Generac Holdings Inc (GNRC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Generac Holdings Inc.

earnings conference call.

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

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

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

(Operator instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. York Ragen, Chief Financial Officer.

Please proceed.

Good morning, and welcome to our third-quarter 2012 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 our call today by commenting on forward-looking statements.

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 reconciliation to comparable US GAAP measures, is available in our earnings release and SEC filings.

I will now turn the call over to Aaron.

Thanks, York.

Good morning, everyone, and thank you for joining us today.

Before we begin this morning, I want to say that our thoughts and prayers go out to those that are currently being affected by the major storm that hit the East Coast.

This storm was both significant with regard to its strength and for the large region that it has impacted.

Our teams at Generac are working around the clock producing and shipping product to the affected regions, assisting customers with their questions, and providing technical support to our distribution partners.

As a company focused very heavily on backup power generation, our business model is built around providing a very high level of service and support during times like these.

In addition to our teams here at Generac, we have the industry's largest and most well-trained generator dealer network of more than 4500 partners that are focused on taking care of our customers during major outage events.

We believe that this event, as well as other recent outages, will have a positive impact on our results going forward; and, accordingly, we have significantly raised our guidance for the remainder of 2012.

Now I would like to turn our attention to Generac's third-quarter results, which we believe continue to demonstrate the accelerated adoption of standby generators into the residential and light commercial markets.

Our third-quarter net sales increased 26% over the prior year to $300.6 million.

This follows a third quarter of 2011 that grew 49% over the third quarter of 2010.

The significant growth that we have delivered over the last several years clearly illustrates the progress that we are making.

and executing on our Powering Ahead strategic plan.

Growth in shipments of home standby generators were again strong during the current-year third quarter, as the market for this product category continues to develop with more homeowners becoming aware of the importance of having a backup power system for their home.

As a result of our execution in meeting the increased demand for these products during the current quarter, we believe we have expanded upon our leading market share position for home standby generators, as consumers further realize the advantages of the Generac brand; including the breadth of our product offering, our industry-leading price points, and the support we provide for both our customers and our distribution partners.

Major power outage events continue to be an important catalyst for demand, and highlight the powerful macro drivers for our business as a prolonged underinvestment in the aging electrical grid is leading to more frequent and longer power disruptions for homeowners and businesses.

Although the category has been growing at a compounded annual rate of nearly 17% over the last decade, home standby generators are only installed in roughly 2.5% of all single-family unattached homes.

The market opportunity for these products remains very attractive, with every 1% of additional penetration representing $2 billion of market value.

As the leader in this relatively nascent market, with over a 70% share, we believe Generac is very well-positioned for additional future growth in our residential markets.

The latest series of major power outages has helped to create additional momentum in the awareness for automatic backup power solutions for homes.

And this awareness, coupled with our greater marketing and distribution efforts, have continued to drive significant baseline growth for home standby generators in North America.

With regards to our commercial and industrial products, an important driver for our business going forward is the increased market interest in cleaner-burning, more cost-effective, natural-gas-fueled backup power solutions.

While still a much smaller portion of the overall C&I market, demand for these products is increasing at a faster rate than traditional diesel-fueled generators, given their lower capital and operating costs.

As a leader in the North American market for natural-gas-fueled generators for over 30 years, we believe we are well positioned to capitalize on the secular shift toward these products.

During the current-year third quarter, we continued to see a year-over-year increase in natural gas generator shipments, providing attractive organic growth for our C&I products.

In addition to natural-gas-fueled generators, Magnum-branded light towers and mobile generators have also performed well, as demand for mobile equipment continues to benefit from a secular shift towards renting versus buying, and as equipment rental companies replace their aging fleets.

We remain excited about the strategic fit of these products through the additional diversification and cross-selling opportunities they bring to our business.

After now owning Magnum for over year, we are also very pleased with our integration efforts, and are on track to achieve our cost synergy targets.

We also continue to make important progress in executing our strategic plan.

Our Powering Ahead strategy, which we implemented less than two years ago, has served as the template for investments in our Company that we expect will positioned Generac for longer-term growth.

Since its implementation in 2010, we have exceeded our performance goals established at that time, reaching many of those targets a year earlier than we had originally planned.

As we look to the future, our Powering Ahead strategic plan will continue to be driven by the same four key growth objectives of growing the market for a home standby generators; increasing our share of the commercial and industrial market; diversification of our business through new products and services; and expanding our geographic reach.

As we continue to move the Powering Ahead plan forward, we are focused on a number of new initiatives that will continue to grow the baseline business for Generac, as follows -- in working to grow the residential standby generator market, we have made important progress in 2012 in designing and implementing a number of focused dealer development programs we believe will allow us to create and close sales leads more effectively.

These programs incorporate new sales tools, training improvements, and more structured processes that are designed to better align our dealer network with Generac and improve the overall consumer sales process.

We have also enhanced our efforts in using data regarding the location of our installed products to implement targeted marketing techniques for new sales prospects, as well as having developed a more sophisticated and efficient process to capture and track sales leads through our dealer network.

Additionally, we have further expanded our residential and light commercial distribution network, ending the third quarter with over 4500 dealers, representing an increase of approximately 500 channel partners over the last 12 months.

Increasing both the awareness and the availability of home standby generators are two important elements of driving the penetration of these products higher.

We also believe improving the consumer purchasing process will allow us to more quickly grow this emerging product category.

With regards to growing the commercial standby generator market, we believe there is significant opportunity to tap into this highly underpenetrated end market, consisting mainly of small footprint commercial buildings such as gas stations and convenience stores, restaurants, pharmacies, bank branches and clinics and other small healthcare facilities.

We believe our expertise in natural gas generators, our vast distribution capabilities and our national account customer focus will allow us to increase the market for commercial standby generators.

By using a targeted marketing approach and funneling opportunities to our distribution partners, we are confident we'll be able to effectively penetrate this market by preventing presenting a very compelling return on investment for business owners who are looking to protect the revenue streams, as well as their inventories with backup power protection.

In addition to our initiatives associated with growing the market for home standby and commercial backup generators, we have a number of new product development initiatives underway as well.

Innovation has always been a part of Generac's culture and is something we view as a core competency of our Company.

As we work towards diversifying our business, we believe innovation can play an important role in helping us to achieve this goal.

One example in this area that we're particularly excited about is our ability to bring some much-needed innovation to the power washer category.

Our One Wash product line was introduced at the Lawn and Garden Show in Louisville, Kentucky last week and is the latest addition to our growing power washer product line.

Market-exclusive features such as variable pressure output for different tasks, automatic shutoff protection and increased ease-of-use differentiate this product from any other power washer on the market today.

We have made good progress online reviews with the One Wash product, as well as with our legacy power washer products for the 2013 selling season.

In addition to power washers, we also have several product development projects under way to broaden our commercial and industrial product offering, which we believe will significantly expand the addressable market for Generac and our dealers over the longer term.

Going forward, we'll continue to focus on new product development as part of our growth strategy, and Powering Ahead will help to guide our investments in this area.

Regarding expanding our geographic reach, our international expansion continues to remain a focus as we look to increase our distribution footprint and support functions globally, as well as expanding our product offering to better fit the needs of individual local markets.

Going forward, we will continue to make our international expansion efforts a priority given the significant global market opportunity that exists for backup power generation.

We're also looking forward to providing further insights with regard to our Powering Ahead growth strategy at our upcoming Investor Day on November 8.

I would now like to 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 2012 were $300.6 million, a 25.6% increase as compared to $239.3 million in the third quarter of 2011.

Looking at net sales by product class, residential product sales increased 17.8% to $191 million in the third quarter of 2012 relative to a strong prior-year net sales comparison of $162.1 million, which saw year-over-year sales growth of 60.5%.

During the third quarter, Generac continued to experience a very strong double-digit increase in shipments for home standby generators in comparison to the prior year.

Significant awareness and baseline growth for this product category continues to be generated through a combination of the major power outages over the last year, expanded distribution in active markets and increased sales and marketing efforts to create and close leads more effectively.

As demand for home semi-generators has significantly increased over the last several quarters, we've been able to execute by officially increasing our production levels to meet this demand.

Portable generator shipments during the third quarter of 2012 were coming up against a difficult comparison versus prior year, but showed a strong sequential increase relative to the second quarter of 2012.

Our broad relationships at retail have provided us with expanded placement for portable generator products, and as a result, we believe we've gained market share in this product category compared to prior year, further enhancing our leading position in the market for residential backup power in the US.

Also contributing modestly to the revenue growth for residential products during the third quarter of 2012 was increased revenue from our power washer product line, which first began shipping in the second quarter of 2011.

We also continue seeing increased sales volumes for our Honeywell licensed residential products.

While we are still in the relatively early stages of both programs, we continue to be encouraged by the quarterly sales trends related to our power washers and Honeywell licensed generators.

Looking at our commercial and industrial products, net sales increased 48.3% to $93.6 million in the third quarter of 2012 from $63.1 million in the third quarter of 2011.

The increase in net sales was primarily driven by the Magnum Products acquisition and to a lesser extent increased shipments of natural gas fueled backup generators.

Partially offsetting these gains was a year-over-year decline in shipments to certain national account customers during the third quarter relative to a strong prior-year comparison.

As a reminder, given our strong telecom market share, there can be some variability in our C&I product shipments, primarily due to the timing of capital spending by our national account customers.

On October 3 of 2012, we reached our one year anniversary of our acquisition of Magnum power products.

Over the last year, we've made significant progress with the integration of this business, and we remain on track with our goal of achieving roughly $2 million in cost synergies on a run rate basis.

As discussed on previous calls, much of the savings we're projecting will come primarily as a result of improved purchasing scale with certain components and commodities, as well as from improved utilization and efficiencies in Magnum's operations.

We will continue to realize these cost synergies during the fourth quarter of 2012 and remain on track to achieve the full realization on our annualized basis by the end of the year.

In addition to cost synergies, we've also taken advantage of opportunistic revenue synergies through cross-selling opportunities across the businesses.

Looking forward, we expect to further expand on these cross-selling opportunities with Generac's industrial national account customers and industrial dealers purchasing Magnum mobile generators, and we continue to track a number of leads across sales teams both domestically and internationally.

Our other product sales category improved to $16 million in the third quarter of 2012, an increase of 13.5% from prior year third-quarter sales of $14.1 million.

As a reminder, this product category is mostly comprised of the sales of aftermarket service parts, as well as loose engines sold directly to OEMs for use in engine power products across a wide range of applications.

Gross margin as a percentage of sales for the third quarter of 2012 was 38.5% compared to 37% in the prior year third quarter.

The 150 basis point increase over the prior year was primarily due to higher mix of home standby generators and a lower mix of portable generators.

The positive impact from commodity cost moderation improved pricing and improved overhead absorption also contributed to the improvement in gross margin relative to prior year.

All of these margin improvements were partially offset by the mix impact from the addition of Magnum Product sales.

Operating expenses for the third quarter of 2012 increased by $12.2 million or 27.4% as compared to the third quarter of 2011.

These additional expenses were driven primarily by operating expenses associated with Magnum, increased sales, engineering, and administrative infrastructure to support the strategic growth initiatives and higher base line sales levels of the Company, increased incentive compensation expenses as a result of the Company's financial performance during the quarter, and lastly, increased variable operating expenses resulting from the increase in organic sales.

Adjusted EBITDA increased to $76.3 million in the third quarter of 2012 as compared to $61.6 million in the same period last year.

Our last 12-months adjusted EBITDA as of September 30, 2012, was $268.5 million or 24.4% of net sales during that period.

GAAP net income for the third quarter of 2012 was $25.5 million as compared to $37.4 million for the third quarter of 2011.

Current year net income was impacted by an $11 million increase in interest expense from the refinancing of the Company's senior secured credit facilities in May 2012, as well as the normalized income tax provision of $16.3 million versus only $126,000 in the prior year quarter.

Talking further about income taxes, the third quarter of 2012 includes the impact of a normalized effective income tax rate of 39% as compared to a tax rate of 0.3% in the prior year third quarter.

As we've discussed in recent earnings calls, until the fourth quarter of 2011, a full valuation allowance was recorded in the Company's net deferred tax asset, resulting in substantially no income tax provision.

In the fourth quarter of 2011, it was determined that a full valuation allowance was no longer required against the Company's net deferred tax assets, and that valuation allowance was reversed.

Therefore, starting in the first quarter of 2012, a normalized income tax provision has been recorded through our income statement.

More importantly, though, the vast majority of this income tax provision is non-cash in nature as we will continue to realize significant cash tax savings, primarily from the step-up in asset basis and NOL carryforwards relating to 2006 change in control transaction and to a lesser extent the recent Magnum acquisition.

As a result, we believe the Company will only pay nominal federal income taxes for the foreseeable future, which is why we only reflect cash taxes in our adjusted net income calculation.

Adjusted net income as defined in our earnings release increased to $54.1 million versus $50.6 million in the prior year third quarter.

The increase in adjusted net income is attributable to improved operating earnings during the quarter, resulting from the 25.6% increase in revenue, including the incremental results from the Magnum acquisition, partially offset by the higher interest expense due to refinancing the Company's credit facilities as discussed previously.

Diluted net income per share for the third quarter was $0.37 compared to $0.55 per share in the third quarter of 2011.

Diluted earnings per share for the third quarter of 2012 includes a net $0.23 per share impact from the normalized effective income tax rate, as well as a $0.10 impact per-share impact from the higher interest expense levels.

Adjusted diluted net income per share as reconciled in our earnings release was $0.78 for the current year quarter compared to $0.75 per share in the prior year quarter.

Free cash flow as defined by net cash provided by operating activities less capital expenditures was $61.6 million in the third quarter of 2012 compared to $60 million in the same period last year.

Strong operating earnings and the monetization of inventory levels were partially offset by an increase in capital expenditures, primarily related to capacity expansion initiatives.

Free cash flow over the past 12 months was $188.9 million, and unlevered free cash flow, which adds back cash interest expense, was $214 million.

As of September 30, 2012, we had $882.9 million of bank debt outstanding net of unamortized original issue discount and $58 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $824.9 million.

Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the third quarter was 3.1 times, down from 3.5 times net debt leverage ratio at the end of the previous quarter on June 30, 2012.

A strong cash flow profile and availability on our unfunded $150 million revolving credit facility gives a significant operating flexibility to further invest in our future organic growth initiatives, pay down debt to our targeted leverage levels while also executing on potential strategic acquisitions.

With that, I'd now like to turn the call back over to Aaron to provide some additional comments on our outlook for 2012.

Thanks, York.

Due to the substantial power outage activity currently occurring on the East Coast, we are significantly revising our guidance upward for the remainder of 2012, mainly due to increased demand for home standby and portable generators in the fourth quarter.

Full-year 2012 net sales are now expected to increase in the low 40% range over the prior year, which represents an increase from the low 30% range previously provided in our October 1 business update.

As a result of the higher sales outlook, our adjusted EBITDA for the full-year 2012 is now expected increase in the mid-40% range over the prior year, which is an increase from the mid-30% growth rate previously expected.

In addition, diluted net income per common share for 2012 is now expected to be in the range of $1.21 to $1.27 per share as compared to the $1.02 to $1.08 per share range previously expected.

Adjusted diluted net income per common share is now expected to be in the range of $2.95 a share to $3.00 a share as compared to our previous expectation of $2.65 to $2.70 a share.

We believe the long-term impact of the recent outage events will continue to increase awareness for residential and light commercial standby generators.

This higher level of awareness is expected to drive further expansion of our distribution network in the affected regions, as well as create opportunities to use our enhance sales processes and marketing techniques.

These are important factors in accelerating the adoption of these products, which we believe will lead to the establishment of a new and higher baseline of demand for automatic standby generators.

As a result, we now expect residential product shipments for full-year 2012 to increase in the high 30% range.

This is on top of a very strong year for these products in 2011 as residential sales last year increased 32% in comparison to 2010.

With regards to our commercial and industrial products, despite there continuing to be a number of macro data points that suggest a moderating growth environment at least in the near term, our outlook for C&I for the remainder of 2012 has modestly improved compared to our prior forecast, driven by increased capital spending by certain industrial national account customers, as well as increased demand for light commercial generators and certain mobile products due to the recent outage activity.

As a result, we now expect our C&I product sales to increase at a mid-50% growth rate for the full-year 2012 on an as reported basis.

Gross margins are expected to be approximately flat for full-year 2012 when compared to the prior year.

The higher sales mix of home standby generators and improved pricing, coupled with lower input costs, should be offset by the addition of Magnum's products in our sales mix.

As a result of improved operating leverage, full-year 2012 operating expenses as a percentage of net sales, excluding amortization of intangibles, are expected to decrease nearly 100 basis points as compared to the prior year.

On an absolute basis full-year 2012, operating expenses have increased compared to 2011 as we continued to invest our infrastructure to support our strategic growth initiatives and our overall higher level of organic sales.

In closing, we believe our third-quarter results clearly provide further validation of the powerful growth drivers for our business.

We continue to believe increased awareness of automatic standby generators and execution on our powering and strategic plan will further build on our track record to strong organic revenue growth.

We're focused on growing Generac's topline through product innovation, expanded distribution and targeted marketing for our products.

When considering all of these factors, we believe our Company is very well-positioned for future growth.

This concludes our prepared remarks, and at this time we would like to open up the call for questions.

Operator?

(Operator Instructions) John Clearly, Canaccord Genuity.

Hi, good morning and congratulations.

Just a couple of quick questions here.

First, with regards to the raise in guidance for 2012, can you folks talk about were you producing or getting inbound inquiries last week ahead of the storm?

Give us, if you would, a little bit more of the visibility of the channel.

Are you dealing with stock outs, etc.?

Yes, it's a great question, John, and one that we've gotten obviously a lot of questions and inquiries on over the last what I would call four or five days here.

Really since going back since midweek last week when it was pretty clear that all the forecasts were kind of aligning to indicate a pretty severe event was going to occur.

We immediately went into a mode where we work with our channel partners to figure out where their inventory positions are.

We have inventory stationed not only here in the Midwest where we have our distribution center, we also have third-party warehouse and logistics companies that we work with across the United States.

Many of those are in the more populous regions of the country like the East Coast.

And so we began immediately shipping products midweek last week and all the way through this weekend and, frankly, up and through till today here.

Obviously stock is starting to run low.

Portable generators, I think you'd be pretty hard pressed to find a portable generator anywhere.

We do know that our retail partners are bringing portable generators from other regions of the country, and they're now putting in the logistics to get those generators to the East Coast.

The problem is logistics are still very difficult.

Moving trucks even from the Midwest here out to the East Coast has been a challenge.

There's a lot of debris on roadways.

They're just now getting things opened up with bridges and tunnels in a lot of the metropolitan areas out in the East Coast.

And so some of the harder hit areas, it's a challenge getting the product where it needs to be at this point.

But we continue to ramp up our production and send product directionally toward that area.

And then two quick follow-ups.

First, in the mid-Atlantic region, in particular as you folks raise your expectation of baseline business, is this the capitulation that some folks are seeing with they had a big spring storm and now we have Hurricane Sandy?

Is that what is giving you the confidence to raise that baseline at least qualitatively with us?

And just one quick follow-up.

That's an excellent part of or a great part of that, John.

It's a -- when these events happen and when they happen in succession, they build on each other and the time period between the event shortens, what it does is it gets people to what we call the tipping point.

So each family, each person has kind of their own tipping point in terms of where -- how they view this category when their power is out.

Sometimes people can go an hour, two hours a day two days, three days, and they're not at the tipping point.

They go to a second outage, and they have another extended period of time without it.

That might get them over the tipping point.

For some people, it's even a third outage or even a fourth outage before they become, you know, very interested in the category and serious prospects for a home standby generator.

So when we see events like this happen in kind of serial fashion that they've happened over the last call it 14 months out east and in the mid-Atlantic region in particular, that certainly creates an awareness for the category that did not exist before.

And that awareness is going to help us, and we have seen this over the last decade here.

These events happen.

They create -- we see a spike in sales.

That spike in sales settles down, and it settles down into a baseline of sales that was higher than the previous baseline prior to the events.

Lastly, real quick, on the C&I business, you mentioned I think you said improved nat gas shipments on the C&I side or a better outlook.

Can you just give us a little bit more background there?

Thanks very much.

You bet.

Thanks, John.

So on the natural gas side, you know, again, in our prepared remarks, we said in our third-quarter sales, we actually saw some modest increases in our nat gas shipments year over year.

In third quarter, we've continue to see a trend there with natural gas products.

This is a niche market that we have been serving for the last 30 years.

It's still a very small piece of the C&I market overall, but one that we view as having a better growth trajectory than traditional diesel solutions, mainly because, again, the initial capital cost of those products up to a certain kW point are lower, and the operating costs certainly are lower as well.

They also have other inherent benefits.

Certainly they are cleaner burning from an emissions standpoint.

They don't have a lot of the refueling requirements.

So take, for instance, a hospital or commercial application right now in New York City or New Jersey or anywhere out on the East Coast that is without power.

If they have a diesel, a traditional diesel generator, the big constraint today is getting fuel to that generator.

So everybody has the same constraint at the same time you have a scarcity of resource in fuel trucks, and frankly, fuel delivery mechanisms, which many times are often electricity is an important component of that fuel delivery mechanism in terms of the fuel lifting stations and the pumping stations, some of those stations are off-line as well because they don't have power or backup power.

So diesel fuel becomes scarce as the commodity, the delivery and logistics of it become very challenging in a storm.

That is all taken away.

Natural gas oftentimes during major events and natural gas delivery is uninterrupted.

In fact, natural gas becomes more abundant because they are fewer people using it during times of severe crisis.

And so it has really made these products very attractive for a lot of reasons, and we're really seeing that pick up here in the last few years.

Charley Brady, BMO Capital Markets.

Hey, thanks.

Good morning, guys.

Just with respect to the updated guidance and kind of the mix that you're seeing, I'm wondering how that plays out in terms of your gross margin outlook into the remainder of the year?

Yes, you mean this is York, Charley.

I think if you go to the annual full-year guidance that we alluded to in terms of gross margins being roughly flat from 2011 to 2012, if you back into that, that would show Q4 gross margins being similar to Q4 2011's margins, which would be sequentially down from Q3 2012, and the main driver there, the price cost dynamics that we are seeing here in Q3 2012 will really be similar in Q4 2012.

What you're seeing there is that there will be a mix shift towards more portable.

As Aaron mentioned, when you get an event like this, immediately you will sell a number of portable generators and, as a result, reflecting that in our guidance.

Longer-term, as Aaron talked about and as more people become aware and hit this tipping point and start to research on standby generators, we've talked about the impact of these events having two, three, four quarters of impact having higher order rates for home standby generators.

So, as a result of Q4, will be a higher mix -- Q4 2012 would be a higher mix of portables, which would drive that mix to a lower sequential decline in margins.

Right.

And then just on the C&I business, you talked about you saw a tickdown in some of the national account sales.

Could you just expand a little bit on that and what's driving that?

And do you think the storm activity maybe drives some of the rental customer to increase purchases maybe more than they otherwise would have just to get rentals equipment into those markets?

That was kind of along the lines of our comments.

What we meant by national account customers was we are a primary supplier to the telecommunications industry, and if you've been following along with the power outages out east, I mean obviously a lot of those companies are having difficulties as well, both the flooding and loss of power.

It's estimated that upwards of 25% of the cell phone capacity or mobile phone capacity, wireless capacity is off-line right now as we stand out on the East Coast in the affected areas.

We do believe and have seen indications that the telecommunications customers that we serve in those markets are going to be improving their purchase activity here in the fourth quarter certainly.

And then to your point about mobile products, we definitely do see a bit of an influx of orders around mobile gens.

When we get events like this, a lot of that is around the immediacy of need for those types of products.

And then also what we tend to see with our national account customers there, the big rental yards, oftentimes it gives them an opportunity to do a change out of equipment.

They'll oftentimes sell older pieces of equipment off and kind of refresh their fleets at a little bit faster rate as a result of maybe a higher level of utilization of these products over the next couple of months.

Great.

Thank you.

You bet.

Thanks, Charley.

Christopher Glynn, Oppenheimer.

Thanks.

Good morning.

Just looking back at Irene in October, how they played out the snowstorm last year, it seems that the bulk of the Sandy impact could be 2013.

So just wondering what your thoughts are on the timeframe to settle back into a new baseline type of level and whatever that turns out to be.

Right, right.

I mean it's the question I think that is on not only your mind, Chris, but ours as well.

I think it's a little too early to tell just based on we're not sure how long this outage is going to last.

The duration of an outage, you know obviously the severity of an outage is two components.

It's how many people are impacted, but it's really also for how long they're impacted.

And so the longer the outages go, you know, power is fully restored by tomorrow and the duration is shorter, that could have an impact on what we refer to sometimes as the afterglow of demand that we see generally on home standby.

I would also like to point out, though, that there are really two impacts from these kinds of events.

We have an immediate impact of portable generators.

We're North America's number one share in terms of brand brand share of portable generators in terms of producers.

And we see an immediate impact from that right away, and we'll see that here in the fourth quarter.

That dies down immediately.

There's a little bit.

There's some replenishment of stock that will occur maybe in the first half of next year, but the bulk of that demand surge will occur here in the fourth quarter almost immediately and has already occurred.

The afterglow with home standby because that's a research purchase, it's a longer sales cycle, there's a lot more things involved there.

It's a bigger ticket item.

There's building permits to pull when homeowners want to go through a project like that.

And so that afterglow can last between six and 12 months after this type of event.

So, again, a lot of that's going to depend.

We'll watch our order rates.

We'll see how it settles out.

I do believe the one thing that could push this maybe toward the back half of that six to 12 months period in terms of being longer in duration is the fact that we have had a number of these outages kind of one after another here over the last 14 months.

Makes sense.

And then if -- you know, we don't know if there is going to be another event at some point, but -- well, there will at some point.

But if there's another step function change in your demand, you've absorbed what has transpired here tremendously well, like just how would your supply chain and your own capacity be prepared to respond to another step function change like it has over the past 12 months?

Yes, you know, whether it's fortunate or not, I mean certainly not fortunate for people who are going through the outage.

But from our standpoint, we've gotten quite a bit of practice at going through this in terms of testing the capacity of our supply chain, making sure we understand the ability of our supply chain to hit higher levels of output, and so that's been something we've been very focused on the last year.

Additionally, as we said, we've said kind of all along, we felt that organically -- this is pre-Magnum -- we felt that we could achieve about $1 billion in sales with our current manufacturing footprint of about 1 million square feet.

We did add quite a bit to that when we bought Magnum, but we recently we added another facility here.

We bought a facility in September ahead of all this, kind of thinking longer-term, and we are going to bring that facility online later next year in 2013.

We've actually accelerated our plan to bring that facility online towards the beginning of 2013.

So we believe with supply chain, the addition of manufacturing capacity here in the US and also you know we'll go out and want to hire people as well, that we're going to be very well-positioned to take that next leg of growth up and handle that really without any kind of a hiccup.

Jeff Hammond, KeyBanc Capital Markets.

Hey, have you guys been able to do any -- I know it's early and the storm is still kind of going on -- but have you been able to do any kind of assessment on how this compares or doesn't compare to Irene?

Yes, it's something -- we actually track the outages, Jeff, and I think we've talked about this.

Because it is part of our marketing and how we market to people after areas are impacted by outages.

So we track them.

We have a pretty robust system actually we developed over the last several years, and right now what we show is at the height of the outages, over 8 million people were impacted by this event, and that compares with Irene being just shy of $6 million.

And that's just -- there's a lot of reports out there in the media, a lot of different places.

This is our own tracking.

We think it's like-on-like in terms of being comparable.

So we would -- again, to answer your question, we feel that this would be a larger event at least in terms of the number of people, and as I said previously, not exactly sure of the duration yet.

We will have to see that.

There were areas of Irene that were certainly impacted for a week or longer.

It does sound like all the initial reports around this event put the restoration process of at least something on par with what happened with Irene.

So you're saying your internal process was the same for both storms put you at $8 million versus $6 million?

That's how we see it, yes.

Okay.

Okay.

Perfect.

(multiple speakers) And then just on your penetration rate number of 2.5%, how up-to-date is that?

Does that reflect Irene and some of the recent storms and maybe give a better sense of maybe some of the areas that have higher penetration rates or where you see penetration rates in some of these more effective areas like the East Coast and Northeast?

The 2.5% is a pretty recent number.

We updated that earlier this year.

So it did reflect at least some of the Irene demand.

You know, that is something that, you know, we track again very closely, and again, our addressable market as we define, just to remind you, a single-family unattached housing stock, greater than $100,000 in value, which is about 50 million US homes.

So every 1% of penetration is about 0.5 million homes.

We use an average sell price at retail of about $4000.

So that's the $2 billion market opportunity number that we've talked about in our prepared remarks.

Yes, as far as other -- kind of looking at areas kind of area by area or state-by-state by penetration, which we track, we've got some states that are clearly more further along that penetration curve than the 2.5% average states like Florida where you would expect some coastal areas.

New York is approaching something that's not 4%, but it's greater than 2.5%.

Somewhere in between there.

States like Illinois that have poor power quality and Michigan also are a little bit further along in the penetration curve, kind of in that kind of low to mid single-digits, that 4% to 5% range.

But we have a lot of states that really when you look at it, states that just -- they are really just still very, very underpenetrated.

A lot of states are right around that 2.5% range.

So, you know, again, we just think there's a tremendous amount of opportunity in this category.

It's really only a decade old and something that we feel that power quality in the United States is really unbelievably poor.

We travel the world, and there are places around the world where people just can't understand in the US how we can have the kinds of issues with power quality we have here.

Now we do have some unique situations around just the geography and the climate that we deal with in the United States that make that more challenging and make it so that our grid is mainly above ground in a lot of areas.

But the chief cause there is that it's underinvested in.

And that underinvestment has created just a very frail and fragile system that continues to suffer from outages.

Okay.

Great.

I'll get back in queue.

Thanks.

(Operator Instructions) Jerry Revich, Goldman Sachs.

I'm wondering if you could talk about your capacity to deliver standby products as a potential winter storm activity?

If you could, just give us an update on where lead times stand today, and just quantify for us how much added supply chain capacity you think you have today versus a year ago?

Thanks.

Thanks, Jerry.

In terms of just where lead times are at today, we still do have home standby products available.

Certain SKUs are starting to move out into a backlog situation, and lead times are moving out to reflect that.

We've seen leadtimes as we saw with Irene.

We have seen leadtimes get extended.

I think what we've said about this category is that because it is a longer sales cycle and there's more involved in this process in coordinating the trades and project managing installation of this, everything from obtaining permits to lining up contractors to do the electrical work, as well as the natural gas and LP work that's involved with the installation of these products, there is a longer cycle.

And once the storm passes, I think people have made up their mind that they are going to jump into the category, and they will wait if they need to wait.

Obviously we don't want to wait long.

We want them to get those products for the next event that may happen given my comments here previously about the fragility of the grid and the susceptibility of it to further outages.

The ability for us to ramp up, as I said before, we have been testing our supply chain and pressure testing our supply chain in terms of output increases here over the last 14 months.

We feel very good where we're at on that.

We've brought out additional suppliers where we've got certain components that were sole-sourced in the past.

We've gone to dual sourcing many of our critical components to make sure that we have adequate supply of those components, not only to ramp up, but in the event of some unforeseen interruption of supply of a source.

So we feel very good about where we're at in supply chain.

Our actual constraint was starting to become manufacturing capacity, and as I said before, we acquired a plant here recently in September.

We're going to bring that plant online much quicker than we had originally thought, and we believe it will be in producing products in that plant and reallocating our production between all of our facilities to kind of reflect the additional needed capacity that we're going to have to serve the market going forward.

And Aaron, last year you were able to pick up some portable share because you carried higher inventory during the storm season.

How do you think that's been playing out this year, and can you talk about a third quarter and how much portables inventory you had on hand?

Thanks.

Jerry, you know, we felt that we were in really good shape coming into this season.

Obviously this event was really kind of the first and only event, you know, after the June windstorm out east for the mid-Atlantic, excuse me.

We really didn't have much of a hurricane season.

And so inventory levels were relatively high, both the channel partners out on the East Coast and in the southern states, as well as our own inventory levels.

So we feel we were in better shape this year than we were last year.

We also had increased our inventory levels, mainly because we had picked up share, and we've got additional placement of those products.

So just with a broader distribution pipe, we need to make sure we've got product to fulfill that.

So we believe that having those products on hand is going to serve us well with our channel partners going forward as we look at additional placement next year, but we think we've satisfied that demand pretty well.

The key now is going to be resupply.

How quickly can we get additional portable generator manufacturing ramped up and get the supply of those products moving in a direction to not only stock our own distribution centers with those products, but our third-party logistics warehouses and our channel partners as well.

And, Aaron, on that last point, can you share leadtimes with us currently or just a rough sense on how long that resupply will last?

That resupply starts -- it actually starts immediately.

We produced -- excuse me, we produced portable generators.

We're talking portables now, Jerry.

We produced portables Jerry here in the US.

We also contract manufacturers on those products as well overseas.

So obviously with regards to supply-chain to bring those products online, we'll produce what we can as quick as we can here for our safety stock levels on raw materials and so will start resupplying right away.

We've ramped up our production levels already over the weekend as it relates to portable generators.

And then we'll have a resupply process that lasts over the next four to 12 weeks.

We'll see quite a bit of stock come into the marketplace, and we'll see how the market absorbs that.

We think generally what we see after events like this is a fairly knee-jerk reaction by channel partners.

They tend to go heavier on stocks for the next season after going through a major event.

So what that means for next year is stock in you know it could be greater than this year?

I don't know if it would be greater than this year, but we had kind of the same effect last year.

We had another event in 2011 that led to a pretty strong stocking here in 2012.

I think it is going to look at least similar here going into 2013.

Brian Drab, William Blair.

A lot of my questions have been asked already.

But going back to a question I just asked, I don't know if this is more of a comment or question really, but I just wanted to see if you have a thought on this.

When you're looking at the 8 million households that are without power and comparing that with Irene, do you think how you think about the location of those people?

Because in this case, you've got some estimates that 2 million people in New York are without power, and I imagine there's a lot of people without power right now that live in something like a 400 square foot apartment in lower Manhattan.

And I mean it is an excellent point, Brian, and one that we would have to dig in deeper into those outage numbers.

I'm sure that 5.8 million or the nearly 6 million we saw in Irene had a bit of that as well.

Although to your point, I do believe the New York metro area in particular, the New Jersey metro areas in particular where you've got those are not necessarily prospects for this product category.

There's probably a higher concentration in this outage event than there was.

So perhaps the 8 million in relation to the 6 million may be a bit overstated if you are just looking at a raw percentage increase.

I think it is a fair point.

Okay, okay.

And then you talked about international expansion.

Could you give us maybe a little bit more of a detailed update on how things are progressing in Australia?

I know the main focus is on the US today, but if you could talk about that, that would be great.

The Australian agreement that we signed was a company by the name of Allpower.

We signed that last quarter and made that announcement.

That was going to roll here late in the fourth quarter.

We're on target to achieve our rollout plans.

You know, we are excited about that market.

We do caution people it's a relatively small market in relation to the US.

But, again, it's a market that today the home standby generator category, frankly, doesn't exist like commercial markets don't exist.

They have diesel generators, as you would expect all over the world.

Portable generators are another opportunity for us in Australia as well.

We're excited about our international efforts.

Australian notwithstanding, Latin America continues to be a focal point for us.

We've made some significant investments organically.

We'd love to see that market grow faster for us.

Organic growth in international markets is a difficult thing.

There's no question about that.

It takes a lot of resources, and it's going to take time to build that out.

But we are very focused on, I think, for us getting on board with a cultural change of getting outside of the US market with our products both from a design standpoint, as well as, you know, support and distribution standpoint have been very -- those have been critical hurdles for us to overcome because we haven't had to do them before.

We're not a large national company today, and if we want to become one in the future, we think that we have a fantastic opportunity over the long term to take the Generac brand and do something very special with it worldwide, similar to what we're trying to do here in North America with that or in the US market with the Generac brand.

But it's going to take time, and it's going to take a fair amount of resources, and that is reflected in our increase on an absolute basis.

The operating expenses of the business have gone up, you know, as we've made investments in things like international expansion.

Okay.

Thanks and then you mentioned the power washer business a couple of times and wondering if you could first remind me and then maybe update us on how you perceive the size of that market, and could you quantify at all what your level of sales in the quarter was into that market or what you'd expect it to be for 2012?

Yes.

So when we think of the power washer market from a retail standpoint, we look at it, and this would be gas-powered washers.

We see that as a market that's somewhere in the $800 million range, $700 million to $800 million range from a market standpoint.

It's a market that it has actually kind of gone through -- this year was a drought.

So droughts are not favorable to power washers because of water restrictions.

So, you know, that's something that actually hurt the market this year, and I think the leaders in that market would tell you that.

You know, we have got a very small piece.

We used to be the leader in that market.

We sold that business.

It's dominated by a couple of others out there who do a very good job at serving the market.

We believe there is room for growth there in innovation, which is what I spoke to in our prepared remarks.

You know, we're not going to break out the sales individually here on the quarter, but I will say this, as we said in the prepared remarks, we believe that with some of the innovation we'll bring into the market for 2013 and based on conversations we've had with our channel partners there and just in particular what we debuted at the Lawn and Garden show at Louisville last week, we've have got some neat products there.

We've got some channel partners that are excited about this.

We believe we're going to be a player in this market going forward.

We are committed to doing it.

We think there's a lot of opportunity to win innovation, to not only to increase the size of the market, but, frankly, to increase the average sale price of these products.

Unfortunately the market over the last several years has been a bit of a race to the bottom with average sale price?

And we believe that with innovation, we can create in the minds of consumers and in the minds of our channel partners a better value, a product that has more feature and benefit and can absorb a higher retail price point.

The jury is out on that.

We'll see if that -- if our theory is supported going forward, but we believe innovation is a key to that, no matter what product we're talking about, but certainly in this power washer category.

All right.

Thanks for your time.

Jeff Hammond, KeyBanc Capital Markets.

Hey, guys.

Just to follow on the pressure washing, do you have a sense of what the market size is and how you'd maybe frame where you think you can take your share to relative to where you went where you took portables?

Yes, so that's a great question, Jeff.

We think the market is probably in that $700 million to $800 million range for gas power cold water washers here in the US market.

That would be kind of last year's market estimate for 2011, I should say.

In terms of where we can take share, we believe on the portable generators side we're kind of in that mid-20% share range now today on portable generators.

Is it reasonable to believe we can take power washers there?

I don't know.

We had some pretty unique situations kind of converge with portable gens, and we had kind of one of the larger providers of portable generators.

When we reentered the market back in 2008, one of the larger providers of portable generators exited the market through a liquidation at that point.

So it opened up a hole in supply, and we were able to fill that hole very quickly and take advantage of that.

Obviously the Generac brand we believe carries quite a bit of weight, not only with our retail distribution partners but with consumers as well.

We've seen that, and that has been demonstrated time and again.

So where we can take share going forward, we believe that it's likely that we're going to grow.

Right now we're very low single digits in this market.

I would say double-digit share, low double-digit share here in the next several years is a very real possibility for us, given some of the receptivity we've had to being back in the marketplace and, frankly, to receptivity of some of the innovation we're bringing to the market, and the fact that there is room in this market for growth and there is room in this market for innovation.

I think we're going to do -- I think it's going to be a very nice flat platform for us as we grow out, and it's going to give us confidence to look at other potential engine power tools to add to that platform.

So we're starting to do that analysis today and starting to think about beyond power washers what's next for Generac.

We're very aggressive with engine-powered products.

We are an engine manufacture ourselves in our own right.

We manufacture really great air-cooled engines and liquid-cooled engines, and we think that there's room in the market for products that use those engines.

So we're going to continue to push on that here going forward.

Okay.

Great.

And then just a couple of follow-ups on commercial.

Can you give us the Magnum acquisition contribution in the quarter?

Sure, Jeff.

It was, if we grew 48% total for C&I, Magnum was basically most of that grew just over 50%.

Organic C&I was slightly down, and again, that was mainly due to some of that timing of national account telecom customers ordering patterns.

So you exclude Magnum and telecom, actually we were about flat on C&I in the third quarter.

Okay.

Great.

That was my follow-up.

What are your national account -- some of these big national account telecom customers telling you about CapEx plans into 2013?

We wish we could get them to tell us a lot more.

Unfortunately the planning cycle there, I'm not sure they're completely done yet, frankly, and that might be why we don't have a lot of insight.

Although in years past, it's been difficult to get quite a bit of information.

They tend to do their CapEx planning and large levels.

We get soundbites of what those CapEx levels look like, but unfortunately it doesn't filter down necessarily to exactly how that translates out into generator purchases.

So we can just look at what we're seeing right now, Jeff, and what we can tell you is that interest has increased for those products with 25% of the wireless capacity off-line as a result of the events out there.

Some of it not all related to power losses, of course.

Flooding and everything else being a part of that.

But certainly that puts pressure on carriers to make sure they've got robust plans to have their networks' uptime be a lot greater than they are today when events like this happen.

So we think that's going to be a net positive for us with those customers going forward.

We stand ready to serve those customers with increased capacity.

We've got products for all those customers that, you know, we've been channel partners with them, and we've been a strong provider of those types of products to that industry for a long time.

And there are a lot of Generac backup generators running on cell towers right now today as we speak out on the East Coast.

Okay.

Thanks, guys.

And that concludes the question and answer portion of this conference.

I would now like to turn the conference back over to Aaron Jagdfeld, CEO and President, for any closing remarks.

Please proceed.

Great.

Thank you.

We'd really like to thank everybody for joining us this morning, and just one last quick reminder that, again, we have an Investor Day for the Company next week on November 8. So we intend to detail a lot more of our Powering Ahead growth strategy a little bit more on a granular level, and we look forward to discussing that with those of you that will be in attendance.

Thank you, again, this morning.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.