Generac Holdings Inc (GNRC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Generac Holdings Inc.

earnings conference call.

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

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

We will conduct a Q&A session towards the end of the conference.

(Operator instructions).

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

I would like to turn the call over to York Ragen, Chief Financial Officer.

Over to you.

Thanks, Gary.

Good morning, everyone, and welcome to our first quarter 2013 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 that 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.

We are very pleased to report our first-quarter 2013 results this morning, which we believe continue to demonstrate the accelerated adoption of standby generators into the residential and commercial markets.

Awareness of the need for backup power has steadily increased over the last several years as power outages have occurred more frequently and for longer periods of time.

With our sales, marketing and distribution efforts and our superior operational execution, we have quickly built Generac into a very powerful brand in the emerging market for residential and commercial standby generators.

Our first quarter net sales increased 36% over the prior year to a record $400 million with strong organic growth of 29% which remained broad-based across all major regions of the United States.

This strong organic growth is even more impressive when considering it follows the prior-year first quarter, in which net sales more than doubled over the first quarter of 2011.

We converted these record shipment levels during the first quarter of 2013 into record levels of adjusted EBITDA and adjusted earnings per share.

Growth in shipments of home standby generators were again very strong during the quarter as the market for these products has further developed with more homeowners becoming aware of the importance of having a backup power system.

With penetration rates at less than 3% of single-family unattached homes in the US we believe there remains a substantial opportunity to continue to grow the market for these products.

As the leader in the home standby generator category over the last decade with approximately 70% market share, our efforts remain focused on driving growth for this emerging product category.

When combining the elevated awareness for major power outage events in recent years along with our A.M.P.-targeted marketing process, PowerPlay in-home selling solution and efforts to expand distribution, we believe we can continue to drive demand for home standby generators going forward.

In addition to increased home standby sales during the first quarter of 2013, we also experienced a substantial year-over-year increase in portable generator shipments through the combination of inventory replenishment and overall expanded placement for these products at our retail customers.

In a relatively short period of time since reentering this product category, we have leveraged our technical knowledge, manufacturing capabilities and our distribution relationships to build a leading share in the portable generator market.

In doing so, we have further positioned the Generac brand as representing quality innovative products that provide the reliability and durability that our customers demand.

Building on our success in portable generators, we set out to reenter the engine-driven power washer market last year.

Through our technical expertise in air-cooled engines and detailed customer research, we have developed a full line of washers which includes the industry's only variable speed power washer that we call OneWash.

We recently launched this innovative new product for the spring selling season and have received positive initial feedback from both retailers and consumers.

With the successful first-quarter roll-out of OneWash and increased placement of our consumer and pro-sumer units at our retail channel partners, we believe we're making good progress in taking share in the power washer product category.

In addition to executing on the significant increase in demand for residential products, the first full quarter of the Ottomotores acquisition has also contributed to our year-over-year sales growth.

Our progress to date with the integration of both the Mexico and Brazil operations has been favorable as we work toward realizing the potential revenue and cost synergies.

Although we are still early in the integration process, the Generac and Ottomotores sales and marketing teams remain excited about the potential to sell our residential and light commercial standby generators and mobile power equipment in the Latin American market.

Much of the cost savings we are projecting will come primarily as a result of increased purchasing scale with certain components and commodities as well as from improved utilization and efficiencies in the Ottomotores operations.

We remain on track to begin realizing savings of approximately $2 million a year on an annualized basis toward the second half of 2013 with the potential for additional cost reductions during the second full year of ownership.

Demand for our Generac-branded commercial and industrial stationary generators continues to see positive momentum due to the increased awareness of the need for backup power on the part of businesses.

In particular, we experienced strong shipments of light commercial generators used in smaller footprint retail applications as the market interest in cleaner burning, more cost-effective natural gas-fueled backup generators continues to increase as a result of the exceptional value proposition of these products.

Additionally, we saw revenue growth from our telecom national account customers as wireless providers look to further safeguard their networks from power outages.

Our strong results have generated over $210 million of free cash flow over the 12 months ending March 31, 2013.

Our attractive margins, capital-efficient business model and favorable tax attributes are the drivers of our significant cash flows, which we believe sets us apart from many of our peers.

This strong cash flow generation has allowed us to pursue several shareholder value-enhancing activities.

In recent years, we have invested heavily in the infrastructure of our business to support and drive organic growth, which has been the primary factor in doubling the size of Generac.

In addition to investing in our organic growth, over the past two years we have also paid down approximately $200 million of debt, closed on acquisitions totaling $130 million and paid a $6 per-share special dividend.

We believe all of these investments have helped to drive significant value for our shareholders with our market capitalization increasing by over $1.3 billion over this time period.

As we continue to focus on driving shareholder value, we are pleased this morning to announce for a second consecutive year that Generac will be paying a special cash dividend to its shareholders of up to $5 per share.

As part of this proposed special cash dividend we plan to refinance our existing credit facility and incur, subject to market and other conditions, approximately $335 million of additional debt.

The new $1.15 billion credit facility is expected to be priced approximately 200 basis points or more below our current credit facility and will be slightly accretive to our earnings per share on a run rate basis.

We are confident that this new capital structure will provide us with the flexibility to further invest in organic growth initiatives as well as pursue acquisitions that fit our Powering Ahead strategy.

Given our performance and significant cash generation coupled with a very robust credit market today, we believe this transaction represents yet another attractive return of capital to Generac's shareholders.

I would now like to turn the call back over to York to discuss first-quarter results in more detail.

York?

Thanks, Aaron.

As Aaron previously mentioned, net sales for the first quarter 2013 were $399.6 million, a 35.7% increase as compared to $294.6 million in the first quarter of 2012.

Looking at net sales by product class, residential product sales increased 45.8% to $255.2 million in the first quarter of 2013 relative to a strong prior-year net sales comparison of $175.1 million which saw year-over-year sales growth of 153% over the first quarter of 2011.

The growth in the current year was broad-based, primarily driven by a significant increase in demand for home standby and portable generators.

With regard to home standby generators, the combination of strong incoming orders and increased production rates which drove shorter lead times during the quarter contributed to record shipment levels of home standby generators.

Awareness for home standby generators remains high as a result of the afterglow from major power outages over the last couple of years.

As demand has significantly increased over the last several quarters, we have been able to quickly expand our capacity and supply chain, enabling us to execute and satisfy our customers.

Portable generator shipments during the first quarter of 2013 were up significantly in comparison to the prior-year quarter.

Our broad relationships at retail provide us with expanded placement for portable generators over the last several years.

As a result, we have seen strength in shipments of these products due to strong inventory replenishment and sell-through at retail after major power outages in recent quarters.

We believe our solid execution and working capital investments have allowed us to capture a leading share of the portable generator market, further enhancing our leading position in the market for residential backup power in the US.

Also contributing to the revenue growth for residential products during the first quarter of 2013 was increased revenue from our power washer product line, including an encouraging start to sales of our new OneWash product which began loading onto retail shelves during the quarter.

We also continue to see attractive revenue growth from our Honeywell-licensed residential product that are targeted toward penetrating the HVAC distribution channel.

Looking at our Commercial and Industrial products, net sales increased 21% to $127.1 million in the first quarter of 2013 from $105 million in the first quarter of 2012.

The increase in net sales was primarily driven by the Ottomotores acquisition.

This is the first full quarter of including Ottomotores in our financial results and we are excited about the international expansion opportunities that the Ottomotores businesses will provide us throughout Latin America.

Also contributing to the year-over-year growth were strong shipments to telecom national account customers as well as increased sales of light commercial natural gas generators used in smaller retail applications.

As more businesses are affected by power outages, we are seeing increased penetration in the commercial market for backup power as companies look to protect their reputation, inventories and revenue streams.

These increases were slightly offset by a difficult prior-year comparison during the quarter for certain of our mobile products sold through national rental accounts.

Our other product sales category improved to $17.2 million in the first quarter of 2013, an increase of 19.2% from prior-year first-quarter sales of $14.5 million.

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

Gross margin as a percent of sales for the first quarter of 2013 was 38.4% compared to 37.7% in the prior-year first quarter.

This 70 basis point improvement was primarily the result of increased cost reduction efforts, improved pricing and a moderation in commodity costs.

These margin improvements were partially offset by the mix impact from the addition of Ottomotores sales.

Operating expenses for the first quarter of 2013 increased $5.4 million or 10.5% as compared to prior-year first quarter.

This increase was primarily driven by operating expenses associated with the Ottomotores business as well as increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher baseline sales levels of the company.

Partially offsetting these increases was a $6 million decline in the amortization of intangibles.

Excluding the impact of non-cash intangible amortization expense, operating expenses as a percentage of net sales during the first quarter of 2013 was 12.7%, representing a 60 basis point decline as compared to 13.3% in the prior-year quarter.

Adjusted EBITDA increased 43.5% to $108.8 million or 27.2% of net sales in the first quarter of 2013 as compared to $75.8 million or 25.7% of net sales in the same period last year.

Our attractive EBITDA margins improved by 150 basis points in the current-year quarter, primarily as a result of our material cost reductions and leveraging our SG&A infrastructure on the higher organic shipment volumes.

Adjusted EBITDA over the last 12 months as of March 31, 2013 was $322.8 million, or 25.2% of net sales during that period.

GAAP net income for the first quarter of 2013 was $50.7 million as compared to $30.1 million for the first quarter of 2012.

Adjusted net income as defined in our earnings release increased 26.9% to $83.9 million in the current-year quarter versus $66.1 million in the prior-year first quarter.

This increase is attributable to improved operating earnings during the quarter resulting from the 35.7% increase in net sales, partially offset by the higher interest expense due to the refinancing of the Company's credit facilities in May of 2012 as well as higher cash income taxes.

Diluted net income per share on a GAAP basis was $0.73 in the first quarter of 2013 compared to $0.44 per share in the first quarter of 2012.

Adjusted diluted net income per share as reconciled in our earnings release was $1.21 for the current-year quarter compared to $0.96 per share in the prior-year quarter, a 26% year-over-year increase.

The current-year adjusted EPS figure includes a $0.20 per share head wind from the combination of higher interest expense and, to a lesser extent, higher cash income taxes.

With regards to cash income taxes, the first quarter of 2013 includes the impact of a cash income tax expense of $4.5 million as compared to only $55,000 in the prior-year quarter, which translates into a $0.06 per-share impact to adjusted EPS.

As we've commented during our previous conference call, our cash income taxes for 2013 are expected to increase going forward due to a combination of our NOL carry-forward becoming fully utilized during 2013 and higher overall profitability levels.

Cash income taxes for 2013 were previously estimated to be approximately $9 million to $10 million.

Based on our increasing guidance for the full year 2013, cash income tax expense is now projected to be $14 million to $15 million for the year, which translates into a cash income tax rate of 6% to 7%.

Importantly, our favorable tax shield through annual intangible asset amortization in our tax return remains intact through 2021, resulting in approximately $49 million of cash tax savings per year for the next nine years.

As a result, our cash income tax rate is expected to be significantly lower than our current projected 37% to 39% GAAP income tax rate for the foreseeable future.

As we drive higher profitability over time, any incremental pre-tax profit over this tax shield will be taxed at the projected 37% to 39% tax rate going forward.

Free cash flow, defined as our net cash provided by operating activities less capital expenditures, was $33.9 million in the first quarter of 2013 as compared to $36.4 million in the same period last year.

Strong operating earnings were partially offset by increased working capital investments driven by higher levels of accounts receivable from record levels of shipments during the quarter as well as the replenishment of inventory levels to support higher production rates and seasonal build requirements.

Free cash flow over the past 12 months was $210.7 million, representative of our very strong free cash flow conversion.

As we announced today, the Company is pursuing a recapitalization to fund a special cash dividend to shareholders.

Historically, we have demonstrated the ability to pay down debt through our strong free cash flow generation with a recent example being the prepayment of $110 million of debt thus far in 2013, which includes a $30 million payment of debt made this week.

Going back to March 31, 2013 we had total debt outstanding of $813.2 million net of unamortized original issue discount.

Total consolidated cash and cash equivalents at the end of the quarter was $54.3 million, resulting in consolidated net debt of $758.9 million and a consolidated net debt to LTM adjusted EBITDA leverage ratio of 2.4 times as of March 31, 2013.

This compares to a 3.5 times ratio at June 30, 2012, which reflected the $6 per share special dividend recapitalization in the second quarter of last year.

For the special dividend that we are contemplating this year, we intend to incur, subject to market and other conditions, approximately $335 million of additional debt as compared to March 31, 2013, to fund in large part a special cash dividend of up to $5 per share on our outstanding common stock.

As part of this transaction, we expect to amend and restate our existing credit facility and up-size it to an aggregate amount of approximately $1.15 billion at an interest rate that is approximately 200 basis points or more lower than our current credit facility.

Again, this should be slightly accretive to adjusted earnings per share compared to the current run rate.

The proceeds from the amended debt financing will be used to pay the special cash dividend and to refinancing our existing credit facilities.

We expect our current $150 million unfunded revolver will remain in place and be extended for another year.

The declaration of the special cash dividend is conditioned upon obtaining new debt financing under acceptable terms.

We currently expect our Board of Directors will declare an authorized payment of the special cash dividend before the end of the second quarter of 2013.

Again, given our strong free cash flow profile and availability on our undrawn $150 million revolving credit facility, we are very comfortable that we can still pursue our growth initiatives while continuing to de-lever over time.

Following the dividend recapitalization, we will continue to prioritize our cash flows towards making investments to drive the organic growth of the Company, paying down debt to our targeted 2 to 3 times gross debt leverage ratio and executing on disciplined strategic acquisitions that we have in our pipeline.

With that, I would now like to turn the call back over to Aaron to provide additional comments on our outlook for 2013.

Thanks, York.

As a result of continued strong demand for our products, we are raising our sales guidance for full year 2013.

Full-year 2013 net sales are now expected to increase in the low- to mid-teens range over the prior year as compared to the approximately 10% sales increase previously expected.

Specifically, for the second quarter of 2013, net sales are forecasted to increase between 30% and 35% in comparison to the second quarter of 2012.

This top-line guidance continues to assume no material changes in the current macroeconomic environment and no major power outage events for the remainder of 2013.

We expect that demand for home standby generators will continue to benefit from increased awareness as a result of the major power outage events that have occurred in recent years, resulting in a new and higher baseline level of demand for these products.

In addition, we believe the ongoing improvement in the environment for residential investment and execution on our initiatives will further drive home standby penetration rates.

As our guidance for the remainder of the year does not include any assumptions for major power outages, we expect to see a year-over-year decline in shipments of portable generators, although not to the magnitude previously expected.

For comparative purposes, when excluding the impact of event-driven portable generator sales in 2012, we are projecting total residential product shipments for 2013 to increase in the high-single-digit range over the prior year as a result of continued demand for home standby generators and increased placement of power washers.

We continue to expect net sales for Commercial and Industrial products to increase at a low 30% year-over-year growth rate for 2013 through a combination of the Ottomotores acquisition as well as high-single-digit organic growth for both stationary and mobile power equipment.

Our outlook for C&I products continues to assume a modestly improved nonresidential construction market in 2013 over the prior year.

Summarizing our sales growth assumptions for full year 2013, total Company organic year-over-year growth excluding the impact of event-driven portables from 2012 is now expected to be between 8% and 10% which represents an increase from our previous guidance of 6% to 8%.

Assuming no major outages for the remainder of 2013, this organic growth is now expected to be partially offset by an approximate 3% head wind from a decline in portable generator sales.

The acquisition of Ottomotores is still expected to contribute between 7% to 9% growth for a total expected year-over-year net sales increase in the low- to mid-teens range.

In addition, as discussed during our last call, based on our historical experience, a major outage event could provide an incremental net sales of between $20 million and $50 million, representing the potential for 2% to 4% additional growth to our forecast, depending on several factors.

Consolidated gross margins for 2013 are now expected to be flat as compared to the prior year, which represents an improvement from our previous outlook of a decline in gross margins of between 80 to 100 basis points.

This significantly improved forecast for gross margins is primarily due to the greater impact of cost reductions and further moderation in commodity costs, along with a slight improvement in product mix.

Given this outlook, we expect full-year margins of approximately 37% for the third year in a role as we continue to diversify and globalize our business.

Operating expenses as a percentage of net sales excluding amortization of intangibles are still expected to be slightly up compared to 2012 as we continue to invest in our infrastructure to support our various strategic growth initiatives and an overall higher level of baseline sales.

As a result of a higher sales outlook and the revised margin guidance, we now expect adjusted EBITDA for the full year 2013 to increase in the-low teens percentage range over the prior year, which is higher than the mid-single-digit percentage range previously expected.

We expect cash flow conversion to remain strong during 2013 and to be consistent with the cumulative average during the past four years of free cash flow, representing between 90% to 95% of our adjusted net income.

In closing this morning, we believe our first-quarter results clearly provide another tangible example of the significant earnings power of our business model.

The powerful macro drivers for Generac, including the underinvestment in the electrical grid, an aging and more electrically dependent population and more severe and unpredictable weather should drive further awareness of the need for backup power.

In addition to these macro drivers, we continue to work on a number of exciting strategic initiatives that we believe will further grow the baseline business for Generac over the long term.

Through innovation and solid execution in 2013 we expect to drive the adoption of backup power generation for homes and businesses.

At the same time, we are building Generac into a larger, more balanced company with improved global focus by continuing to diversify our product offerings, our distribution channels and the geographies we serve.

Add to this the potential for further recovery and residential investment and nonresidential construction and we believe Generac is well-positioned over the long-term to continue driving organic revenue growth, superior margins and strong free cash flow.

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

Operator?

(Operator instructions) Christopher Glynn, Oppenheimer.

So just curious, if we look at the 2Q guidance, are we looking at that as indicative of the new baseline?

Or, does that factor in, still, a partial lingering afterglow from the events?

I think there's probably some afterglow.

I think we have -- when you talk about lead times and as we ramped up production here in the first quarter, we came into the year with lead times elevated as a result of the strong demand from Sandy.

It was about probably 8 to 10 weeks when we came into the year.

We ramped up production very quickly, very efficiently.

By the end of the quarter or coming into the second quarter, probably -- lead times were probably more 3 to 4 weeks and then now, probably today, they are probably more in line with normal lead times, around two weeks.

So I think, as a result of that there's probably some lead time contraction in Q2.

Having said that, then there's the baseline levels from the seasonality perspective that underlie that, then.

Okay.

And then in terms of overall penetration of the products category, I think you have been talking about 2.5% or so.

Could you comment on the relative penetration for homes $100,000 to $200,000 versus maybe higher-value tranches?

It's a great question, Chris.

The penetration rates -- we have always been amazed, when you look at penetration rates and we look at kind of -- we spread the sales, if you will, for home standby generators across a wide range of demographics, age groups, home values.

What we see is a very even distribution.

So, first of all, just to clarify, the penetration rate we say now is a little less than 3%.

And that, just to remind everybody, the addressable market as we define it is single-family unattached housing stock in the US greater than $100,000 in value.

So we really -- while some of these products probably end up on homes less than $100,000 in value, the majority of them are greater than that.

When you look at -- specifically to answer your question -- tranches like the $100,000 to $200,000 range, what we find is actually a pretty even distribution.

Certainly, the further up the home price gets as a percentage of that home's value, the investment in home standby generator become smaller, so obviously it becomes an easier project to undertake from a financial standpoint for homes of greater value.

That's just a general statement.

But, that being said, what we see is, in particular in areas of the country where you have older housing stock, which is in the Northeast, some areas in the Midwest, where you have -- demographically speaking, we have older customers who have been in these homes for a long time, the home values themselves are not that great.

In fact, when you look at it, there's actually a pretty even spread.

Homes under $300,000 represent a little less than half of total installed base, and that's probably a little bit of a dated figure, about a year or two old, and about a half of it is over $300,000, so just to give you some perspective in terms of how that breaks out.

Great.

Thanks and congratulations.

Jeff Hammond, KeyBanc Capital Markets.

Can you quantify what is Ottomotores was in the quarter?

We haven't broken out specifically, but it was the vast majority of the year-over-year growth, that 21% year-over-year growth for C&I -- the vast majority of that was Ottomotores.

We did see a positive organic growth on the Generac side, but Ottomotores made up the vast majority of that, 21%.

Okay.

Just in general, what are you seeing in the commercial around attitudes on commercial generators on the East Coast, just given the level of storms and just change in attitude from your key customers in cell phone, backup power, gas stations, etc.?

Are you seeing any movement on regs being put in place there?

We've seen, obviously, an elevated interest in commercial gen sets.

We called that out as one bright spot in Q1, and frankly, we have been calling that out as a bright spot over the last several years here in terms of the value proposition that in particular the smaller footprint retailers get from having a small backup system.

In particular, we have seen a tendency towards small natural gas systems because the front end cost is lower on those machines.

As it relates to regulations and, in particular, certain verticals in businesses, we obviously -- telecommunications, we have been a long-standing supplier to that industry.

We continue to see a lot of interest in that vertical, in particular.

We've now seen stepped-up interest, as a matter of fact, not only from the telecommunications providers themselves, but the co-locators also.

So these are some of the companies that co-locate space for towers where the wireless company itself does not want to either own the real estate or physically can't own the real estate or, for whatever reason, doesn't.

The co-locators, and there's a few of them out there, have gotten interested in this category in the last few years because they are offering backup power on those sites.

And it basically is another amenity, if you will, for the carriers to entice them to choose one, co-locater versus another, one of their peers.

So we are seeing more interest there.

Around regulation, the SEC had shown some pretty strong interest early on in tackling this issue of critical communications that don't occur when you have power outages.

We have this notion that we want to send everybody a text message when a tornado is coming or send everybody text messages to get out of the way of the path of severe weather.

That's a great idea, and everybody carries a mobile phone.

The problem is, if the tower site is dark as a result of that -- as a result of an outage from that weather, you don't get the message through.

So it renders those first alert systems, really, it renders them useless.

So that's an issue.

The other issue is just critical communications -- 911 calls, a lot of people are cutting the land line to their homes and they're using cell phones now exclusively.

And that creates a problem, obviously, if the local cell site doesn't have power.

So the FCC started to tackle this issue.

I think there has been -- obviously, there's a new chairperson coming in for the FCC.

So we will see if -- the outgoing chairperson had some interest in it.

We will see if the new chairperson wants to take that up as an area.

We have actually seen, actually, more interest at the local and state level than we have at the federal level around gas stations.

This whole fuel infrastructure discussion has gotten some legs here in terms of certain townships and certain local entities actually mandating at least some level of readiness for critical fuel depots or critical fuel stations, some amount of readiness to connect the generator, which is good.

But the logistics get pretty tough in the middle of a storm to find a generator to hook up to that installation.

So we still think the right answer is a permanently installed backup generator for critical installations, critical communications, critical infrastructure.

We think that's the right answer.

We do think that, over time, regulations will move in that direction.

We just don't know at what speed.

Okay, and just overall on margins, what is driving the better op margins?

Is that just simply better flow-through on volumes, or are you getting any kind of a better mix shift?

Actually, I think the biggest -- you are talking Q1 specifically, year-over-year gross margins, 70-basis-point improvement.

Mix actually wasn't a huge component of that, because if you remember last year, at this time, we were in a similar pattern that we had just come off significant outages and we were shipping a lot of home standby generators in Q1 of 2012.

We did that in Q1 of 2013 as well.

I think when you look at the cost reduction efforts that we have been working on where -- part of our culture is just we are relentless on value engineering.

Our strategic global sourcing group works tirelessly to scour the globe to find the best quality, lowest-price components.

And then when you think about Magnum, the things that we are working with the Magnum group to go after cost reductions in a way -- in the Generac way.

All those things are what is happening behind the scenes to drive the improvement in margins that we are talking about.

When you talk about -- I mentioned, and actually in the release, it mentions pricing.

In this type of volumes, you don't -- any promotional discounting you don't need to do.

And those are the big drivers.

I think commodity moderation is playing a bit of a role here.

But I think when you put that all together, you are getting the 70-basis-point improvement.

And that's even in spite of the Ottomotores business for the first quarter layering on, which has traditional industrial international type margins that are layering on top of that.

So all good things on the margin front.

Great, thanks, guys.

Ross Gilardi.

I'm just wondering; what's happening with installation costs around the country?

And are you seeing more electricians getting trained and learn about your products and start more businesses just dedicated to installing generators -- are you seeing installation costs start to go down to reduce the overall installed cost to the customer?

That's an area of focus for us over the years.

We have always said that we can work tirelessly here at Generac to take cost out of the product, you know.

We can take $100 of cost out of the product, and that's a lot of work, to take $100 of cost out of a product.

And, yet, if our installation partners just turn around and put $100 back in the installation or overcharge for an installation, we are not getting the kind of traction we need for the TCO, the total cost of ownership of the product.

So we have been focused on this issue.

What we haven't had is enough data to do something about it.

And that sounds like a bit of a copout, but it's true.

Pricing is all over the map.

Installations are -- we wish there was a one-size-fits-all approach to installations, but if you are installing a product in a 100-year-old farmhouse versus new construction, those installations, the spreads on the cost of those different installations is pretty wide.

But what we have done is, if you recall, we have launched now this new selling system that we have.

We call it PowerPlay.

It's a tablet-based selling solution which allows our distribution, and these are our dealers which we have got now over 5000 dealers here as of the end of Q1, and it allows those dealers to quickly produce a proposal.

And it's a turnkey proposal for homeowners.

Well, in doing so, it includes the installation cost, and a fairly detailed breakdown of the installation cost between materials and labor and all the aspects of permits and things that go into that.

We have a very rich stream of data suddenly coming at us relative to installation costs.

It's our goal this year to collect that data, to mine that data and to start to create different programs around that.

I can say that, just from a step back, just a big macro standpoint, to answer your question, yes, we are seeing some higher competition on installations as more people have been trained how to do it, as more dealers come online and as interest has increased in the category and dealers have to get a bit sharper with their pencil on a total cost proposal basis.

But yet, I think that there are still some fairly decent breakthroughs to be had in installation costs which we have not yet realized in the market.

I think our ability to collect that data, mine it and to find insights in it to help us either design product modifications to take cost out of the installation, which we have done a little bit over the years here, or to improve training or, frankly, to exert some amount of additional control or pressure over what the installed costs are being charged on the marketplace -- I think that's the more exciting thing.

It's a little bit more longer-term view, but I do think that's going to be something that we are looking forward to kind of 2014 and beyond.

And then what are you seeing in the rental channel right now?

You said that, I think, part of Magnum -- I'm not sure if it was part of Magnum or all of Magnum was actually down due to tough comps.

Is that the rental companies being more cautious on fleet?

Is there any competitive issue there at all?

Are you any less excited about Magnum going forward than you were 3 to 6 months ago?

Yes.

No, we remain really excited about that business.

What we find -- it's interesting.

That's a business that we are learning over the last really year and a half of our ownership here.

The national account part of that business is a pretty heavy weight on that business in terms of the amount of sales.

And very similar to our national account business in our C&I segment, that can be a bit lumpy from quarter to quarter.

There's a degree of variability.

So we think that this is just kind of that nature of from one quarter to the next seeing a bit of variability there in the national account purchases.

We really like the long-term prospects for this business.

When you look at what it targets in terms of the infrastructure buildout in the US, road construction, commercial construction, oil and gas, which did pull back a bit, I think you could admit maybe there's a bit softness there on the oil and gas side.

But I think that also is a fairly temporary phenomenon.

Natural gas production, oil production in this country, domestic energy production is going to be front and center for us for the next couple of decades here in this country.

And so we think that we are in a really good spot with this business.

We like the opportunities for this business internationally.

They don't have much in the way of international sales, so we think there's some opportunities there as well going forward.

So we think that there's no share loss in these numbers.

It's really just, I think, some variability quarter to quarter.

Okay, thank you.

And then just lastly, could you just talk a little bit more about your initial read on Ottomotores and Brazilian markets' receptivity to the product?

And does whet your appetite to want to diversify further globally with acquisitions?

Yes.

The Ottomotores acquisition has really been, for us, it has been a great experience.

As a company that has been, frankly, very focused domestically here in the US and Canada for the last 50-plus years, getting ourselves down on the ground in another country or other countries, as in this case, with all of Latin America including Brazil and Mexico, and really starting to understand, create an understanding for those other markets, how those markets transact, distribution, not only philosophies but tendencies, how customers order, all the things that come with learning a new business.

We are pretty quick studies here, so we picked this up, we think, pretty quickly.

Frankly, that business has a lot of opportunity.

Brazil, in particular -- that's a very -- obviously, it's a very kind of protectionist economy the way that it's structured.

With having a physical presence in the country, we think that there's some opportunities there.

The Ottomotores -- it's still relatively new down there.

They've only been there for a couple years.

The previous owner had started up that branch, that business, Ottomotores Brazil, several years ago, and it's still pretty small but we like what we see there in terms of potential demand around the World Cup infrastructure buildout, around the Summer Olympics in Rio, that buildout.

We think the next several years here are pretty exciting.

As far as whetting our appetite for further acquisitions, as we have indicated, part of our Powering Ahead strategy is to be a more global company.

We believe that there is a substantial opportunity for Generac to be much bigger on the global scene in terms of a player in the markets that we serve, the products, in particular, around nat gas, which, again, is a pretty nascent market globally.

It's growing North American, but it's still pretty small in other parts of the world.

I think natural gas is going to be an area of intense focus, natural gas production, natural gas utilization.

Not only in generator sets, but base load power creation is going to be -- transportation potentially is going to be a very solid focus worldwide here for the next several decades.

So I think we are going to be really focused on finding additional opportunities to grow globally.

That could be organically in certain areas; it could be through acquisition.

I guess we will evaluate each of those opportunities as they come along.

But we are pretty excited about the potential for Generac and becoming a much more global player.

Outstanding, thank you.

Charley Brady, BMO Capital Markets.

I'm not sure if I missed it.

Did you guys give how much portables and how much standbys were up in the quarter?

No, we --

We don't break that out, traditionally.

-- have not traditionally broken that out.

But I think what we did say is that both contributed to growth, and we saw very nice growth on both sides of -- both those product lines.

Okay, and on the OneWash product -- how many stores is that in right now, and what does the rollout look like for that product?

I don't have that total store count, Charley, directly offhand, but we've got an innovation endcap, as it's referred to, at Lowe's in all stores.

So it's the entire store count of Lowe's.

We've got some other partners in the retail side.

It's in thousands of locations; put it that way.

I don't have -- again, don't have the exact store count, so I apologize for that.

But good receptivity on that product initially here, both at the retail channel as well as consumer channel.

I think, pursuant to comments made by others in the lawn and garden market, the spring has been -- I know here in the upper Midwest, up until really the last few days, you would not have wanted to have been outside doing anything.

It has been -- I think I saw it was snowing again in Minnesota yesterday.

So there's parts of the country here where spring just has not arrived or has only recently arrived.

So we are actually pretty encouraged by the performance of OneWash and, frankly, our other consumer and pro-sumer washers at this point, in spite of a slow start to the spring season.

So we are hoping to see that accelerate even more here.

I will say that a lot of the OneWash today is placement.

It's a initial rollout into these stores.

So what we will be monitoring very closely over the next 30 to 60 days is the sell-through at retail, and again, we hope to see spring arrive in parts of the country where it has yet to arrive.

Okay, it's fair to say that the bulk of the rollout, initial placement, is completed?

A good chunk of that initial rollout has been completed here through April, so it's not fully reflected in Q1.

There's some additional -- that rollout was bridging over really March and April, and there's a little bit actually here in May as well, but the bulk of it is done.

Okay.

In terms of pricing, I know you talked about mix really not being a big driver of that, and then cost containment being it.

But I'm wondering, can you quantify how much, if any, price helped the margins?

Price was a small piece of the puzzle.

That was a sliver, compared to --

We didn't raise prices in our residential markets this year.

We adjusted prices only slightly in our C&I markets on certain nodes.

So I'm thinking in the totality -- and that, frankly, we wouldn't be realizing much of that yet anyway in C&I because there's a lag in terms of the quote to order to ship cycle.

So that's something that -- it was a very small contributor in the quarter.

One more and I'll get back in the queue.

Your comment on the special dividend, when you said up to $5, I'm just trying to understand the up-to part.

Is that contingent on the size of the financing?

Because it sounded like the size of the financing was pretty fixed.

We've got -- it's similar to what we did last year, Charley.

We said up to, at that point, $10 we were looking at.

And then we went out, and the structure of that deal, even though the financing was -- we had a pretty good plan on what we wanted to do -- the high-yield markets were not as receptive.

We hit a soft patch in the high-yield market, frankly, when we launched last year.

So we downsized the dividend to $6.

So this year, should market conditions dictate, I think the important thing to note, as we said last year, is we really don't have a gun to our head to have to do anything.

This is an optional transaction for us that we think is not only accretive, as we said, even though on a slight basis, to our run rate EPS, but we think it's a great way to return capital and to evidence the free cash flow of this Company to our shareholders.

But, again, if the markets tighten up for some reason; if there's something in Europe or something in, who knows, some other part of the world that gets people jittery in terms of the debt markets, the credit markets, we could down-size that if we needed to.

There's really no need to do the transaction, other than we think that it's just a smart financial move for us.

Great, thanks a lot.

Debt markets are strong, but should they not be in the next week or two, then (multiple speakers) -- just a disclaimer.

Yes, fair enough, thanks.

Brian Drab, William Blair.

Obviously, the entire Generac team has been working at an amazing record pace for the last six months, in large part to help those in need on the East Coast.

So congrats on what you guys have accomplished.

Can you talk a little bit more about the order rates and general dealer activity that you are seeing on the East Coast?

And what has the trend been throughout the first quarter?

And if you could comment, how has the activity been in April?

Sure.

I think -- we typically don't get too detailed in those descriptions, Brian, but I think I can tell you just a couple of high-level things.

As I said, I may have mentioned it in answering a previous question, our dealer count is now over 5000 dealers at the end of the first quarter, which is, obviously, a bigger number than it was.

I think we were at something on the order of 4800 at the end of the year.

So we have added -- that's a pretty brisk pace to continue to add distribution.

So you can take that to mean there's still a high level of interest, certainly at the distribution level around these products.

Consumer level -- now that we have got, frankly, some pretty good information coming at us with, as I mentioned, our PowerPlay application, our A.M.P.-targeted marketing process.

The information flows that we are getting is -- frankly, it's starting to be a tidal wave of data that -- we have always been a very data-driven organization.

We are getting even more data now at a much more granular level, both geographically, breakdowns of profit margins for dealers and installation costs.

And really, that's helping us refine our marketing message, our targeted marketing approach in terms of geographically where we are going.

We see, obviously, in the Northeast, as you indicate, still a fair amount of interest in the category.

We just hit the six-month anniversary for Sandy here at the beginning of the week.

We think that that interest is going to stay fairly strong throughout the next couple of quarters.

As we have said, when you get a large event like that, that afterglow, as we refer to it, can be anywhere from 6 to 12 months.

Certainly, in the Northeast there's a compounding effect with the Irene event that happened in 2011.

There's just some areas of that country that have been battered by these events, and power outages have been very prevalent and have caused people to reevaluate their needs, and those needs now are starting to include backup power.

On top of that, you have got housing increasing, and while new construction is not a huge part of where these products go, it's still 10% to 15% of our sales.

So movements up to the kinds of levels for new construction do have some kind of an impact there that's positive.

I do think, my comments aside about the Northeast, we've actually seen strength in all regions.

So that's what gives us -- again, we talk about events and we talk about the impact that those events have.

Really, the impact that those events have is it gives us the opportunity to tell our story to everybody.

And regardless of if you live in California or you live in New Jersey or you live somewhere in the Midwest or Southeast, we get to tell people about the category.

We get to educate people.

We get to invest in our infrastructure to promote the category.

We get to invest in our infrastructure to market the category.

And I think that's the most -- to me, when we talk about this new and higher baseline, there couldn't be more evidence of that than to see all the regions performing well in this category.

Okay, great, thanks for all that detail.

And if we could talk just a little bit more about the Sandy effect, when I think about the typical person who's affected by Sandy, I wouldn't be surprised if it's something that -- a standby generator is something that they considered throughout the winter, talked to the dealer.

Now the weather is breaking; now you are going to start to see the installations.

Why doesn't it work that way, where we would see actually even stronger sales of standby generators now that the weather is breaking?

Well, I think there's a couple of things.

First of all, obviously demand surged in the near-term months right after the event.

Right?

So through the fourth quarter, we saw very good demand through the first quarter, above our historical levels of demand, certainly, for that category, and it continues here going into the second quarter.

Obviously, as it warms up in certain parts of the country, installations become easier to do.

So, physically, there's some constraints to installing when the ground is frozen in certain areas.

Trenching for gas pipe and electrical runs, if that is required in certain installation, that's tougher to do in the dead of winter.

So installations have certainly picked up.

As York mentioned a couple times, we ramped up our production pretty aggressively in Q1 and into Q2 here.

We've got, now, our lead times down to -- at the end of the first quarter, we were down to about 3 or 4 weeks, and that's down now back inside of normal lead times here as we stand today.

Interest level remains high, and I think it will remain high, as I said, for the next couple of quarters.

The thing you run into is that, the further you get away from a major event, even though people maybe did the consideration immediately after and they maybe did research, they maybe talked to a dealer, dealers were busy.

Product was not as available, and so they probably put off, maybe said, hey, I'll look at it again in the spring or the summer.

Unfortunately, our research shows that it takes people sometimes another event to trigger them, to tip them over the point of purchase.

Some people are a lot more proactive and they will get back in the queue right away here as soon as it warms up, or they will read something about the anniversary of Sandy or they will experience a thunderstorm locally that takes out power or they will hear a story about how power being cut to some part of the country, and that will remind them that they remain vulnerable without a backup power system.

So, again, there's a lot of different factors that go into that.

It's an emotional thing for people.

It's a practical thing for certain others who have businesses they run out of their homes or medical devices they are running.

But for people where it's more of a discretionary purchase, sometimes it takes a couple of outages to put them over the edge.

Right, okay, thanks for all the detail.

Steven Tusa, JPMorgan.

Sorry, my questions have been answered.

Thanks.

John Quealy, Canaccord Adams.

Good morning, guys, congrats on the quarter.

Can we go to PowerPlay for a minute?

I know it was rolled out on the iPad, I think, January at your sales conference.

Can you talk about -- are closure rates better for the population that has this application in the field?

Is time to close better?

Just anecdotally, can you give us some feel on how that's rolling out on the ground level with the guys?

It's a great question, John, and one that we have been watching this very closely because, obviously, we want to see the impact it's having.

Right?

So our focus here is the first quarter of the rollout has really been around training.

It's around getting more people to use the product, getting them comfortable with it, getting them to load in their -- there's quite a bit of setup, actually, on the front end for this.

We've actually rolled out a couple of iterations of the software, just in keeping with -- in terms of the -- as we get feedback from dealers, as we get feedback from our -- we are continually monitoring how the software is being used.

We have actually rolled out just recently an updated version of PowerPlay that adds some additional features to the software that we think are going to be helpful to continuing to streamline the sales process.

But getting at the heart of your question, one of the encouraging early returns here in this data has been that close rates are about double for those dealers using the software versus those dealers not using it.

And that is, for us, kind of the -- that is what we hope to see as a continuing outcome of our investment in this.

And it has been an investment.

It's a huge investment to do this.

But we think it's the right thing to streamline the sales process, to make it more effective, and we are seeing that kind of an impact.

So it has been very -- we are very encouraged early on.

And then second question, on the nat gas side, on C&I or small light commercial, very clearly it feels like a buy versus build opportunity for Generac.

And to your comments earlier, there's just so much going on downstream in gas, in the last mile, when we look forward a couple quarters, should we expect an acquisition?

I'm not saying major, but something on the nat gas side, maybe domestically?

Or how should we think about this opportunity for Generac in the next couple quarters from an M&A perspective?

I think for us, it's probably less about M&A in that space than it would be organically.

When we look across the universe of opportunities with M&A for this thing, for that, if we just talk nat gas for a second, we really are the standout leader in nat gas gen sets in North America and have been for some time.

So acquisitions, if they were going to come in the nat gas space, for us, would probably be -- if we could find something that -- the expertise that we have developed in nat gas, where that could be extendable into other products or other market opportunities, that might be something we would look at.

But frankly, as I look out just in the near term, the next few quarters, to answer your question, I don't see as much on that side.

I see more about our efforts to push into the commercial applications.

So this light commercial or what we refer to as small footprint retail-type applications -- bank branches, restaurants, gas stations, convenience stores -- those types of retail applications we think just need to be brought into the loop on the opportunity and the return on investment.

We've just got to run the math for them.

If most businesses can pay back a power outage, they can pay back the cost of this product very, very quickly with a single outage.

And so, when you look at that and if we can get that message out there to businesses, we think there's a potential for quite a bit of upside just in investing in our sales efforts, investing in our marketing efforts around nat gas going forward.

Organically.

Organically.

And then lastly, so on the debt side, currently you are very covenant-light.

Can we assume that the new tranche here is going to be similar light covenants, or can you talk about that a little bit?

Correct, yes, we anticipate it's going to be basically an amendment and restatement of the existing credit facility, effectively the same credit facility, covenant light, up-sized and with lower interest rates.

So -- and some other flexibility built-in as well, so anticipate it to be covenant-light as well.

Great, thank you, guys.

Jerry Revich, Goldman Sachs.

Aaron, it sounds like your market share is tracking better than you expected in power washers and maybe portables.

I'm wondering if you can just talk about if you are getting traction in the marketplace and how you are tracking in those product lines, roughly.

Yes, no, it's something that on the portable generator side -- I will take hit one first because that has been a market we have been in -- it has been almost 5 years now since we reentered the market.

Based on all the information we see, we are the leading share from a brand perspective, the leading share player in portable generators today as we stand.

So we think that that share is somewhere in the mid-20s.

Frankly, it continues to move up.

We continue to get placement in places we didn't have before, season to season, just looking at where we are at.

Certainly, as our comments indicated, the first quarter remained strong with portable generators.

We saw quite a bit of inventory replenishment and some new shelf placement that we got over the prior year.

I think, as a result of our position, our strong position from an inventory perspective last season, we think that we were very well positioned to take advantage of the demand surge that occurred for those product.

So we feel very good about portables.

What we have done now is we've translated that -- as my comments indicated -- we have translated that into this position of power washers.

Now, on power washers, Jerry, we are still single-digit share, so we are not diluting anybody yet.

There are some very strong players in that market, but we like our approach from an innovation standpoint.

We like our approach from a value orientation standpoint, the positioning of our brand as a brand that is -- that stands for something in this space in terms of being rugged, in terms of being durable, all of those power washers are made in the US.

So we are promoting that quite heavily.

That is different than some of the other competitors who are out there, so we think that they are is applied to be had in terms of positioning ourselves as those products being manufactured here in the US.

And so we like our position.

We like the long-term prospects.

We think that kind of double-digit, low- to mid-double-digit margin or, excuse me, market share is very achievable in the next few years for us in that space.

And, Aaron, can you give us an update on the Honeywell-branded generator strategy?

Is that, from a focus standpoint, they have taken a little bit of a back seat to all the work that you are doing with main Generac distributors?

And what are your medium-term targets for that part of the platform?

Honeywell has done very well.

It is done exactly what we wanted to do, which was to get us an entree into the HVAC space, and that's what we have been using that brand exclusively to do.

For home standby, in particular.

For home standby, in particular.

We don't focus as much with it in the portable gen space, but we do have a few retailers where it helps us differentiate product offerings for those retailers with a very good brand.

Obviously, Honeywell is an incredibly well recognized brand, and that's why we are really happy to put it on the product.

But in the home standby space, the strategy there all along has been to target the 100,000 HVAC dealers that are out there.

We are accelerating our efforts in terms of training those dealers and in terms of getting them signed on board.

It's a buildout process, much the same as what we have gone through with the electrical contracting space.

The HVAC space takes a lot of work.

These are folks that aren't as familiar with the products.

While they know how to deal with natural gas and propane fuels and they know how to deal with electricity, they are not as familiar with air-cooled engines or water-cooled engines.

So getting them trained properly technically, getting them to understand the process, the sales process -- they are generally fairly accomplished salespeople, though, in the HVAC space.

And that's the part we really like about that.

So we like where Honeywell is -- we like the trajectory it's on.

We are getting into the heating -- or, excuse me -- the cooling season here.

So what we are finding with Honeywell is you have to continue to keep their attention, the dealers, that is.

They get pretty busy starting this time of year as the weather heats up.

So we need to keep them focused on the opportunities in power generation, and we have to continue have to figure out how to make sure we get their mind share around the category going forward.

But we really like the opportunities that Honeywell has brought to us.

Okay, thank you.

Stanley Elliott, Stifel.

Thanks for taking my question and congratulations.

With all the momentum in the category, are you seeing any more favorable response or anybody from the home builders actually starting to take a look at this and offer this up as an option from the building site?

We have, Stanley.

The place where we see the best traction with that, and frankly it has been a bit of where we have seen traction over the last several years, but it's accelerating here recently -- is more with the custom builders, which is great because they are looking to differentiate their product, being the home, from the large production builders with other amenities.

So hot tubs and generators and other -- granite countertops, things like that to separate themselves in terms of their product.

So that's the good news.

The bad news is that it's very decentralized.

Right?

Custom builders are generally building in much smaller quantities of homes.

There's lots of them.

You could just look just in the Milwaukee market here where we are located and there's 15 or 20 of them here.

And this is a fairly small market from a new construction standpoint.

So you can multiply that by the top 100 or 200 DMAs around the country, and there's a lot of custom builders.

So reaching them all with a message around this product category is where our focus lies today, but that's a little bit of a slog to try and get that built out the way we'd like to.

I still continue to think that new construction is -- if we could just get some of the big production builders to get on board with -- instead of looking at -- today what we get with these guys is a one-off development that they are doing in an area of the country where maybe power quality has been poor.

They will look at the development and there will say, okay, I want to have each of the homes in this development be generator-ready.

Maybe even some of them come with a generator, or at least offer the option to the homeowner to put one on.

That's what we would like to do everywhere.

We would like to see homes be offered up by builders as being constructed generator-ready.

Frankly, to make a home generator-ready is only a couple hundred dollars.

It's really -- it's about a little bit of coordination about running the gas supply to the home and the electrical supply to the home to make sure they are conveniently located to accept a generator down the road, to make sure that they are easily to accept a transfer switch in the home's basement or garage or where ever the electrical system is for the home.

It could greatly reduce the cost of adding a generator downstream if the homes were made generator-ready.

So that has been our big message.

We are not trying to necessarily sell generators to builders as much as we are trying to sell them on the concept of offering homes that are generator-ready.

And on the power washer product, it sounds like the rollout is going very well.

Have there been discussions with other big box retailers about them adding that to shelf space maybe later on in the year, or certainly in time for next spring selling season?

Yes.

We are getting into, right now -- we are getting into the line review season here for next spring season.

So the rollout occurs generally in the December, January, February time line in terms of our production ramp up and then placing that in market kind of February, March, April.

So those line reviews are starting to heat up, Stanley, so we will be participating in those.

We think there's still a lot of opportunity out there.

We've gotten a lot of traction with our washers.

In some of those retailers where we are not on the shelf today, actually, if you go online for those retailers, you will see that our washers are some of the best-selling online washers that they have.

So we think that that could translate into the potential for, obviously, a robust discussion around placement of our products on the shelf for the next selling season in some of those retailers.

I don't anticipate that they are going to make a change from any decisions they have made today for this year's selling season.

There wouldn't be time to react to that.

But, certainly, we like our position today on the customers that have decided to put it on the shelf and we like our prospects tomorrow for those retailers that we think are very good targets for us.

And frankly, all of those retailers we have very good relationships with, with portable generators and home standby.

So we think that that should translate into potential opportunity for us down the line.

Yes, agreed.

Thank you very much, and best of luck, guys.

That now concludes the Q&A session.

I will now hand the call back to Aaron Jagdfeld, President and CEO.

Over to you, Aaron.

Thank you.

We want to thank everybody, of course, for joining us again this morning and we look forward to our second-quarter 2013 earnings release, which at this point should be scheduled sometime for early August.

So with that, we thank you again for your attention this morning, and good day.

Thank you very much, ladies and gentlemen.

That now concludes your conference call for today.

You may now disconnect.

Thank you.