Generac Holdings Inc (GNRC) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2014 Generac Holdings, Inc.

earnings call.

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

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

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

(Operator Instructions).

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

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

Please proceed, sir.

Thank you very much.

Good morning, and welcome to our first quarter 2014 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'll begin our call today by commenting or 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 risk 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 reconciliations 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 pleased with our overall first quarter results as they met our internal expectations, with revenue at a level consistent with historical seasonality as our lead times for residential products returned to more normalized levels entering 2014, as compared to the elevated levels they were at entering the prior year first quarter.

Our results further demonstrate the ongoing diversification of our business as continued growth from commercial and industrial products helped to offset the impact of harsh winter weather on home standby generator installations.

First quarter net sales were $342 million as compared to $400 million in the first quarter of 2013.

C&I product sales increased 24% during the quarter, due to a combination of acquisitions and continued organic growth.

As expected, residential products faced a strong prior year comparison as sales were $164 million, compared to $255 million in the prior year quarter.

Which benefited from elevated demand due to Superstorm Sandy.

In addition, residential product sales during the first quarter were impacted by extreme cold temperatures and significant snow cover, which delayed the installation and slowed demand for home standby generators.

As mentioned inthe earnings release this morning we're reaffirming our guidance for full year 2014 in terms of revenue growth, EBITDA margins, and free cash flow, with solid year-over-year revenue growth to resume for the remaining quarters of the year.

Looking beyond the first quarter we are seeing increased installation activity and demand for home standby generators in April.

Going forward, we remain particularly focused on additional opportunities to increase the awareness of home standby generators using our innovative sales and marketing tools, including our amp targeted marketing process, and infomercial advertising campaigns.

The sales leads generated from these methods will be directed to our generated ad lead team for qualification, and in home consultations will be scheduled with homeowners through our PowerPlay in-home selling solution.

These sales and marketing tools first became fully operational early last year, and form an innovative and cost-effective approach to identifying and qualifying sales leads.

In 2014, we will be focused on improving sales closure rates for home standby generators by further optimizing the use of these tools.

With only approximately 3% of US households owning a stationary backup generator, there is a substantial opportunity to grow the category over the long-term.

Our new product pipeline will continue to be an area of focus for us during 2014.

Innovation has always been a part of Generac's culture, and is a core competency of our Company.

We have used the growth in our business over the past several years to accelerate our product development efforts by dramatically expanding our research and development capabilities.

As a result 2014 is expected to be another year of heavy product introductions particularly for residential products.

New technologies rolling out in 2014 include the Guardian Synergy series, the industry's first variable speed residential standby generator.

Most generators operate at a constant speed to produce electricity,regardless of how much demand there is for the power.

The patented variable speed technology we have developed in the Synergy series allows the generator's engine to run only as fast as necessary to meet the electrical load demand.

The end result is a Best-in-Class much quieter, more fuel efficient generator with exceptionally clean power output.

In 2014 we also plan to launch our Power Pack series, a step-up from our previous entry level CorePower product which will combine all of the benefits of automatic operation, with many of the features found in our market-leading Guardian series, with a 7-kilowatt unit starting at an affordable $1,899 at retail.

Power Pack has a compact footprint, a galvanneal steel enclosure for durability, and is designed to streamline the installation process thereby reducing the total cost of ownership, and resetting the bar lower on the opening price point in the industry.

In addition, we plan to launch our new Power Dial technology into the portable generator market this spring.

This innovative feature dramatically simplifies the starting and operation of these products by incorporating the fuel valve, choke circuit and ignition all together in one single consumer touchpoint, making power dial generators the easiest to start and easiest to use portable generators on the market.

These products will be available later this quarter at Lowes and other retailers.

Its new product introductions such as these that help to maintain our leading market share for residential products, and are a big part of our ability to continue our track record of above average growth and premium earnings.

Shifting over to C&I sales of commercial and industrial products increased at a strong rate during the first quarter driven by the Tower Light and Baldor generator acquisitions, as well as solid organic growth.

The strong momentum that we experienced during 2013 from our telecom national account customers continued during the first quarter of this year, as wireless providers in particular look to further safeguard their networks from future outages.

We also saw some notable strength in the quarter from rental equipment customers in the US as a result of improving trends in the oil and gas markets.

A quick update here with regards to Baldor Generators and the integration of this recent acquisition, which remains a key corporate focus throughout 2014.

Recall that Baldor offers a broad behind of standby and prime rated products up to 2.5 megawatts, and the addition of these products significantly expands our industrial product offering and manufacturing footprint, and essentially doubles the addressable domestic market that Generac and its distribution partners can serve.

Although still early in the process we are making good progress in strengthening our distribution as we work to combine the Generac and Baldor industrial networks.

In addition, we have identified some meaningful product cost synergies given our increased manufacturing and sourcing scale, as we transition the acquired products and facility into our portfolio.

We are also particularly excited about the increased exposure the Baldor acquisition gives us to the oil and gas market within the US, and potential cross-selling opportunities with our Magnum Mobile Products business.

Through these two acquisitions we now have a broader product line of mobile gaseous fuel generators, that are capable of running on well gas generated at the drilling site.

Additionally advances in drilling technologies over the past several years have created access to a significant supply of shale gas, which creates an attractive secular opportunity for mobile power equipment demand, including the need for support equipment, such as light towers, generators and pumps that are essential at these drilling sites.

We expect the oil and gas market to be an increasingly important end market vertical for Generac going forward, as we position ourselves to participate in this potential long-term up cycle.

Our powering ahead strategy has served as the framework for the significant investments we have made during the last three years to drive penetration of our products, including backup generators used in residential, light commercial and wireless telecommunications applications.

While continuing to execute on the compelling secular penetration opportunities within these important end markets, we remain focused on strengthening our leadership position in the overall markets we serve, as well as providing diversification to our revenue base.

As we continue to move the powering ahead plan into the future we're focused on a number of initiatives that are driven by the same four key objectives, to grow the residential home standby generator market, gain commercial and industrial market share, diversify our end markets, and expand into new geographies.

Combining this strategy with the long-term growth drivers for our business and the potential for further recovery in key macro economic indicators, we believe Generac is well-positioned over the longer term to drive future growth and shareholder value.

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

York.

Thanks Aaron.

Net sales for the first quarter of 2014 were $342 million, as compared to $399.6 million in the first quarter of 2013.

Which benefited from elevated demand from Superstorm Sandy.

Looking at the net sales by product class, residential product sales were $164 million in the first quarter of 2014, as compared to $255.2 million for the comparable period in 2013.

Shipments of residential products during the prior year first quarter of 2013 were positively impacted by approximately $100 million, as we have ramped production levels to satisfy the extended lead times that resulted from Superstorm Sandy.

Lead times were at more normalized levels entering 2014, and as a result this dynamic did not repeat in the first quarter of 2014.

Excluding this $100 million of benefit during the prior year quarter, residential product sales during the first quarter of 2014 increased 6% year-over-year, driven mainly by increased shipments for portable generators due to localized ice storms that impacted various regions of the US during the current year quarter.

As previously discussed the harsh winter weather impacted installations and demand for home standby generators during the current year first quarter.

Despite this severe winter weather and excluding the prior year benefit from extended lead times, shipments of home stand by generators were flat year-over-year, as we were able to hold the new and higher baseline level demand for these products.

Looking at our commercial industrial products, net sales increased 23.8% to $157.4 million in the first quarter of 2014, as compared to $127.1 million in the first quarter of 2013.

The increase in C&I net sales was driven by the acquisitions of Tower Light, which closed in August 2013, and Baldor Generators, which closed in November 2013, along with solid organic growth for stationary generators and light towers.

The strength in organic C&I sales was primarily driven by an increase in shipments to certain national account customers, highlighted by the telecom and equipment rental markets as the wireless cell tower and oil and gas secular opportunities continue to play out.

Our other product sales category improved to $20.7 million in the first quarter of 2014, an increase of 19.8% from prior year first quarter sales of $17.2 million.

This growth is primarily due to increase in sales of service parts as the installed base of our products continues to grow with the overall growth of the Company.

Gross margin for the first quarter was 34.9%, compared to 38.4% in the prior year first quarter.

The decline in gross margin was primarily due to changes in sales mix compared to the prior year, most notably a higher mix of organic C&I product shipments, a lower mix of home standby generator sales, and the addition of Baldor Generator's acquisition.

Operating expenses for the first quarter of 2014 declined $2.7 million or 4.8% as compared to the first quarter of 2013.

The expansion reduction was driven primarily by a decline in warranty expense as a result of warranty rate improvements in recent quarters.

Partially offsetting this reduction were the operating expenses associated with the acquisitions of Tower Light and Baldor Generators.

Excluding noncash and tangible amortization expense, operating expenses as a percentage of net sales during the first quarter of 2014 were 14.3%, representing a 160 basis points increase as compared to 12.7% in the prior year quarter.

This increase was primarily the result of reduced leverage of operating expenses on lower sales volumes during the current year first quarter, as compared to the prior-year period which benefited from Superstorm Sandy.

Adjusted EBITDA was $77.5 million, or 22.7% of net sales, in the first quarter of 2014, as compared to $108.8 million, or 27.2% of net sales in the same period last year.

Adjusted EBITDA margins for the current year quarter came in slightly ahead of our expectation.

Compared to prior year margins were unfavorably impacted due to the overall decline in gross profit margin, and reduced leverage of operating expenses on the lower sales volumes on the current year first quarter, adjusted EBITDA over the last 12 months as of March 31, 2014 was $371.3 million, or 26% of net sales.

GAAP net income for the first quarter of 2014 was $34.7 million, as compared to $50.7 million for the first quarter of 2013.

Adjusted net income as defined in our earnings release was $50.7 million in the current year quarter versus $83.9 million in prior year first quarter.

This decline over the prior year is the result of the previously discussed lower operating earnings during the quarter from the decline in net sales and lower overall EBITDA margins, along with a $5.4 million increase in cash income tax expense.

These reductions were partially offset by $4 million in lower interest expense due to a reduction in interest rates from the May 2013 refinancing of our senior secured term loans.

Diluted net income per share on a GAAP basis was $0.50 in the first quarter of 2014, compared to $0.73 per share in the first quarter of 2013.

Adjusted diluted net income per share as reconciled in our earnings release was $0.72 for the current year quarter compared to $1.21 per share in the prior year quarter.

With regards to cash income taxes, the first quarter of 2014 includes the impact of a cash income tax expense of $9.9 million, as compared to $4.5 million in the prior year quarter.

As we commented during our last conference call, our cash income taxes for 2014 are expected to increase due to a combination of our NOL carry-forwards and certain tax credit carry-forwards becoming fully utilized during 2013, certain discrete tax deductions that were taken in 2013 that will not repeat in 2014, and to a lesser extent higher overall pre-tax profitability levels.

Cash income taxes for 2014 were previously estimated to be approximately $63 million to $65 million, translating to a full year 2014 cash income tax rate of 21% to 22%.

Due to a higher level of benefit than previously expected from certain tax credits, and discrete tax deductions during 2014, cash income tax expense is now projected to be approximately $55 million to $57 million, which translates into an anticipated full year 2014 cash income tax rate of 19% to 20%.

As a reminder, even though we are now starting to pay income taxes our favorable tax yield through annual and tangible asset amortization in our tax return remains intact through 2021.

Resulting in approximately $49 million of cash tax savings per year for the next eight years.

As a result, our cash income tax rate is expected to be significantly lower than our now currently projected 34% to 36% GAAP income tax rate in 2014.

As we drive higher profitability over time, cash income taxes can be estimated by applying a projected longer term GAAP income tax rate of approximately 36% on pre-tax profits going forward, and then deducting the approximately $49 million of annual cash tax savings from the tax yield each year through 2021.

Free cash flow defined as net cash provided by operating activities less capital expenditures was $31.4 million in the first quarter of 2014, as compared to $33.9 million in the same period last year.

The larger decline in operating earnings was mostly offset by less investment and working capital compared to the prior year.

Namely due to a reduction in inventory levels in line with sales volumes during the first quarter of 2014.

Free cash flow over the last 12 months was $226.7 million.

As of March 31, 2014, we had a total of $1.2 billion of outstanding debt net of unamortized original issue discount, and $173.7 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $1.02 billion.

Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the first quarter was 2.7 times, a level that is at our targeted range of 2 to 3 times.

Given our strong free cash flow profile, we are confident in our ability to continue to invest in the future growth of the business, both organically and through M&A while also evaluating other priority uses of cash.

In April 2014, we made a voluntary pre-payment of debt of $12 million, that will be applied against our excess cash flow payment requirement in our credit facility, as well as against future term loan principle amortizations for the next 12 months.

In addition, as a result of our credit agreement leverage ratio stepping below 3 times, our borrowing costs will decline by 25 basis points to 3.25% beginning with the second quarter of 2014, which is reflected in our previous guidance.

With that I would now like to turn the call back over to Aaron to provide additional comments under our outlook for 2014.

Thanks York.

We are reaffirming our guidance for 2014 in terms of revenue growth, EBITDA margins, and free cash flow.

For full year 2014, net sales are still expected to increase in the mid-single digit range as compared to the prior year.

Importantly this top line outlook continues to assume no material changes in the current macro economic environment, no major power outage events for the remainder of 2014, and does not include the potential impact from additional acquisitions.

In summarizing our sales growth assumptions for the year, excluding the impact of the previously discussed headwinds related to the first half 2013 production ramped to normalized product lead times, we still expect total or again I can year-over-year growth to remain between 9% and 11%.

When including this headwind in prior year, we continue to expect organic growth to be approximately flat year-over-year in 2014.

The acquisitions of Tower Light and Baldor Generators are still expected to contribute approximately 5% growth for total year-over-year net sales increase in the mid-single digit range.

We continue to expect the seasonality of quarterly results during the year to return to a more normal historical pattern, assuming no major power outage events during the year.

As a result we still expect the first half of the year to represent approximately 46% of total sales, and the second half approximately 54%, with the third quarter being the highest revenue quarter of 2014, and the first quarter being the lowest.

When taking this into consideration we continue to expect solid year-over-year revenue growth for the remaining quarters of the year.

Consolidated gross margins for 2014 are now expected to decline slightly, compared to our prior guidance, pry primarily as a result of a higher mix of C&I product shipments than previously expected, however this incremental decline is expected to be fully offset by a slight incremental reduction in operating expenses.

As a result we're reaffirming our adjusted EBITDA margin guidance for 2014 as we continue to expect margins to remain in the mid-20% range, which is consistent with the average level seen during the past four years.

Adjusted EBITDA margins during 2014 are still expected to experience some variation from quarter-to-quarter as a result of normal seasonality.

As previously guided the second half of the year is expected to be proximately 400 basis points higher than the first half, as a result of more favorable product mix, increasing synergies from acquisitions, and additional SG&A leverage on higher sales volumes.

We continue to expect to generate significant free cash flow in 2014, given our superior margin profile, capital efficient operating model, low cost of debt, and favorable tax attributes.

For full year 2014 we expect our conversion of adjusted net income to free cash flow to be approximately 90%.

In closing this morning, as we continue to execute on our powering ahead strategic plan, and capitalize on the long-term secular growth drivers for our business, we expect to continue to generate strong free cash flow for the foreseeable future.

With regards to our future allocation of capital we expect our highest priority use of cash going forward to be focused on investing in the business to grow organically.

We expect our second priority would be to pay down debt if our net leverage ratio exceeds approximately 3 times, or if interest rates rise materially in the future.

Our next priority use of cash is to seek strategic both on acquisitions that are in line with our powering ahead strategic plan.

Although our guidance for 2014 does not include any assumptions for any acquisitions, we are currently working and active M&A pipeline, and are well-positioned from a liquidity perspective to execute on additional opportunities that meet our acquisition criteria should they become actionable.

Lastly once we step through the first three priorities, and as future cash flow and liquidity permits, we will consider a further return of capital to shareholders.

Over the past three years we believe we have demonstrated the effective use of our strong free cash flow by progressing through this capital allocation strategy.

We will continue to follow this approach as we pursue additional shareholder value enhancing activities going forward.

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

Operator.

Thank you.

(Operator Instructions).

Please stand by for your first question, which is from the line of Jeff Hammond from KeyBanc Capital Markets.

Please go ahead.

Hey, good morning guys.

Good morning, Jeff.

So just a couple of things, it sounds like your kind of expectation on this $100 million and $40 million is kind of playing out.

One, is that fair?

And two, can you give us any kind of quantification or impact of kind of the weather delay, and a little more clarity on what you're seeing in 2Q on home standby that would suggest, maybe some pent-up demand or normalization?

Jeff, this is York on the first part, the $100 million and the $40 million, what you're referring to is our previous statements where the headwind that we talked about, as we came into 2013, as a result of Superstorm Sandy, there were extended lead times.

We ramped up production to satisfy those lead times.

That is a quantifiable number.

It was in total for the first half 2013 it was $140 million.

$100 million in the first quarter, $40 million in the second quarter.

That is playing out because it's a quantifiable number.

And Jeff, I think on the second part of your question, just the impact of weather, the winter weather on Q1 home standby in particular, it's a little bit part of the seasonality that quote-unquote normal seasonality that we see in our business in residential.

In the winter months it's more difficult to install these products.

They're outside, there's generally trenching involved, and other things that when the ground is frozen, or there's three feet of snow, become more challenging to do.

We typically see as we say, we typically see Q1 being the lowest quarter.

Obviously the harshness of this past winter is not something we've experienced since we've been in this category, and I think we saw some things that in terms of just physically not being able to put product on the ground in parts of the country, that was really a challenging situation, I think.

But I think when we stripped it back and we kind of look by region, one of the things we do like is that in parts of the US, where arguably the harshness of the winter was not as maybe it wasn't quite as bad as places in the south central, one of the reasons we track, the west, those regions were actually up in Q1 over the prior years, in terms of installations.

I think what it tells us is a couple of things.

It tells us that clearly, installations were down because of the weather, as we would expect.

But we like the underlying trends that have continuing in the home standby category and have continued for the better part of 12 years.

We don't see -that changing dramatically.

And as we go forward into April, we continue to see as the weather warms up, as we would expect, we see installations starting to pick up in those regions like the Northeast and the Midwest in particular, where I think the harshness of the winter probably impacted us the most.

We're starting to see that increase here in April.

The cadence of installations which we track, I think you recall we track what we refer to as activations, which is every new home standby that gets turned on, the minute it's turned on we see it.

We see exactly where it is, and it gives us a tremendous amount of information.

But it gives us a really good feel on what's going on out in the end market relative to installs.

Further upstream when we look at proposals through PowerPlay and some of the other selling solutions that we have put together here, those have also picked up in April, so we like the trends there.

I think there's a lag of course, that happens between when you do a proposal to when you sell a product, and when it gets installed.

So I think whether there's pent-up demand to get to the root of your question, I think is still a bit unable for us to comment on at this point.

I think we like some of the trends.

But we're not sure if that demand is truly pent demand, or if it's something that we won't get back.

But I think we've adjusted our viewpoints here accordingly, by changing the mix a bit going forward, with C&I being a bit stronger and resi being a little bit lower.

But to reflect that, frankly, that's really the outcome and it's modeled in our guidance that we have updated today.

Okay.

Great.

And then just a couple of quick ones on commercial.

One, can you give us the acquisition revenue in the quarter?

And two, is there a way to maybe size some of these bigger end markets within commercial like telecom, oil and gas, your regular commercial retail?

So Jeff, this is York.

C&I grew 23.8%, I think another way to answer your question, organic growth was 6%.

So about 18% then was roughly acquisition driven.

I think in terms of sizing the end markets and the opportunities there and kind of framing that, Jeff, I think I'll step through just the three you mentioned, because I think they are probably the most, the largest opportunities, if you will.

Telecom we have said this before, there are roughly 300,000 wireless cell sites in the US.

And today, roughly 30% of those sites have backup power in the form of a generator.

And so when we talk in terms of penetration rate opportunity, we talk on the residential side, we're only at 3%, and where is that ultimately top out, is it double-digits?

Kind of like portable generators at 15% of households.

When you talk about telecom I think it's conceivable you could see a topping out there something much closer to 100% in my viewpoint, many more critical communications, whether it be data or voice, are shifting to wireless.

And the proliferation of mobile devices obviously is pushing that.

And so as that happens, what we've seen is in our telecommunications customers in particular, is a move towards hardening their networks.

Now the cadence of that move can shift from quarter-to-quarter.

The way they release capital dollars, deploy them, and the way they arrange the project management for installations can move from quarter-to-quarter, but I think the long-term view on telecom is that those 300,000 sites eventually will need some kind of back up power.

You even have situations now where, you've got FEMA is out there promoting the fact that we're sending text messages to people to give them advanced notification, and warning about storms that are coming towards them, tornadoes, bad weather, you get a text at your mobile phone saying take shelter immediately.

Well that's all well and good as long as the cell network is up.

The problem is when you get poor weather that's generally when the cell network goes down.

For some of these advanced warning systems, and these kind of critical communication and warning systems to work and operate flawlessly, we believe and we continue to he that a view that hardening of the telecommunications network is a long-term opportunity.

In oil and gas, that's one I'm trying to get my arms around in terms of quantification.

It's relatively new for us.

We had some exposure that we kind of acquired into if you will through the Magnum acquisition a couple of years ago, but that's really accelerated with Baldor.

One of the bright spots of the Baldor acquisition has been their penetration into the oil and gas market, as it relates to natural gas or propane-powered mobile gen sets that really run off of wellhead gas.

So there are some regulation changes coming in terms of the ability to flare gas off.

So the need to consume that gas or store it, refine it and sell it is going to become of greater importance to the energy companies that are extracting it.

And so we see an opportunity not only in the support equipment, I mean the mobile equipment like light towers and mobile gens and even to an extent mobile pumps that, really are the support equipment for the production activities on the drilling sites that has been great for us, as well through our rental accounts.

But also these natural gas fired gen sets, and other products that we had the opportunity to help them consume some of that otherwise kind of flared off and lost gas, and turn it into the power at the site, instead of trying to use a diesel gen set and the logistics around diesel, and the cost of operating diesel gen sets, effectively the gas is free in kind of a round about way, and so there are some really good opportunities there.

We're truly trying to quantify it still.

I'm going to shy away from giving you any discrete numbers there.

I think one of the things that we do watch is the number of new drilling sites, the rig count.

That's kind of become an indicator that we're watching with greater importance and greater interest.

It seems to correlate to some of the need for the support equipment that goes on those sites.

That's something that we have watched a little bit closer.

The last category kind of the regular kind of commercial building backup, or what we refer to as the optional standby market, this is a market depending on your source, is in excess of 10 million buildings out there that where an optional standby generator could help a business protect its revenue stream, protect its perishable inventory in cases, provide security during outages, we have done a lot here in the last 12 months to 18 months.

Really on the heels of events like Sandy and Irene, to take advantage of the increased awareness of the optional standby category for these businesses to have backup power.

And so I think the quantifying that, we believe that the penetration rates today in those installations are still in kind of that mid-single digit range, so there's a lot of upside.

It looks a lot like home standby in terms of not only the upside potential, but also the work that we have to do to educate business owners on how just how cost-effective it is to have a generator.

We have demonstrated the payback model for businesses, and particularly you get into restaurants, small restaurants and other things like that, where a generator can be paid for in as little as a 24-hour outage.

So I think it's a very strong payback model in certain businesses and certain verticals, and I think it's something that we look forward to, and again it's one of the reasons why we invested very heavily in our C&I business overall, all of these things that we talked about.

We really like the performance of that business.

It continues to perform well.

It's going to continue to perform well 2014 as we look at the year here, as it's shaping up, and we're excited about it.

Very helpful.

Thanks, guys.

Thanks, Jeff.

Thank you.

The next question comes from the line of Ross Gilardi from Bank of America.

Please go ahead.

Good morning, guys.

Thanks very much.

Hey, Ross.

I just wanted to clarify a couple of things.

What you say about shipments of home stand by in the first quarter, did you say they were flat year-on-year?

So if you take out this extended lead time concept from the first quarter of 2013, if you carve that out, which was a piece of that, a large piece of that $100 million that we're recording, the vast majority of that $100 million that we're recording in the release, related to that extended lead time, you carve that out, Ross, and we were actually flat with home standby year-over-year.

The harsh winter.

With that harsh winter, yes.

Okay.

And within your comments about I think organic, you're expecting organic growth to be positive for the entire Company for the remaining three quarters of the year, is that what you were saying?

When you exclude, again when you exclude that headwind that we just talked about, we expect it to be relatively,- there will be revenue growth overall, if you exclude that.

It will be flat when you include that.

Yes.

Yes.

I was talking for the remaining three quarters of the year?

For the remaining three.

That's a full year.

So for the remaining three quarters of the year I guess we have to look at that.

But --

Okay.

Yes, for the remaining three quarters, if you add them all up--

There would be growth.

Yes.

Yes.

Correct.

That's a true statement, Ross.

Okay.

And how about on standby?

If you take out the $40 million in Q2 of 2013, would you expect that to be up year-on-year in Q2?

I guess we didn't get that level of discrete.

No.

Granularity there with, the mid-single digit guidance that we're talking about flat organic mid-single digit.

We did talk about 46% of our sales would be in the first half, which I think you will be able to, that's total Company.

Didn't give that level of granularity there, Ross.

Okay.

But it's the right thinking that $40 million of that $140 million headwind will be in the second quarter, so you need to carve that out when you're looking at comparisons for the second quarter.

Okay.

And the harsh winter, did it help clear out some of the excess inventory in portables in the chain, that was there as a result of lack of hurricanes?

Yes, it did.

I don't think when we look at what happened in Q1 with weather, there were a couple of ice storms and things.

We wouldn't have classified any of that as major first of all.

I think they're all fairly, I suppose if you were living through them they were major, but from our perspective in terms of the raw number of people, and the duration of the outages they wouldn't qualify as a major outage.

They did to your point Ross they helped clear out some of the excess portable inventories, to the point where retail inventory levels of portable generators feel about right now.

Both for the retailers and for where we're at coming into the season.

So I think we wouldn't expect to see a tremendous amount of builders, a couple of puts and takes some of the retailers perform a little bit with weather when there is weather than others.

But across the board across the line portable generator inventories feel about right at this point, so they don't want feel heavy as a result of some of that clear out.

Great.

And you made reference to some operating cost savings that will help offset some of the mix erosion from having higher mix of C&I this year.

Could you go into a little bit more detail on the nature of some of those things, and help quantify at all?

Yes, I think there's a couple things there, Ross.

Some of it is a little bit tighter cost operating cost management on again it's a pretty slight kind of offset, but at the end of the day, some of those costs are, I think just being a little more prudent, on whether it's advertising or whether it's some other things that might have been a little bit more exploratory, if you will, or a little bit more advanced, we just basically dial a couple of things back, but nothing that will impact really for us anyway any of the programs, or any of the initiatives that we have going on in any material way.

I mean I think that's kind of the key, just a little bit better, tighter expense management which as we've grown quite a bit we have integrated subs into our SG&A line, so kind of rationalizing some of the expenses there, at the subsidiary levels alongside with what we do, and kind of tightening up the org structure a little bit, I think there's a little bit of optimization, cost optimization to do there.

Just my last one, can you talk a little bit more about the trends you're seeing internationally, given some of the softness outside of North America, particularly with Tower Light and Ottomotores?

Yes, we have obviously got a little bit better view outside of the US and Canada through those entities.

I think I'll speak to Latin America first.

I think Latin America, I think maybe has underperformed to just broader expectations, in terms of the economies down there based on not only some of the geopolitical things going on, the political environment in some of those countries, but even in Mexico, where Ottomotores is a leader in the commercial industrial market there.

Mexico in particular went through an administration change last year, and continues to be a little bit slow to let loose some of the spending through the new government there, so I think has delayed a little bit of what we would have expected to this point with Ottomotores.

We're doing a lot of good things in that business to get the foundation ready for growth.

The business as we mentioned previously was fairly neglected in terms of investment over the year through the previous owner.

We had quite a bit of work to do down there, and it's been quite a learning experience for us we've been on a pretty steep learning experience for the last year, just culturally as well as just doing a lot of work with that business and that team down there to understand the markets in Mexico and Latin America, and how they operate and transact, and what we need to do to optimize our arrangements and our operations there.

I would say that in Brazil where we also have an operation through the Ottomotores acquisition I think personally for us, we have seen a little bit brighter skies there because we resourced a little bit more heavily on sales and marketing and done some things there, that I think are going to help us longer term.

I don't know that they're indicative of the broader Brazil economy.

I think everything there would also indicate continued slowness.

I think we are outperforming a bit there.

Our feeling is we're going to outperform there based on what we've done to resource that.

Now it's on a very small base, so don't get overly excited.

Over in Europe with Tower Light, I think we saw a better economy in the UK, and we saw continued weakness in broader Europe.

I think is how we would kind of place our viewpoints through the rental markets in particular markets that we serve, that would be the best viewpoints that we would have.

There were a significant amount of weather-related issues, even though the broader economy in the UK feels better, they had a very damp spring, winter/spring, very wet, especially in southern UK, southern England.

So in terms of job sites and rentals, a little more challenging environment there in southern Europe, in southern England than we anticipate that it will be for the rest of the year.

So we like that company though, and where it's headed, a lot of good things going onat Tower Light, as well.

It's a very well run company, and we're trying to figure out how we can extend their product platform and extend their importance to their customers in the rental markets through kind of some synergies, product synergies that we can bring to them through here.

Thanks very much, guys.

Thanks, Ross.

The next question is from the line of Christopher Glynn from Oppenheimer.

Please go ahead.

Thanks.

Good morning.

Good morning, Chris.

Hey, York.

So previously you had been a little more specifically on res, I think you said 10% to 12% excluding the $140 million, just wondering if we could touch back on that?

Based on some of Aaron's comments we did dial that back in based on some of the views here with the harsh winter weather.

It was slight though.

It was maybe a couple percent off of that, so it wasn't a big change.

Okay.

Thanks.

And I just wanted to just dive into a little bit on your comments on the long-term shift to the rental of mobile power equipment.

What behaviors are changing exactly on a secular basis?

And are the rental companies customer service operations improving?

That's our view on it.

There are a couple of key things I think that underpin that secular shift to renting versus buying.

One is, I think coming out of the economic slow down here over the last several years, many of the smaller construction firms just they found that during those downturns they had a significant mismatch of, they owned the equipment, they had a note from the bank against the equipment, but they had no revenue to utilize the equipment.

So in those instances, rental would have been, much more beneficial to them.

And in a lot of cases either that equipment was repossessed or returned or sold off, which created kind of a further dampening affect on those markets several years ago, especially like 2009, right before our ownership of that business in the preceding years, which were more difficult.

But so I think the ability to kind of better match expenses with revenues for those smaller construction companies is a big plus on rental.

The other thing is access to capital.

That's been more challenging for small businesses, maybe starting to loosen up a bit here over the last 6 to 12 months, but traditionally those small businesses could go to their local lenders and get a loan and by the equipment.

The ability to do that has been dramatically reduced over the last several years, that is coming out of the downturn.

Access to capital and I think matching of revenues to expenses are the primary movers there.

But what we've seen is the rental companies really capitalize on the shift, and in particular we serve all of the major rental accounts through the Magnum business and somewhat through the Baldor business, and they have continued to refine their model.

They are very focused on equipment utilization, but they are very focused on providing customers much more than just an equipment rental.

They provide them with the service level for refueling, they provide them oftentimes in particular in the case of long-term rentals, they provide them with maintenance agreements, so they take care of the equipment.

If you think about the oil and gas markets in particular, where a light tower per se, they use light towers in these drill sites where they don't have primary power available, there is no utility power, and so there's no lighting.

They operate, some of these drill sites operate 24/7 or if they're up in Canada where daylight is shorter during the winter months light towers are very prevalent.

And so what you'll find though, is they'll go out on long-term rental agreements and essentially what the rental company is renting is just the light.

They're not really, the site says hey we need this much light or this much power on a site, the rental company provides the equipment to do that, and then all of the services behind it from refueling to maintenance to keep the equipment up.

And so that's really the model, they've refined it quite a bit, and I think it's again a reason why we see that long-term secular trend taking hold, and why we like the fact that we're in good position to benefit from that going forward with the Magnum business and the Baldor business.

Thanks, guys.

Thanks, Chris.

The next question is from the line of Charley Brady from BMO Capital Markets.

Please go ahead.

Thanks.

Good morning, guys.

Hi, Charley.

Can you just touch a little bit, you talked about the new portable product going into Lowes and Home Depot later this year.

Is there a sort of a channel fill that helps out one quarter versus another?

And was that baked into prior guidance?

That is the case.

That's the way it works, Charley.

In that case that product we mentioned going to Lowes, and there will be a load-in on that in late in Q2, early Q3 ahead of the season.

That's really reflected in our guidance.

We kind of take into consideration the impact of product launches and the timing of those launches quarter-to-quarter.

Typically the standby launches there is not much of a load-in, but there is when you get into portable generators and power washers.

Okay.

Thanks.

That's helpful.

On the Baldor deal, maybe you mentioned it and I missed it, you talked a little bit about synergies that you're seeing there can you quantify that a little bit more, get more granular on what you've seen now that you have owned it a little bit, relative to when you bought it and maybe get some numbers around what kind of synergy you might see a little bit longer term?

Yes.

Are you speaking more in terms of cost synergies, Charley or product synergies, revenue synergies?

I guess I'm probably speaking of both.

Dumb question on my part.

Of course you are.

On the product cost side, right now what we're seeing is we're coming in line with the synergies that we kind of expected.

I don't think we provided any discrete numbers around that, but we think there's significant upside to that business.

That business was very suboptimized from a cost perspective, as we said.

We talked about that when we announced the deal in the fourth quarter call.

We talked a bit about Baldor.

The margins in that business were not what we would expect to see.

And as a result, when we peel the onion back on that, we did this during our diligence we continue to execute on this, is really a lot of that is on the sourcing side but also on the optimization of the manufacturing footprint, it is one of the reasons why we really like this business, we're kind of busting at the seams, our C&I business as we talked has been growing, pretty rapidly here over the last several years as we have made that a much bigger part of Generac, and we run out of space.

So we had to do something about that.

It's one of the main reasons why we like the Baldor acquisition, they have a big beautiful facility purpose built for these type of products.

The better utilization of that facility, the sourcing synergies that we're going to get those a kind of meaningful things that's are going to start to progress into the back half of this year that's going to show up.

So there's a lag analysis there you do, you got to run through their inventory, and ramp-up to the new stuff, but really it's some of the numbers are really startling, in terms of just on a component level what we see in terms of opportunities there.

So really excited.

So that's the cost side, without getting too granular.

The revenue side I think this has been an area of upside surprise for us as we got into it.

We liked what they were doing in certain end market verticals, I don't think what we really understood even though we caught it during diligence was just their kind of the breadth of their exposure to oil and gas.

They really staked out a nice position there.

It's a nichey space, but we were able to take their kind of exposure through certain customers, they serve certain I'll call them kind of specialty rental companies focused in power, providing those types of backup power, rental power to the oil and gas industry, were customers of Baldor.

What we've been able to do is take our capabilities in gas technology, combine that with our cost position, our kind of sharp cost position with mobile gen sets at Magnum, put that together and take it to Baldor's customer base.

So it's kind of what you always hoped to see when you do acquisitions, is to kind of knit those things together in a very cohesive way.

Doesn't always work that way, but in this case we think that it's really been beneficial, because we're able to take our gas technology and our ability to operate engines on natural gas and propane very cost-effectively, put them on wheels and skid them out at bases, and take them out to the oil fields and gas fields through the Baldor customer base, and it's been very well received.

There's an up cycle there, no question that what we've seen through the first quarter of this year, and what the expectation is for the balance of this year is that oil and gas is going to continue to grow.

We see that as we have called out a number of times as an upside from a long-term secular growth trend for natural gas gen sets in general, but I think broader than that is the production side of that, the extraction and production of oil and natural gas in this country, we really like our exposure to that now through Baldor, and that's one thing I would say is an upside through the acquisition that has become a little bit more evident to us here recently.

Great.

On the gross margin impact can you quantify and maybe you did the mix impact on gross margin in the quarter?

It was effectively almost all of it.

It was a modest level of price cost, but it was very small.

The vast majority of that of the gross margin delta year-over-year was mix related.

Okay.

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

On the M&A pipeline, and you talked a little bit about looking, you have fire power for that, I know it is a little farther down maybe on the list of capital allocation uses, but can you give us a sense of kind of can you obviously have the towers, you have the Baldor deal, but are there other product lines that tie into what you're doing?

Give us a sense of the geographies, or a sense of what you're thinking about when you talk about M&A pipelines?

Yes, it's really both, Charlie.

It's both geography, and as we called out a number of times I think when you look at things like you Tower Light, you look at things like Magnum, some of the other products that come with those acquisitions, they're not generators but engine powered equipment.

We view those spaces as ripe spaces.

So when you, if you would look at our pipeline, which we don't give, discrete comments on but if you would look at that pipeline, it would have a mix in there of engine powered equipment companies, it would have a mix of other generator, true generator companies in other geographies, or other engine powered companies in other geographies, so I would say this, is that we have been working very hard on that M&A pipeline over the last four years, and I think we have, not everything is actionable, it's right, it's about timing in a lot of cases, and bid/ask spreads in certain businesses and industries, but at the end of the day we think we have got a lot of opportunities there.

So your comment that it's low over the priority standpoint again we're putting as we said, just kind of stepping through that, the first priority for use of cash is to grow the business organically.

And when you have the kind of margins we got we want to put as much capital against that as we can.

There's a bit of a point of diminishing returns there just in terms of bandwidth and your ability to execute.

CapEx is only about 2% of sales.

When you look at our working capital needs on every dollar of sales as we grow is about 20%, so it doesn't eat up a lot of cash that way.

And paying down debt, which is our second priority, we said that we kind of like where we're at right now, the liability structure we built is very cost-effective.

In fact, in our prepared remarks, our borrowing costs stepped down another 25 basis points here beginning in Q2 because we're sub-3 times on our leverage ratio.

That's a nice little feature that makes the debt structure even more attractive.

We're sub-3 times on leverage.

We don't see borrowing costs dramatically increasing.

If interest rates went up dramatically, we would probably focus a little more heavily on debt pay downs.

But in the meantime we have kind of got our sights set on M&A and organic activity growth, so that's really where we're focused.

Great.

Thanks very much, Aaron.

Thanks, Charley.

The next question is from the line of Jerry Rivich from Goldman Sachs.

Please go ahead.

Good morning.

And it's Matt Rybak on behalf of Jerry.

How are you?

Good, Matt.

How are you?

Good.

Doing well, thanks.

Portables was strong in the first quarter despite was sounded like a pretty full channel heading into the quarter.

Could you give us an update on any sort of inventory and restock you're seeing in April on the portable side, and how we should think about the run rate going forward?

Yes, I think Matt, my comments previously here on kind of where inventory levels are on portables, we feel right now when we look at, we have a fairly decent insight.

We're the number one market player in portable generators.

We have a pretty good insight as to what is going on in the channels, as well as what we have got going on inside Generac, but we feel that inventory levels are kind of right-sized right now.

We don't see a lot of load-in for Q2 for additional portables, minus some of the new products that we talked about with Power Dial, and that's reflected in our guidance.

I think our portable shipments in Q1 to your point were a little bit better than what we were originally expecting, and that was really the direct result of some of the events that happened in Q1.

It was not only the combination of drawing down some of those portable gen levels to some more normalized levels, but also taking some inventory from us.

The drawdown was both from us, as well as at the retail channel level.

But it drew it down to a level that everybody is kind of comfortable with going forward into the season.

That's kind of how I would characterize it.

Great.

And then on the Baldor acquisition can you say more about how the distribution structure in the C&I business is shaping up after the deal, and update us on how the representation decisions are coming along?

It's a great question, and been a huge area of focus over the first quarter and here into April.

We started to make the announcements in assigning different territories to distributions through a combination of our existing Generac dealers, as well as the addition of a couple of Baldor dealers into that, and some new dealers.

Those are things that that's coming along very well.

It's not complete yet.

I like where we're at in the cycle.

I mean, what happens when you do that and some of the markets where we have got changes that are occurring, there is because you have a long sales cycle in C&I products bringing a new dealer up to speed is something that takes a while.

So it's a little bit of a, you have got to take a step backward to take two steps forward,market to market.

But at the end of the day, we're going to end up with a much stronger distribution position overall than we had before the Baldor acquisition.

And that's I think the important thing.

I would say this, the second thing that we've done there is we have created a much stronger second tier of distribution than we had before.

So what we have just been talking about as the primary tier of distribution for C&I.

There is now a formalized second tier of distribution.

We have a specific program, we call it GAIN.

It's the general authorized industrial network.

We're going to take and create a secondary distribution network, a secondary level of distribution, that will take I would say what we referred to as kind of smaller dealers who want to have access to industrial product because they have, they see opportunities in their local markets that perhaps the primary dealer doesn't, but they will work with the primary distribution in the market, it will be at a set price, and there will be programs to not only promote that, but also to make that work from a program element standpoint.

So that's brand new for us.

That didn't exist before, that second layer of distribution.

We're pretty excited because actually what it's taken is it's taken some of our larger residential dealers who want to kind of grow into becoming broader generator dealers, and be a little bit more inclusive of broadening their product line to include C&I, and allow them access to their product where they didn't have access before.

So that's kind of an interesting new development for us that was a result of this combination of the industrial dealer networks, we felt that there were some really good dealers that came out of that combination, but that maybe were not, where you had multiple dealers in a region.

It didn't make sense to just say goodbye to two or three of those dealers, it made sense to put a program together to support them.

That's effectively a pretty significant change for us, in terms of distribution philosophy going forward.

Thank you.

The last question is from the line of John Quealy from Canaccord Genuity.

Please go ahead.

Hey thanks, good morning guys.

Thanks for squeezing me in here.

First on the residential side, obviously you had a tough compare in Q1 with Superstorm Sandy, but can you talk about the dealer churn, I think you added something nearly 200 dealers.

I imagine that's down commensurately, and how you're looking at dealer growth or churn in 2014 on the standby product?

Yes, I mean it's a great question, John.

Again, we had a pretty good kid answer on dealer adds on a net basis between 300 and 400 every year the last few years.

That was, we were actually above that last year.

I don't have the exact number in front of me, but it was something 500 to 550, I think, 550 dealers that we added last year.

Now obviously that is seasonal, as well, right.

So that does, the cadence of distribution adds or dealer adds on a net basis somewhat follows our residential sales pattern seasonally.

So Q1 was more challenging there, but we're still holding to back into that normal cadence of between 300 and 400 net dealers on an annual basis.

We would expect that to pick up in the remaining quarters here throughout 2014.

And again, I think we have by far the largest distribution network in this category, and you would expect that from the 70-plus% market share leader.

In fact, our market share crept up a bit here in Q1, so we think we're doing well to not only continue to hold onto our share, and it's things like distribution adds, and it is things like new products, some of the things we talked about, but distribution is an enormous part of that strategy, and an enormous part of our success here over the last decade in terms of building this business.

Thank you.

I would now like to turn call over to Mr. Aaron Jagdfeld, President and Chief Executive Officer for closing remarks.

Great.

Thank you very much for joining us this morning, we look forward to talking to you again on our second quarter earnings call, which should be some time in late July of this year.

Thanks, and have a good day.

Thank you for joining today's conference.

This concludes the presentation.

You may now disconnect, and have a very good day.