garden OEMs and shipments of RV generators to OEM coach manufacturers.

The 39% year-over-year increase in the other product category primarily relates to elevated service part sales as a result of the major power outages during the quarter.

Gross margins in the third quarter of 2011 were 37% of net sales compared to 41.9% in the same period last year.

This 490 basis point decline was mostly attributable to the significant shift in sales mix towards more portable generators in the current-year quarter.

In addition to sales mix, but to a lesser extent, higher commodity costs versus prior year impacted gross margins.

As we have previously discussed, our primary material inputs are steel, copper and aluminum, which have increased significantly from trough lows in the prior-year quarter as compared to peak heights in the current quarter.

Partially offsetting these commodity increases, we have implemented select price increases throughout 2011 and we've been working on a number of cost reduction projects.

Operating expenses for the third quarter of 2011 were $44.5 million versus $37.6 million in the third quarter of 2010.

This $6.9 million year-over-year increase was driven by higher variable operating expenses on higher net sales, increased sales, marketing and engineering costs in support of Powering Ahead strategic plan, and higher incentive compensation expenses as a result of the Company's financial performance during the quarter.

This increase was partially offset by a $1.1 million reduction in amortization of intangibles, as certain definite-lived intangible assets became fully amortized since the prior-year third quarter.

Adjusted EBITDA of $61.6 million in the third quarter of 2011 increased 34.7% from $45.7 million in the same period last year.

Our last 12 months adjusted EBITDA, as of September 30, 2011, has now increased to $169.4 million compared to $156.2 million for fiscal 2010.

Net income for the third quarter of 2011 increased to $37.4 million compared to $23 million for the third quarter of 2010.

Adjusted net income, as defined in our earnings release, increased 37.8% to $50.6 million versus $36.7 million in the prior year.

This significant improvement in adjusted net income is attributable to improved operating earnings during the quarter, coupled with a slight decrease in interest expense compared to prior year.

Interest expense decreased in the third quarter of 2011 to $5.9 million compared to $6.5 million in the same period last year.

This decrease is a result of nearly $100 million of debt prepayments we have made over the last 12 months.

Diluted net income per share for the quarter was $0.55 per share compared to $0.34 per share in the third quarter of 2010.

Adjusted diluted net income per share, as reconciled in our earnings release, was $0.75 per share for the current-year quarter compared to $0.55 per share in the prior-year quarter.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was $60 million in the third quarter of 2011, a 70.4% increase from $35.2 million in the same period last year.

As a result of our record residential shipments during the current-year quarter, we generated a significant amount of free cash flow.

The increased demand during the quarter helped to monetize finished good inventory levels that were seasonally high coming into the quarter.

Looking to the fourth quarter of 2011, we would expect to utilize a portion of this cash flow to replenish certain inventory levels in anticipation of the winter storm season.

With regard to our capitals structure, as of September 30, 2011, we had $632.5 million of term loan debt outstanding and $138.7 million of consolidated cash and cash equivalents, resulting in consolidated net debt of $493.8 million.

As a result, at the end of the current quarter, our consolidated net debt to LTM-adjusted EBITDA leverage ratio was 2.9 times.

This compares to a 3.7 times net debt leverage ratio at December 31, 2010.

As we have discussed, on October 3, 2011, we used approximately $80 million in cash on hand to acquire the assets and certain liabilities of Magnum Products, LLC.

When you pro forma the combined results of both companies and account for expected cost synergies in 2012, the Magnum transaction is nearly leverage-neutral, bringing our September 30, 2011 leverage ratio to 3.1 times from 2.9 times on a stand-alone basis.

I would now like to turn the call back over to Aaron to provide additional comments on our Q4 2011 outlook.

Thanks, York.

Given the major outage events that occurred during the third quarter of 2011, we are updating our outlook for residential product sales for the fourth quarter, as we now expect sales will increase year-over-year by over 30%.

Increased shipments of home-standby generators will be the primary driver, as the demand for these products is expected to remain strong into fiscal 2012 in the regions impacted by the recent outages.

As we'd mentioned earlier, our commercial and industrial sales can be impacted by the timing of capital spending by certain of our national account customers.

Due to larger shipments in the third quarter of 2011, we believe a few of these accounts will be focused on installation rather than on new purchases in the fourth quarter.

Additionally, our C&I shipments will also be impacted in the fourth quarter by a short-term gap in the supply of certain Japanese components which has now been resolved.

As a result of these factors, we expect shipments of our C&I products in the fourth quarter to be roughly flat compared with the fourth quarter of 2010 on an organic basis.

However, trends in the C&I market remain positive overall, and we expect growth rates to return in the first quarter of 2012.

With regards to the Magnum Products transaction, we expect that it will be immediately accretive to earnings in the fourth quarter of 2011, and there should be opportunity for additional accretion thereafter as a result of anticipated cost synergies.

Based on current projections, we believe the acquisition will add approximately $25 million to $30 million in revenue and $0.03 to $0.04 per share in adjusted earnings per share in the fourth quarter of 2011, excluding certain purchase accounting adjustments.

Gross margins in the fourth quarter, exclusive of Magnum, are expected to sequentially improve from the third quarter due to a sales mix shift towards more home-standby generators and the realization of price increases, cost reductions, commodity price moderation and improved manufacturing overhead absorption.

On a combined basis, the inclusion of Magnum's results will reduce gross margins by approximately 250 basis points during the fourth quarter.

Gross margins for Magnum's products are expected to improve in 2012 as we implement synergies throughout the year.

Overall, we expect total Company gross margins in the fourth quarter of 2011 to be roughly in line with gross margins experienced last quarter.

In closing, we are very pleased with our third-quarter performance.

With the penetration of home-standby generators still very low at less than 2.5% of single-family households, we believe the events of the third quarter have created a substantial increase in awareness and will help to accelerate the adoption rate for these products.

The power grid continues to age, and when combined with the relative lack of new investment, will be further susceptible to power outages for the foreseeable future.

In addition these macro factors, we have a number of initiatives in place through our Powering Ahead strategic plan.

These initiatives, when taken together with our acquisition of Magnum, will help us to gain industrial market share, diversify our end markets and expand our footprint geographically.

We believe the execution of our strategy will position us well for continued growth in 2012 and beyond.

This concludes our prepared remarks.

Thank you again for joining our call today.

At this time, we would like to open up the line for questions.

Operator?

(Operator Instructions) Zach Larkin, Stephens Inc.

Good morning, gentlemen.

Congratulations on a great quarter.

First off, I just wondered if you guys could talk -- with a lot of the recent storm activity in both the Northeast and also along the East Coast that we saw last quarter being in markets where Generac's got a more established distribution channel, could you talk about the types of category awareness activities that you focus on in these more established markets versus what you might do in what I might call a distributor-light region.

That's a great question, Zach.

So certainly the Northeast, as you've indicated, is a market we've been in for a long time and there is a lot of people up there, and power quality tends to be quite a bit poorer in the Northeast, and as a result, we've got pretty strong distribution.

So our efforts there are going to be less about new dealer acquisition as they might be in a region that is dealer-light, as you indicate.

If there were storm activity in, say -- if you refer back to maybe like Hurricane Ike in Houston, that was a dealer-light region for us when it occurred back in 2008.

But in the Northeast, our efforts will very quickly turn to trying to make sure we take care of the influx in demand.

So our efforts are -- they will go towards our normal advertising, which we do kind of post-outage.

Less of an emphasis on dealer acquisition; more of an emphasis on which dealers are in the region, so tagging existing dealers in those ads and driving customers to those solutions.

Awareness is a little bit higher in the Northeast than it is in other parts of the country.

So the advertising messages as well probably don't need to focus quite as much on awareness as much as they do on where to buy.

And so that is really how we would approach that as we go forward here in the next couple of months.

Thanks, Aaron.

And then also, could you guys talk a little bit about factory utilizations?

Obviously, inventories have ticked down quite a bit.

So assuming you've had very high utilizations in the factories, could you give us a sense of where that would be versus just normal seasonality?

From a seasonality standpoint, the third quarter is generally probably our busiest quarter in terms of utilization of facilities.

Generally, as we work towards the end of the year, as we've said before, the second half of the year for Generac, even when you have kind of non-storm years, is typically a higher rate of sales and production for us than would be the first half.

And this year, obviously, with the events that happened in the third quarter, the events that are taking place right now, it has kind of pushed factory utilization that much higher over where they would normally be at this point.

Great.

And then just one final question, if I may.

On margins, you talked about the mix shift that is going on that should cause improvements in the overall margin profile, and also just touched briefly on the commodities.

But with commodities having come back in the quarter, and knowing that there is generally a lag before you actually recognize benefits from commodity moves, how should we think about the impact from a lower commodity profile going into 4Q and maybe early next year?

I think you've hit it, because we've talked about how there is lags in our 00 in terms of pricing -- indexing commodity costs to our material pricing.

Depending on the supplier, it can vary, depending on the inventory levels that we have, the timing can vary.

We've talked about how it can be as much as three to five months in terms of working those indexes through our financial statements.

So there will be -- this moderation of commodity costs, there will be a lag in that.

And we will probably start seeing some of that towards the end of the fourth quarter, but it is something that you should probably be modeling in more in Q1 of 2012.

Thanks, York.

And congratulations again, guys, on a great quarter.

Jeff Hammond, KeyBanc Capital Markets.

Just on the -- you guys had preannounced in September, and it looks like res came in better.

Is that just simply that you are getting better home standby sell-through?

That's exactly it, Jeff.

Okay.

And just -- I know you don't give guidance, but I mean what -- as we look into 2012 and as you are getting feedback from your dealers, what kind of growth rates do you see persisting into the early part of '12?

We are going through all of that right now in terms of planning, and obviously that is kind of a fluid exercise with the -- there is 1.8 million people this morning still without power out in the Northeast from this past weekend's event.

So clearly, that is impacting our viewpoint on where we think 2012 is going to come in.

So we are just not -- probably not in a position, Jeff.

I think the one thing I can say about 2012 is that -- and we've said this in previous calls, and it is kind of our observation of this market, being in it for almost a decade now, is that when you get an event, the immediate surge in demand is all about portable generators; it's about availability of portable gen sets.

And so that is the first wave.

Beyond that, after that, it really turns very quickly to focus on the home-standby generators.

And that is an effect that can last, depending on the severity of the outage, depending on the concentration of distribution in a particular region where the owners were impacted, that can last anywhere from six to 12 to even as long as 18 months.

So we've still got residual effect down in the Houston market, as an example, in Louisiana.

What happens is you've got this baseline of business.

The outage events drive that baseline quite a bit higher for an extended period of time.

Again, that is six to 12 to 18 months.

And then it eventually settles out -- without further events, it settles out, but it settles out into a new baseline that is markedly higher than the baseline prior to the event.

So again, as we look at that now, we're kind of working through just exactly what we think 2012 is going to be, and we will be able to give you a much deeper outlook on that in the next call.

Okay.

And then just on the fourth-quarter guide, how does -- when do you actually see the replenishment process from your DIY and more portable base?

That was already beginning in the back half of Q3, obviously, after Irene.

That continued here -- I think availability of portable generators is pretty scarce right now.

If you talk to any manufacturers out there, everybody is kind of in heavy replenishment mode internally in terms of production and ramping up capacity and bringing up supply chain.

And so that replenishment would have continued here through the fourth quarter.

Clearly, with the events this weekend, that is going to pretty much wipe out portable generators again for most of the manufacturers, including Generac.

So I think it just one of those cases where I think that had there been more inventory available, even this weekend, it probably would have sold.

It probably would be selling this week.

So things are pretty scarce right now throughout the channels and I think at the OEM level as well.

Okay.

And then just on this telecom business, can you give us order of magnitude, what was pulled out of 4Q into 3Q?

It really wasn't pulled.

It is a matter of timing in terms of these guys -- there can be some swings in their demand cycles in terms of CapEx.

We've got a customer or two in particular that they took heavy orders in the third quarter.

Order magnitude, it is in the millions of dollars, in terms of the amount of magnitude of that impact.

But they are going to have to catch up in terms of their installation now.

So they've got crews that are installing generators.

Some of these guys may have bit off a little more than they could chew in terms of -- and as happens; we watch them do this.

I think it is around their capital spending cycles quarter to quarter.

We look at those telecom companies.

and a lot of them are currently in multiyear kind of growth programs in terms of hardening their networks against outages.

And so we are pretty excited and continue to be pretty bullish on the telecom channel here as we go forward.

So you think the growth you saw this year extends into '12 and beyond, with this kind of upgrade cycle?

All the visibility we have, which, to be very frank, sometimes is a little bit limited with these national account guys, but they've been on record, public record, that they are spending, in some cases, billions of dollars per quarter on CapEx.

Should they change that, clearly that would have impact on us going forward.

But all things considered, if they continue to spend CapEx dollars at those elevated rates, that is going to benefit us in the C&I business at least as it relates to the telecom vertical.

Sounds good.

Thanks, guys.

Christopher Glynn, Oppenheimer.

I think we got an answer, but just to spell it out, the new snowstorm is seeing a new push on portables.

Is there any way to gauge the relevant impact versus what Irene did for you?

No, I mean, other than to say what I just said, Chris, which is I don't think there is enough stock out there.

Inventory levels were much higher coming into Irene.

With portable generators for all manufacturers, retailers were pretty well-stocked at that point.

Kind of the inverse is true here now, with this past weekend.

I think we all started to restock; the retailers, to a degree, had started to restock.

But they no way were in -- they weren't in the kind of shape I think they all wanted to be in, and we certainly weren't either in terms of having our inventories completely replenished for the winter storm season.

So it's an early storm.

We kind of gauge these things based on history, and it's really the only way that we have to kind of guide ourselves.

And historically, we wouldn't see those kinds of winter weather patterns until sometime in December or January.

So I think it is going to be a case where there will be some portable demand certainly from this storm, but it probably will not be -- it is going to be limited by the amount of inventory that is there.

There is a constraint there.

Is that a pricing opportunity?

You got to be careful with that.

You can't gouge people on products, and we would never do that.

But certainly as, we've done in the past, manufacturers from time to time promote their products to promote stocking of products in particular, whether it is portable gens or home standbys.

And we run seasonal promotions all the time, and obviously, you are not going to run those in the middle of an event like this, when demand is heavy.

So clearly, there is probably -- while you're not going to go out and get pricing, per se, you won't be doing the promotional events that you might otherwise seasonally be doing.

Okay.

And then on the C&I side, twofold issues.

On the timing of the vertical, we got that pretty clearly.

But with the Japanese components now resolved, but still regarded as an impact in the fourth quarter, would we see some demand catch-up related to that in the first half?

You will.

Yes, the first quarter, as we've said, this supplier, they've rectified the issue.

It is really related to the tsunami back in March.

Those are is long-leadtime components coming from Japan.

So it started actually to impact us a little bit in the third quarter, although we were supposed to -- we used some safety stock to kind of cover that.

But it's really going to hit us kind of full on in the fourth quarter, and there will be -- that will snap back in Q1.

Got it.

Thank you.

(Operator Instructions) Mike Halloran, Robert W.

Baird.

Just back on the C&I side, if I think about and kind of lump how you are thinking about the overall second half of the year as a group, is there anything in that that I can't sustainably build off on a go-forward basis?

Obviously, some deceleration expected there.

But I think York alluded to the fact that the underlying trends in the market actually showed a little bit of improvement in the quarter.

So maybe you could just talk about the back half on a whole, and if there is anything you think is not sustainable in that.

It's a good question, Mike.

And I think when you look at the back half of the year, we think that is probably a fair proxy for the kind of demand we are going to see going forward.

As York indicated, there were a couple of articles where we saw some strength that -- places like industrial was one that kind of hit the radar screen this quarter, with manufacturing plants being retrofitted or even constructed new, there is some construction activity there and some activity on projects in industrial.

Healthcare remains fairly strong for us.

Data centers, to a lesser degree, is important in terms of the growth we continue to see there.

And certainly telecom, as we've mentioned, is a big part of that.

And that would be the second half.

And those are drivers that at least we think is pretty sustainable.

The other thing that kind of hit the radar screen here in the second half, probably more so here towards Q3 -- we will have to see if it is sustainable in Q4 -- but on the commercial side, as we've said, the commercial market for us -- and think of them as smaller footprint retail establishments, C stores, small grocery stores, things of that nature -- really, the optional standby market, where generators are really -- it's more dependent on a return on investment for the business owner.

We did see increased quoting activity for those types of projects in the third quarter.

That increased quoting activity should potentially lead, all things considered equal with our historical closure rates, should lead to additional potential opportunity for shipments into the first half of the year, given those lags.

So I think that's going to be offset, as we said, by kind of a continued slowdown in some of the governmental related spending, municipals, education, as kind of pointing to a couple verticals in particular.

That's great.

And then on the Magnum side, when can some of those cross-selling opportunities happen?

In other words, when can you start bringing this product on the revenue side, on the sales side through your -- you see your current channels on the C&I side with some of those customers?

Yes, actually, we've got some opportunities with some of our national account customers on our industrial side -- again, kind of some of those verticals I talked about, and telecom in particular -- where mobile solutions are the product that some of these guys use.

And a lot of them have a component of their backup strategy that is mobile and it's also stationary.

We've just never really been able to participate in the mobile side of that.

It has always gone to our competitors.

Magnum has not really had any connection points there in terms of relationships.

So certainly, we think one of the first places are going to be able to capitalize on this is by offering those types of products to those guys.

Maybe there is some opportunity in the first half.

Certainly by the time we get to the second half of the year, I think those cross-selling opportunities are going to pick up on both sides.

Some of our portable generator products, our power washers that are more the contractor-grade products are going to be able to go to the rental houses that they sell to, some of the rental contractors they sell to.

And then again, their mobile products through our channels.

The government, they're a GSA-listed manufacturer, Magnum is.

Generac is very nascent in that; we really don't participate there.

So we think there is an opportunity.

Obviously on GSA, there are opportunities all the time for stationary products.

So that is going to be a process we are going to ramp up.

Right now, the sales teams are working through just kind of the positioning -- what brand is going to go to what channel, how do we want to manage that going forward?

As we've said, we want to be very protective of Magnum's brand.

They've built a great brand and a great position in their markets.

And their brand stands for something with their customer base, and we want to be sure that we are not quick to come in and change that.

So we are going to walk kind of a careful line here in the first 90 days and come up with a good game plan.

That's great.

I appreciate the time.

Brian Drab, William Blair.

Congrats on a great quarter.

Have you said -- and I don't think you have, but can you help us think at all about what the accretion should be from Magnum in 2012?

I know you are getting $0.03 or $0.04 here in the fourth quarter.

Can you extrapolate this out?

Yes, I think from an extrapolation standpoint, you could use Q4 as a guideline.

But we talked about some of the cost synergies that we will begin to realize.

I think on our acquisition call we talked about $2 million of cost synergies that will begin to be realized.

That's an annual run rate and that will get phased in over time.

And then we are still working on the budget for 2012, and we will be able to comment more in terms of Magnum's performance in 2012.

And at that point, we will be able to provide more color with regards to accretion.

Right.

So I saw the comment about the $2 million.

I guess I'm wondering is the $2 million then incremental to the run rate that we are seeing in the fourth quarter, or is that not how I should roughly think about it?

There is really no cost synergies in the fourth quarter.

Yes, it's all incremental.

It will be incremental.

And again, it will be phased in throughout the year, so it's won't be the full $2 million realized in '12.

And we are working through that.

Obviously, the same way we are doing here at Generac, Magnum is working through their budget process for 2012.

And again, I think, Brian, we will be able to give you a much clearer picture of that as we get on the next call.

Great.

Okay.

And then just to clarify your comment on the gross margins for fourth quarter of '11.

The core is getting better, but is it -- including Magnum, should we expect, did you say, about flat sequentially?

Correct.

Yes, I think as we've talked, there is a number of moving parts.

If you take Magnum out of the equation, we would anticipate sequential improvement in gross margins really for all the things that we talked about -- in terms of mix and cost reductions being realized and overhead absorption and commodity price moderation.

But then offsetting that effectively would be rolling in of Magnum's results, and that would have about a 250 basis point impact on our numbers.

So I think when you put it all together, we would expect that total Company gross margins in Q4 to be roughly in line with where we are seeing them in Q3 here.

Okay.

And a few quarters ago, we began talking about the power washer opportunity.

I think -- it seems like I'm the one typically on these calls that asks about the power washers.

But can you give us an update there?

Is that something that is beginning to move the needle?

It's not quite beginning to move the needle yet, Brian.

It's a good question.

It's an initiative we just started shipping those really in the second quarter of this year.

You have really got to get around the horn here on kind of the cadence of liner views for the year.

We started to go through those processes in Q2 and did a few more in early Q3.

At this point, we've secured some placement for 2012, although I would tell you that I don't know that even the placement we've secured in 2012 is going to necessarily move the needle now, given some of the things that we are talking about on the rest of the residential products business.

We are excited about that in the long run.

We are committed to it.

We think there is a tremendous amount of opportunity.

We've got some very strong competitors in that marketplace, but we do think that we will be able to leverage our distribution relationships there, as well as our manufacturing capabilities and engineering capabilities to deliver a product that is very compelling for retailers to put on their shelf over time.

So I think as we build out our reputation there, it is a little bit of a stretch for some of these retailers.

We've not been in that market for more than a decade.

So we've got some convincing to do, as always happens.

And it was something we had to go through with portable gens as well.

That wasn't quite as immediate.

But portable gens, we had a little bit more of a situation where we had a major manufacturer go out of business, and that opened up the door a little bit more widely for us to step into it quicker.

We don't quite have the same dynamic going on with power washers, so we are going to have to earn our way on the shelf there.

That is just going to take a little more time.

Okay, then maybe the slow -- well, I don't know if it is slower than expected, but has the standby and portable strength taken any of the strategic focus away from the power washer -- or any capacity away from that lately?

No, we've got separate teams in terms of engineering and sales efforts there that are focused on that opportunity.

And again, I don't want to leave you with the impression that it is somehow less than what we were looking at.

We think we are actually fairly where we thought we would be at this point.

We were hoping for maybe a few more big wins in 2012.

We did get some placement, and we will roll out a few SKUs in some places where we want to be.

But I think that is something that is going to be a little further down the line, and for us is we remain very excited about that and we are not going to lose focus on that.

Definitely an initiative.

Yes, it is a big initiative for us.

Great.

Thanks a lot.

Thank you.

Sir, you have no further questions.

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

Thanks a lot, Kirsty.

We appreciate everybody's attention this morning, and we look forward to giving you a further update on our next call.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Take care.