Generac Holdings Inc (GNRC) 2014 Q3 法說會逐字稿

Well, we didn't hear the intro so hopefully you can all hear us this morning.

Good morning, and welcome to our third-quarter 2014 earnings call.

I would like to thank everyone for joining us this morning.

With me today is Aaron Jagdfeld, President and CEO.

We will begin our call today by commenting on forward-looking statements.

Certain statements made during this presentation, as well as other information provided from time to time by Generac, or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see our earnings release or SEC filings for a list of words or expressions that identify such statements in 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.

Third-quarter net sales were $352 million, as compared to $363 million in the third quarter of 2013, a decrease of $11 million or 3%.

Our third-quarter results reflect seasonally higher home standby sales that improved at a solid rate, as compared to the second quarter of 2014, as we continue to build awareness and expand our leadership position in this product category.

Also, our C&I products to see some nice momentum with the oil and gas market, as we experience some notable strength during the quarter from rental equipment customer in the US.

Offsetting this strength, however, was the continuation of a power-outage environment that remained below normalized levels and negatively impacted portable generator shipments, and to a lesser degree, home standby generator sales.

Additionally, there were year-over-year reductions in capital spending with certain of our telecom customers during the quarter, and the overall market softness we have been experiencing this year within Latin America also continued in the quarter.

As previously discussed in our last earnings call, we monitored detail power outage activity internally.

And over the last seven quarters outage severities remain lower than historical baseline levels.

This extended low period of outages has significantly reduced demand for portable generators and has also resulted in moderating growth within the home standby market.

In addition, the lower overall outage environment has slowed the expansion of our residential dealer base during the current year.

Over our long history in this business, we have experienced power outage environments to run in cycles.

In the past, these cycles, both above and below the baseline average, had the most immediate impact on our residential business.

From a longer-term perspective, we continue to expect the trend of an increasing level of power outages to remain in place, driven by an aging and under invested electrical grid, favorable demographics, and the frequency of severe weather that we believe will continue well into the future.

That being said, we obviously can't predict the timing of power outage cycles.

However, historical experience would suggest that we will return to baseline level of outages in the future.

That being said, we have worked hard to diversify Generac over the last several years, through both organic efforts and acquisitions, that have helped to reduce the impact from these outage cycles.

As a result, while periods of reduced outages will still have an impact on our business, it will be to a lesser degree in the future.

Although the lower outage environment has negatively impacted demand for portable generators, we continue to see progress from our initiatives in the home standby market, which have proactively targeted likely buyers of these products over the last few years.

Activation rates for home standby generators have proven to be resilient during the third quarter and thus far during the fourth quarter.

This further reinforces our belief that permanently installed standby generators are an emerging product category as a backup power solution for homes, with an install base that continues to grow.

We also see increased awareness for this product category building as there were some encouraging regional growth trends experienced during the third quarter.

Although the northeast faced a strong prior-year comparison from the afterglow of Superstorm Sandy, there were other regions that experienced strong year-over-year growth such as the Midwest and western regions of the US, as well as in Canada.

In Canada specifically, the major driver was within the Ontario province, which experienced some elevated power outage activity during the second half of 2013, including an ice storm that left 300,000 utility customers without power for several days.

Since that time, we have seen our dealer count in Toronto nearly triple.

We believe this represents yet one more example of a localized area experiencing a sustained power outage in which has led to a significant expansion of distribution in that market, and ultimately will lead to a new and higher baseline demand for our products in that region.

While there hasn't been a major broad-based power outage event since Superstorm Sandy in the fourth quarter of 2012, and the overall power outage development has trend to well below normalized levels since that time; we are very encouraged by pockets of activity we see across the country that continue to drive the baseline demand for home standby generators.

We are also intensely focused on a number of proactive growth initiatives to further increase the awareness of home standby generators.

Through a combination of our unique sales and marketing tools, include our AMP targeted marketing process using advanced data analytics, and our Direct Response television campaign, along with our digital and traditional advertising efforts; we have been successfully generating new sales opportunities for our residential dealers.

These sales leads are directed to our Generac lead team for qualification and scheduling of an in-home consultation, or IHC as we refer to it, through our PowerPlay in-home selling solution.

Recall that many of these sales and market tools only became fully operational within the last two years, and we have continuously improved them since their launch.

As an example, our most recent version of our PowerPlay APP, which will launch this month, has numerous improvements in functionality for our dealers.

This includes a new proposal format that offers homeowners several options for their backup power needs, allowing for a wider range of projects budgets.

Additionally, we recently integrated a new financing portal into PowerPlay that simplifies the qualification and extension of credit to homeowners.

PowerPlay has become an important sales tool for our dealers, but it represents only one component of a broader selling system that we have delivered on, and includes several new and improved training programs designed to improve sales closure rates for our dealers using PowerPlay.

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

Even though we currently are in a below average period for outages, we remain focused on building out and enhancing our competitive position within the portable generator market as we look to further solidify our leading position in providing a full range of backup power products for the residential market.

Toward this goal, in early September we purchased the brands and assets of PraMac America, LLC, thereby acquiring the Powermate trade name for use in certain residential engine power tools, as well as the rights to license the DeWalt brand name for portable generators.

Most notably, this acquisition helps to expand our portable generator product offerings at both the consumer value end of the market through the Powermate brand and for the Premium Contractor segment through the DeWalt brand.

Sales of our Commercial & Industrial products during the third quarter benefited from the contributions of recent acquisitions and continued strength in oil and gas markets.

This was more than offset, however, by a decline in shipments to telecom national account customers as compared to the prior year, which is primarily the result of a reduction in capital spending by certain major customers in this vertical end market.

As we have noted over the last several years, capital spending for our telecom national account customers can be somewhat cyclical with variations from quarter to quarter and year to year.

While we experience robust growth in shipments to telecom national account customers, particularly in the second half of 2013, the current year has been more challenging as certain customers have decided to reduce capital spending for generators in the back half of 2014.

In spite of these recent reductions, we continue to believe the long-term secular penetration opportunity for backup generators at cell tower sites remains firmly in place, due to the need for wireless providers to protect their revenue streams, as well as, the increasing competitive and regulatory pressures they face to harden their networks.

At only 30% to 35% penetration of generators on cell tower sites, we believe there is a significant runway to continue to penetrate this sector as the leader in this vertical end market.

Our Ottomotores business, based in Mexico and also has an operation in Brazil, continues to experience a softer demand environment, primarily due to tepid economic growth throughout Latin America, which has led to reduced infrastructure spending in the region.

Although the market has been recently challenging, we've been making good progress on our integration efforts at Ottomotores.

And we continue to believe this will be an essential platform for our international expansion efforts by providing a local manufacturing presence, and access to the important Latin American market for power generation and other engine powered equipment.

During the third quarter, we continue to see some notable strength from rental company equipment customers in the US, both as a result of strong demand in the oil and gas market and a continued pickup in nonresidential construction activity.

As we have been discussing in recent quarters, we are particularly excited about the increased exposure of the oil and gas market that the combined Valdor and Magnum acquisitions have given us.

Through these companies, we now have a broad product line of mobile and stationary equipment, including gaseous fuel generators that are capable of running on wellhead gas generated at drilling and production sites.

Advances in drilling techniques over the past several years have led to significant increases in shale, oil, and gas production, which we believe is poised to continue over the longer term.

This creates an attractive secular opportunity for both mobile and stationary power equipment demand, including the need for support equipment such as: light towers, generators, and pumps; that are essential at these drilling and production sites.

In addition, the regulatory environment around the flaring of natural gas at oil and gas extraction sites has been a catalyst for increasing demand for gaseous fuel generators.

We are making solid progress and further evaluating the overall opportunity in oil and gas to better determine the appropriate levels of investment and resources needed as we position ourselves to participate in this potential long-term up cycle.

Part of this assessment is included in analysis of other engine-powered products that are used by customers within the oil and gas market.

And with that analysis in mind we recently announced the acquisition of the MAC heater company in Bismarck, North Dakota.

MAC is a leading manufacturer of premium-grade commercial and industrial mobile heaters within the US and Canada, and offers a broad product line that includes: flameless, indirect fire and hydronic surface heaters ranging in size from 200,000 BTUs to 4.2 million BTUs per hour.

These products are primarily used in the oil and gas and construction markets, as well as other industrial sectors and are primarily sold through National equipment rental companies and independent dealers.

The addition of MAC provides immediate access to a diverse lineup of mobile heating equipment that is essential at colder climate oil and gas and construction sites.

We're excited about the potential cross selling opportunities this acquisition brings as we combine MACs heater product line with Magnum's broad relationships in the equipment rental product, and allows us to further penetrate the oil and gas market.

Lastly, as it relates to C&I, in the third quarter we began the consolidation of the manufacturing footprint for our larger industrial generators from our Eagle, Wisconsin facility to the recently acquired Valdor facility in Oshkosh, Wisconsin.

This transition resulted in the deferral of some shipments for certain products which impacted our third-quarter results modestly.

We expect to complete the consolidation of these operations during the fourth quarter.

With this project, and with the increased demand for the product line acquired in the Valdor deal, we expect to see improved utilization of the Oshkosh facility on a go-forward basis.

The additional capacity that Oshkosh provides our industrial business is critical to our ability to aggressively pursue the larger end of the industrial generator market; a market that we had largely not participated in prior to the Valdor acquisition.

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

Thanks, Aaron.

Net sales for the third quarter of 2014 were $352.3 million, as compared to $363.3 million in the third quarter of 2013, with the prior year benefiting from the continued afterglow period of demand from Superstorm Sandy, as well as robust capital spending by certain telecom national account customers.

Looking at net sales by product class, residential product sales during the third quarter of 2014 were $183.7 million, which improved as compared to $179.6 million in the second quarter of 2014.

This sequential quarter-over-quarter improvement was driven by a solid increase in shipment to home standby generators.

Partially offsetting this sequential increase was a normal seasonal decline in power washer sales, as the second quarter tends to see elevated power washer sales given the spring cleaning season.

Comparing on a year-over-year basis, residential product sales declined from the 192.7 million shipped during the third quarter of 2013, with a combination of factors leading to the decline.

First, sales of residential products during the prior-year third quarter were still benefiting from the afterglow of demand from Superstorm Sandy, which occurred in the fourth quarter of 2012.

As we have previously indicated, the afterglow demand from major outage events can last for several quarters with the anniversary of the event creating increased awareness as well.

In the case of Superstorm Sandy this afterglow demand was significant throughout 2013.

In addition, the third quarter of 2014 continued to experience a power outage environment that remained well below baseline levels.

This is now seven quarters in a row where power outages has been below average.

These factors result in a significant year-over-year percentage decline in portable generator sales, and to a lesser extent a modest year-over-year percentage decline in shipments to home standby generators.

Additionally, during the current year quarter we closed on the acquisition of PraMac America, LLC, which contributed only slightly to shipments of residential products during the period, as it closed September 1, and given its relatively small size.

Looking at Commercial & Industrial products, net sales for the third-quarter 2014 were $146.4 million, as compared to $151.5 million in the prior-year quarter.

The decline in C&I net sales was driven primarily by the timing of shipments to certain telecom national account customers.

During the prior-year third quarter, we shipped a significant amount of product to a major telecom customer as they continue to invest in hardening their wireless network.

During the current-year third quarter, that same customer reduced their capital spending on generators, resulting in a significant year-over-year decline in sales.

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

The decline in telecom shipments was partially offset by the acquisition of Baldor generators, which closed in November 2013, and Tower Light which closed in August 2013.

Additionally, strength in oil and gas markets has resulted in significant demand for our mobile products, has increased utilization of this equipment at oil and gas extraction sites has driven significant orders from our broad rental customer base.

Our other product sales category improved to $22.1 million in the third quarter of 2014, as compared to $19.1 million in the prior year.

This growth is due to an increase in service part sales as the base of our stationary and mobile products in the market continues to grow.

To a lesser extent, part sales from recent acquisitions also contributed to this growth.

Gross margin for the third quarter was 37%, compared to 38.4% in the prior-year third quarter.

Gross margin was predominantly impacted by increased promotional activities during the current-year quarter, along with the sales mix impact from recent acquisitions, including Baldor, Powermate and Tower Light.

These declines were partially offset by a higher sales mix of home standby generators and lower mix of telecom C&I product sales.

Operating expenses for the third quarter of 2014 increased $7.3 million, or 14% as compared to the third quarter of 2013.

The increase was primarily driven by a $5.6 million favorable adjustment to warranty reserves in the third quarter of 2013, but did not repeat in the current year.

Increased marketing and advertising expenses over the prior-year quarter, and the addition of operating expenses associated with recent acquisitions were partially offset by a $1.7 million reduction in amortization of intangible assets versus the prior year.

Adjusted EBITDA was $83.1 million, or 23.6% of net sales in the third quarter of 2014, as compared to $100.1 million or 27.5% of net sales in the same period last year.

This decline in adjusted EBITDA margins, compared to prior year, was attributable to the1.4% decline in gross margins, combined with an increase in operating expenses as a percent of net sales, as a result of the factors just discussed.

Most notably the $5.6 million favorable warranty reserve reversal in 2013 that did not repeat in the current year.

Adjusted EBITDA over the last12 months as of September 30, 2014 was $348.7 million, or 24.3% of net sales.

GAAP net income for the third quarter of 2014 was $36.5 million as compared to $47.1 million for the third quarter of 2014.

Adjusted net income, as defined in our earnings release, was $57.9 million in the current year quarter versus $73.7 million in the prior-year third quarter.

This decline over the prior year is the result of the overall decline in operating earnings as previously discussed, partially offset by a $3 million in lower cash income taxes.

Diluted net income per share on a GAAP basis was $0.52 in the third quarter of 2014, compared to $0.67 per share in the third quarter of 2013.

Adjusted diluted net income per share as reconciled in our earnings release was $0.83 for the current-year quarter, compared to $1.06 per share in the prior-year quarter.

With regards to cash income taxes, the third quarter of 2014 includes the impact of a cash income tax expense of $6.5 million, as compared to $9.5 million in the prior-year quarter.

This year-over-year decline in cash income taxes was primarily the result of a reduced cash income tax rate expectation, together with lower pretax earnings relative to the prior year.

Our cash income tax rate for the full year 2014 is now anticipated to approximately be 14%, versus our previous expectation of a range of 17% to 18%.

Primarily due to reduced full-year outlook and to a lesser extent the higher-level benefit from certain tax credits than previously expected.

Although cash income tax was declined during the current-year quarter, year-to-date, cash income tax expense through the third quarter 2014 increased $28 million as compared to $16.7 million in the comparable prior-year period.

As we have commented during recent earnings calls, our cash income taxes for full year 2014 are expected to increase over the prior year due to a combination of NOL carry-forwards and certain tax credit carry-forwards becoming fully utilized during 2013.

As well as, certain discrete tax deductions that were taken in 2013 that will not repeat in 2014.

As a reminder, even though we are paying increasing levels on income taxes, 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 eight years.

As a result, our cash income tax rate is expected to be significantly lower than currently projected 32% to 33% 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 pretax profits going forward, and then deducting the approximately $49 million of annual cash tax savings from the tax shield each year through 2021.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was $47.8 million in the third quarter of 2014 as compared to $76.7 million in the same period last year.

The year-over-year decline was a result of the decline in operating earnings during the current-year quarter, and increase in capital expenditures over the prior year, and an increase in cash interest paid, due to the timing of required interest payments in the prior-year third quarter relating to the credit agreement refinancing completed in May 2013.

Free cash flow over the last 12 months was $208 million.

With regards to primary working capital, the PraMac America acquisition, which closed on September 1, 2014, added approximately $18 million primary working capital to our balance sheet as of September 30, 2014.

As we mentioned in our earnings release this morning, we made a voluntary prepayment of debt during the third quarter of 2014 totaling $50 million, which will be applied against our 2015 excess cash flow payment that is required pursuant to our term loan credit facility.

Because this excess cash flow payment would have been required in 2015, we decided to capture the benefit of the lower interest expense earlier by prepaying a material portion of the anticipated payment in the third quarter.

The $50 million debt prepayment made during the quarter resulted in a recording of $1.8 million loss on extinguishment of debt, which is included within other income expense on the income statement.

Updating our interest expense guidance, our cash debt service costs are now projected to be approximately $41 million for the full-year 2014, while amortization of deferred financing costs and original-issue discount is now expected to be approximately $7 million during the year, for a full-year 2014 GAAP interest expense total of approximately $48 million.

As of September 30, 2014, we had a total of $1.11 billion of outstanding debt, net of unamortized original discount, and $173.2 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $938.9 million.

Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the third quarter was 2.7 times, a level that remains within our targeted range of two to three times.

With that I'd like to turn the call back over to Aaron for additional comments on the remainder of 2014.

We are revising our prior guidance this morning for 2014 in terms of revenue growth and adjusted EBITDA margins.

The revised guidance is primarily due to the assumption of the current power outage environment remaining below normalized levels, the continued reduction of capital spending with certain telecom customers, and overall economic softness within Latin America.

For the full year 2014, net sales are now expected to decline in the mid-single digit range over the prior year, which compares with the previous expectations for net sales of an increase in the mid-single digit range.

Shipments of residential products are expected to decline in the fourth quarter as compared to the fourth quarter of 2013, mainly due to a strong year prior comparison for home standby generators.

This is primarily the result of the prior-year fourth quarter including the one-year anniversary of Superstorm Sandy, which drove a higher level of awareness in demand for home standby generators.

Shipments of commercial and industrial products are expected to increase during the fourth quarter as compared to the prior year.

This increase is primarily the result of acquisitions, as well as the completion of the Oshkosh facility consolidation, but will be partially offset by a continued year-over-year reduction in telecom shipments.

In summarizing, our sales growth assumptions for 2014, excluding the impact of the $140 million headwind related to the first half 2013 production ramp in residential products to normalized lead times, we now expect total organic year-over-year growth to be approximately flat.

This expectation of flat, organic growth on an adjusted basis represents a holding of the new and higher baseline of demand for full-year 2014, following a very strong period from 2011 to 2013, where compounded annual growth exceeded 25%.

Equally important, the holding of this baseline level is occurring with the back drop of a softer demand environment in certain of our end markets during 2014, as we've previously discussed.

With regards to gross margins, we are expecting an approximately 150 basis point decline sequentially in the fourth quarter of 2014 as a result of a higher mix of C&I product sales, partially offset by price cost improvements expected during the quarter.

We are also revising adjusted EBITDA margin guidance for full-year 2014 to now be in the low-to-mid 20% range, as compared to the previous margin expectation of the mid 20% range.

Adjusted EBITDA margins, specifically during the fourth quarter of 2014, are now expected to decline approximately 50 basis points on a sequential basis as compared to the third quarter.

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

In closing this morning, although certain of our end markets are performing below our expectations, we remain focused on the numerous, compelling, secular-growth opportunities for our products.

We continue to believe that a substantial penetration opportunity exists for residential and light commercial standby generators, and we are encouraged by the strong momentum we are seeing in the gas and oil markets.

Longer term, we are also optimistic about the increasing need for our products used in certain end-market verticals; such as telecommunications and data, as well as the opportunity to increase our share of the C&I markets through our recently expanded product offering.

In addition, we believe the overall secular shifts in the market towards natural gas generators and the rental of mobile power equipment remain in place.

With our strong balance sheet and free cash flow generation profile, we are confident in our ability to continue to invest in the future growth of the Business, both organically and through acquisitions.

In doing this, we expect to benefit from being a more balanced and globally-focused Company as we further implement our diversification and international expansion strategies.

This concludes our prepared remarks this morning and at this time we'd like to open the call for questions.

Operator?

Thank you.

(Operator Instructions)

From the line of Ross Gilardi from Bank of America.

Please go ahead.

Yes, good morning.

Thanks, guys.

Just a couple of questions.

First of all, on your inventories, I mean, they look like they're up 11% year on year on a 3% sales decline, and they look high relative to the last several years as a percent of sales.

Maybe some of this is acquisitions, but I'm wondering if you can flesh that out?

Particularly why is your inventory is elevated when a lot of your main products are made-to-order products.

And if we assume no further deterioration in the market, how long will it take to get inventory back into balance and what will it cost you on margin into 2015?

Eric, this is York.

About half of that increase, in fact, is acquisition related.

With the Powermate acquisition came some portable inventory with that acquisition.

I think I highlighted, at least primary working capital-wise was $18 million.

That came with that acquisition and a chunk of that was inventory.

And then the other half is effectively us bringing in portable generators for the Generac portable season.

Unfortunately, we didn't have a season.

As we highlighted, there weren't outages.

That remained below average.

Yes, this happens, you know, Ross, I mean, the cadence with that side of the business is you build for the season and, you know, the same situation played out last year.

We had elevated levels on portables.

Takes us about anywhere from, you know, kind of 6 to 9 months to burn that inventory down.

We do it on an everyday basis.

We don't discount portable generators.

You don't know when an event will happen so there's no point in discounting portable gens because, frankly, the carrying cost of those products is, you know, the economic model there would tell you that, um, discounting those products doesn't make a lot of sense.

As it relates to some of the other inventory categories, home standby inventories actually internally here -- we -- our activation rates, as we noted on the call this morning, have been quite strong, third quarter into the fourth quarter already.

And, you know, the momentum in that business, even in spite of the lower power outage environment.

There's kind of two seasons there, there's the summer storm season and then you've got winter storms that kind of create elevated demand for these products over time.

And we're actually, you know, kind of ramping production on the home standby side as we go into the fourth quarter -- as we're in the fourth quarter here for that kind of second season.

So we would tell you inventory levels, at least as it relates to those products, is, you know, is definitely in range with where we expect it to be at this point in the cycle.

That's presumably for your inventories, Aaron, but do you feel like there's excess inventory in the dealer chain at all, and do dealers have the flexibility to push any excess standby inventory that might have crept in there as a result of promotional activity back to Generac?

So dealer channel, historically, does not -- it's not a stocking channel for us.

Obviously they -- if you take, you got 5,000 dealers, so even if every dealer took a unit or two there would be a fair amount of product out there.

There is product in the field.

But, actually, you know, we look at that, we're able to tell very clearly exactly what's in the field because we know what we ship and when it gets activated.

So, frankly, by every channel we know specifically what's in each channel and we know actually to the SKU level, we know that.

And we have seen some very nice improvement in home standby inventories over the last 120 days.

Again, the seasonal cadence there distribution, when they do take inventory they take it ahead of season.

Which they did in the second quarter.

We noted that.

We have seen that come down, even in spite of not having major outages.

So, actually, we think that we're in really good shape in terms of when we look at days on hand, if you will, as a turn that statistic is coming down very nicely over the last 120 days.

Thanks, Aaron.

I had a question on the balance sheet.

Your leverage now is at 2.7 times.

And if you move forward a quarter and take implied guidance for Q4, you're going to be near 3 times, and I believe you want to keep your leverage 3 times based on your credit agreement terms or you would incur an increase in your cost of debt, as you have made reference to that in prior calls.

So, based on that, can we pretty much assume you won't make any sizable acquisitions or returning any cash to shareholders in the near future while you're hovering around that 3 times range?

Or would you potentially tolerate a modest bump in your cost of debt for the right transaction?

For the right transaction, Ross -- it's a quarter point on the rate, it's already a very low-cost structure in terms of the liability structure.

So, from an acquisition standpoint, we won't let that impinge our ability to do deals.

For the right deal -- we have said this before, our ability to service our debt, it's very low in terms of our total cash flow profile file as a Company.

Even at 3 times, frankly, if we were go above that and the debt were to creep up and the cost of debt were to creep up as a result of that -- in the absence of acquisition, obviously, we would like to keep that multiple below 3 times just from the standpoint of not paying the extra interest.

That's one of the reasons -- we took a proactive approach here at the end of third quarter to pay down some debt, simply because we want to take advantage of the lower -- why not get the interest savings in the fourth quarter?

So we made that decision.

And realize we have that excess cash flow payment we were going to have to make anyway in 2015, so we decided to take advantage of the interest savings ahead of time.

Our use of cash priorities can remain intact.

We're going to generate a lot of cash over time as well.

We talk about our strong free cash flow and our strong free cash flow yield.

We'll be able to generate a lot of cash, as well.

Prior use the cash still remain intact in the order that we've always talked about in terms of organic growth, and maintaining 2 to 3 times leverage and then M&A.

And then, after all that, the Board would evaluate return of capital to shareholders (multiple speakers).

Is it only a quarter, sorry to interrupt, is it only a quarter point on the rate up until 3.25 times?

No, it's only a 0.25 point.

That's it.

Regardless of anything above 3.

Okay.

Got it.

Thanks, guys.

Thanks.

Thank you.

The next question is from Charley Brady from BMO Capital Markets.

Please go ahead.

A little commentary on the promotional activity in the quarter.

How much did that impact the sales in the quarter, and if you had normal promotional activity -- it sounds like it was elevated sequentially, would you still have had growth in the standby generator sales?

I want to understand a bit better the commentary around strong activations but standby sales being down.

From a promotional standpoint, obviously -- the cycles in this business -- again, I'm talking residential here -- you know, when you get into periods where -- this business is, outages do matter.

We're a generator Company.

We tend to, when you don't see outage activity, to the baseline level, you know, we'll tend to promote more, obviously to try to stimulate end demand beyond that which the end market not naturally doing through that baseline average.

In terms of -- you know, I can't attribute the total dollars we would say are related to the promotional activity in the third quarter.

We had promotional activity in the second quarter as well, which we called out, so we're not giving you details, but it grew sequentially in both.

The second part of your question, the activation rates, you know, we have said that there was inventory in the channel and in the second quarter as a result of the preparation of the season, and over the last 120 days we have seen turns improve in distribution.

So, there's a work down of some of that going on as activations have picked up, so you have a little bit of that, that's happening.

There's also a lag.

The activations are after the sales happened.

There's a period of time between when an in-home consultation is done, to when the homeowner decides to actually go forward with the purchase, to when, you know, all permits are issued on the job and the dealer orders from us, and to when the dealer actually puts machine on the ground and activates it.

So, it is a bit of a lagging indicator, so we would throw that out there to make sure everybody's aware of that fact.

But I would tell you from just pure end demand and what we see, we think a lot of that is from our efforts on the proactive side.

Clearly it has to be because the outage environment has been very weak, more weak than we have seen it in a long time.

We have seen cycles.

I have been with the Company 20 years and we have seen cycles over the 20-year period.

That's how outages run.

You run through period of elevated outages and periods where you're below.

That's just part of the business model.

You know, I think -- the fact of the matter is that our proactive efforts today, when I wind the clock back over my history with the Company, we're doing so much more today to stimulate end demand and to find the more likely buyers of the systems than we have ever done.

And we're using data to do that, which I think is a critical advantage we have -- our market share improved during the quarter.

We went up, we believe we're up to 75% share of the market today and we think that improvement is coming purely from the standpoint that you know, we've got more data at our fingertips to find the more likely buyers of these system in spite of not really having the outages.

So, you know, the advantage that we get in kind of down periods like this, I think, is exacerbated by the fact we are just using a lot more tools to our advantage, much more so than anybody else in this industry could do at this point.

I'll just add -- you mentioned year-over-year discussion and last year was still benefiting from the afterglow from Superstorm Sandy.

It was an event that had a long tail, and even when you look at the one-year anniversary of that event, you know that tail did extend into Q4.

We've got that to deal with as well.

Can you quantify the Sandy in the back half?

You said 140 for the first half, but is there any numbers you can put around that?

No.

The 140 --

The 140 was really the lead times coming in.

When you get past that, then how do you attribute, you know, a purchase in November of 2013 to Hurricane Sandy in October 2012?

it's hard to, like, delineate that.

Could have been a small localized outage-and that was the second or third outage it had in a period of time.

So attribution back to a particular event is almost impossible to do.

Okay.

Just one more on the C&I side.

Can you quantify the deferred shipments in Q3 that will come back in Q4?

And are they all coming back in Q4?

Oh, you're talking the (multiple speakers).

Got deferred because you were consolidating the plant, moving the plant.

Yes, I mean, there's -- we're not going to get all of it back in the fourth quarter.

There's a lot coming back.

That was a big project to move everything and consolidate our footprint there, and will give us a great platform to work off going forward.

But it did come with kind of, you know, some deferral of shipments here that-- we're going to get a lot of that in the fourth quarter but, you know --

Lead time.

As we said in our prepared marks, it had a modest impact on Q3 in terms of C&I, but we'll get the lion's share back in the fourth quarter, but not 100% of it.

Thanks, guys.

Thanks.

Thank you.

Thank you.

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

Please go ahead.

Good morning.

Good morning, Jerry.

Can you talk about where lead times stand now for your standby business, and update us on the dealer count -- Aaron, I think you alluded to it in the opening remarks?

And also, as a follow up, what is your lead generation work suggest standby volumes will look like in the fourth quarter versus third quarter?

Yes, so, in terms of lead times, Jerry, lead times are well within in the 0 to 2 weeks that we would normally see, kind of, off-season if you will, given the low environment that we have.

Although again, with activations being elevated, demand has been, as we called out, sequentially more robust from Q2 to Q3.

Dealer counts, you know, that's been a challenge area for us.

When you get periods in the cycle here, like we're experiencing with lower outages, it's -- you know -- we're having some difficulty signing up new dealers on a gross-dealer count.

There's some difficulty there but that's not really where the difficulty lies.

The difficulty lie in, what we refer to as, dark doors, which is the dealers who don't purchase in a 12-month period.

Where actually we take a pretty conservative view there.

I don't know how other companies do it, but we say if a dealer hasn't bought from us in 12 months, he goes dark and we take him out of the dealer count.

In a lot of cases, those dealers don't go away.

They just haven't bought in 12 month.

They're still officially quote, unquote, dealers for us but we just don't include them in the count for purposes of this call, or for the way we, you know, talk about distribution.

You know, if you get an event in an area and a dealer hasn't bought in 15 months, we could see a reactivation of a dealer down the line.

The account is down slightly here in the third quarter from the second quarter.

Down around that 5100 number from the 5200 we were at the end of the second quarter.

You know, that's going to be a challenge for us the balance of the year here.

I think if we can end the year in the 5100 to 5200 number, hold that number through the rest of the year, we would feel pretty good about that.

As far as kind of directionally into the fourth quarter, you know, again, I think we've kind of called out of the fourth quarter contains a pretty difficult comp because, as York mentioned a couple times here, the anniversary of Sandy -- whenever you get the anniversary of a major event, that anniversary period as it relates to last year, having happened in October of last year, creates additional awareness, creates additional -- generally there's a small surge in demand.

Sandy was a big event and had fairly big anniversary event as a result in Q4 of last year.

We've got that comp that we're coming up against, so we've called out sequentially we're going to see some challenges there relative to that comp.

Our guidance assumes that outages stay below normal at the current run rate come into Q4.

Exactly.

Fair point.

Just to make sure I followed you, so standby down sequentially.

Obviously year over year is a really tough comp, but down sequentially is what you're looking for?

RESI and all.

That's how we -- we don't break it out but RESI and all would be the case, based on the implied guidance.

Primarily as a result of that comp.

Yes.

Okay.

And then -- okay, thank you.

For C&I, can you update us on where your telecom customers are in the standby build out on existing towers, and looks like-- are they taking a pause here?

Or are they nearly through that process?

Just should we think about tough compares through the first half of next year or is this a timing issue in the back half of this year?

Yes, I mean, we'll save our comments for next year on the next call because we're working through that and obviously trying to get some better visibility from those customers today on their plans for 2015, which they've not necessarily declared us to at this point.

As the year rounds out, hopefully we'll get some better visibility.

We've call this out from time to time -- again, Jerry, the visibility in the telecom market for us, even quarter to quarter or year to year, is difficult.

Longer term, we've been serving this market for the better part of two decades.

It's grown dramatically over that two-decade period.

The penetration rate being only 30% to 35% of total sell sites out there, and we estimate there is roughly 300,000 sites that are out there.

So, you know, call it a couple hundred thousand sites yet that don't have backup power on them.

We see tremendous runway, whether through regulatory pressure or just, frankly, protection of the revenue streams that these customers have.

That valuable data revenue stream that goes through these sites and the critical communication going through these sites.

We're the number one provider in this market.

It's been a great market for us.

We love those customers.

We just, unfortunately, don't get a lot of visibility in terms of just quarter to quarter.

Our guidance in Q4 contemplates that we will stay in a reduced capital spending environment here with those customers for the balance of the year.

Unfortunately that can turn on a dime.

We've gotten calls where customers want to burn budget before the end of the year.

And when I say customers, I'm using a plurality there.

It's really a single customer this year that has backed off their capital plans pretty aggressively.

And just working through their cycle.

We expect, longer term we expect that that will return to growth.

It's just a question of when.

Thank you.

Thanks, Jerry.

The next question is from the line of Michael Halloran from Robert W Baird.

Please go ahead.

Good morning, everybody.

Good morning, Mike.

Hi, Mike.

Could you talk a little bit about call of confidence in the base business here?

It certainly seems like you're calling what you're seeing on the residential side to be a baseline on a forward basis, and given the lack of storm activity, or outage activity in this case, maybe you could just take about the puts and takes that you are seeing on that, that gives you the confidence this is the right baseline to think about.

That's a great question, Mike.

We struggle internally ourselves to understand, after each kind of elevated period -- we called out compounding growth rate of 25% from 2011 to 2013 and trying to figure out where the baseline comes in after that.

These kind of cycles work through has always been a challenge is in the business.

The one immutable truth in this business, over my time with it is, that there is a higher level of baseline demand that does become pronounced, it holds, and figuring out where that hold is at, I don't know if we're ready to call that this is actually it.

I feel like in the business, given the activation data we're seeing, given the proactive approach that we have been taking, and the things we're doing to give our dealers and our distribution partners more success in the marketplace in terms of sales tools, and the training.

I mean, just the sheer amount of effort we are putting in to that is really, I think, a pretty great testament.

I think the one thing though -- seven quarters of reduced outages is -- it sets the baseline.

And we think this probably is a great point to say, hey, this demand kind of we're seeing right now, end demand we're seeing, would be the baseline so we like where that's kind of settling out.

It is unfortunate that some of the other things in the business, like on the C&I side with telecom and, you know, the softness in Latin America.

All those things that hit in one quarter -- which is regrettable, but for maybe the consolidation of our manufacturing footprint, which is certainly in our control, but even that is a project that just led to some deferral of some shipments.

Everything else just, you know, lined up against us in the quarter.

From our standpoint, the base business is very healthy.

You look at oil and gas, you look at the rental markets, you look at natural gas generators.

We like the recovery going on in the non-res market in C&I.

All those things are good things.

We think economic environment in the US is firming up and that should portend to good things in the future.

And outages will not stay low forever.

There's a return to the baseline average at some point.

Right now, we're in a cycle where it's down and it will come back.

I've watch this business enough to know that, when those thing do come back, they come back pretty aggressively and that's just how this business works.

And that's fair.

And that leads into the next question here.

I'm not asking you to commit to guidance or anything like that, but when I think about next year and I think about the baseline level of business today, and I think about the lack of outages that you have seen so far, you know, maybe talk about the puts and takes and specifically stay on the residential side, that could help actually see a return to growth in 2015.

I mean, it certainly seems, based on the internal initiatives you're seeing in the environment, that there's a growth expectation from a portfolio perspective on a forward basis.

Curious how you're looking at those puts and takes as you enter next year?

Yes, I mean, obviously we're working on next year's plan at this point and, you know, we'll be able to speak more discretely to that when we get into 2015.

But I think just on the initiatives, I kind of under pin that, and certainly underpin what we're seeing in my comments this year but underpin next year.

We've got some -- you know, we talk about this data we've got.

I mean, we've been collecting activation data now for four years and the amount of data we have is frankly, it's staggering even by our standards.

What we have amassed in four years time and the outage data we've been tracking over that same four-year period.

It's very detailed data, it's down to the household level, down to the DMA.

We're down to zip codes.

Down to just some of the mining of that data.

We have only been superficial in our mining of that to date.

We've got some aggressive projects on the docket for next year to involve, you know, a lot more -- we're going to enlist some help, frankly, in analyzing that data at a level of depth that we have not to date, to try and drive even further, you know, try to find those proactive buyers and trying to get the right messages to the right people at the right time.

I mean, there's some pretty amazing thing that we think we can do with the data that we haven't done yet.

I'm excited just from that standpoint because I think it unlocks some potential there that's not there, so that to me is pretty exciting.

I think, another area that we've been focused on is in the installation side of th equation, staying on the residential side as you want to do.

That installation component-- continuing to work to bring that installation cost down.

You know, we work very hard here to be very value based when it comes to the product, in terms of whether it be home standby for portable, for that matter, but in speaking about home standby, the installation is still a large overall part of the total cost of ownership.

From our stand point, there are both technical solutions available to us we have been working on for a number of years to try and reduce the cost of installation, but also market forces.

With 5,000 dealers out there, and, you know, we have been collecting -- speaking of data -- enormous amount of data from PowerPlay.

Remember PowerPlay gives us visibility to the entire proposal that a dealer is putting out there for the consumer.

So I now not only have the generator component of that, but I have the installation component of that.

And in some cases at a very detailed level.

So it's given us great data and insight into just where is the installation cost coming from, and how does it vary region to region and dealer to dealer?

We see some really good opportunities for best practices to be shared amongst dealers in term of reducing install costs and being more efficient during the installation itself.

And there, I think, some market forces we can use to our advantage to try and drive lower install cost for homeowners going forward.

Those two thing in particular, Mike, get me -- again, we're excited about the opportunities, things -- we have been focused on the fringe but maybe not the bull's eye and what we will focus on going forward.

Thanks for the time.

Thanks, Mike.

Thank you.

The next question is from the line of Jeff Hammond from KeyBanc Capital Markets.

Please go ahead.

Hey, good morning, guys.

Good morning, Jeff.

Just -- you talked about, you know, I know most of the focus has been kind of the storm and residential.

But you talked about oil and gas as an opportunity.

Can you just size how big you think the oil and gas market is for you guys?

Kind of given that the couple acquisitions and -- what's kind of the time frame where you think you'll have a more formidable approach or proactive approach to kind of addressing that big opportunity?

Yes, it's a great question, Jeff, one we have been intensity focused on here.

As we said in the last call, we kicked off a pretty aggressive project internally here to do exactly that, to quantify the opportunity, to understand the service model we need to be successful there, the products, you know, where there are gaps or product opportunities.

That's ongoing.

I mean, we're coming to the tail end of it as we have plans formulated for 2015 and you know, it's our intention when we get to kind of the 2015 guidance we'll give on the next call to frame that out more discretely for investors.

And we'll have a much better idea ourself what is going to be needed to be successful there in terms of the investment level that matches that opportunity level.

We think the opportunity level is pretty big.

Getting our arms around exactly how big and where can we play, where can we be successful.

I mean, you have the back drop, too, of, you know, oil prices coming down so, you know, trying to quantify impact on the short term.

Longer term, we think it's a multi decade run, domestic oil energy production.

But in the short term, there may be some variability with that trying to get our arms around to understand.

You know, as a vertical for us, in particular when you pro forma in the Mac acquisition, the heater acquisition that we did, it's become and incredibly important vertical in our C&I side.

It's rivalling the telecom market for us in terms of size, just raw size, and, frankly, you know, we like the growth trajectory of it.

It's grown well this year as we've talked, and we think there's a tremendous amount of upside and we see the opportunity to kind of carve out a niche there in the engine-powered equipment space in that market that could be very beneficial to the Company longer term.

More to come on that Jeff.

Appreciate the question.

I think we're just a little premature in getting too detailed about our kind of spelling out the opportunity, but it will come.

Okay, great.

And then just some fine-tuning questions.

Can you give us acquisition revenue in the quarter?

Yes.

So the Powermate acquisition was very small, it closed on September 1. On the RESI side, those are our first really acquisition to think about on the RESI side, but it was very small.

When you look at C&I, so as reported, C&I was down about 3% organically with the telecom reduction, organically C&I was actually down 15% or mid-teens.

There's roughly about 12% contribution for acquisition on just the C&I category.

Okay, great.

And then can you size the annual revenue, run rate, or trailing on both the Mac and Powermate businesses?

Yes, I mean, Jeff, Powermate, I'll start with that one.

That is an example of a portable generator manufacturer and we see this cycle repeat.

Unfortunately, that's a company that went through two of these before -- it's focused only on portable gens.

When you get into extended periods of low outages, portable gen companies they have a difficult surviving if that's their business model, and so we basically -- that was really about buying the brand, and some inventory, and working capital.

It's small on a run rate basis because of that, you know, current back drop of the environment.

It can expand very quickly, though, as we have noted when you get outages, that's the end of the market that expands pretty quickly.

The Mac side, just from a competitive standpoint we won't give you the discrete revenue numbers.

We disclosed it's about 100 employees.

It's really a nichey focused company on, you know, really exposed very heavily to oil and gas, and something that, you know, we think is the opportunity to put that into our general rental customers on a more aggressive basis through the Magnum sales force, our mobile product sales force.

We really like the up-side opportunity to do that in terms of revenue synergies, but, you know, that's something we just -- we're not going to give the discrete numbers on that.

Margins.

Yes, exactly.

Margins are great in that business as well.

Okay.

And then just -- real quickly back to telecom, I know you don't always get great visibility but just qualitatively as you talk to those major customers, I mean, is the air -- you know, is this kind of dip -- you know, tied to some other spending?

Or are they giving you any kind of color on, you know, how they're thinking about the product category and the spend category kind of long-term and where their penetration rates are etcetera?

You know, I wish I could tell you we sit down and have deep, meaningful conversation with them about that, but, unfortunately, they approach it kind of from a project basis year to year, and they make decisions, puts, and takes in their CapEx spending on when to kind of put this project ahead of others or when to put this project behind others.

The dialogue right now has been strictly around -- we're really talking, again, about one customer here that had a project ongoing to harden their network more aggressively.

They backed off of that project.

Whether it's tied to their decision in the announcement to make a big acquisition, which, you know, they made an announcement as such earlier this year, we don't know.

They don't give us that kind of detail.

Again, it's our belief and we have seen this movie kind of -- I've watched this movie before.

I've been through this cycle before and they back off.

But then ultimately, you know, they come back to it because they understand the importance of hardening the network.

I would -- maybe I would feel differently about this opportunity long-term if we were at 75% or 80% penetration of sell sites, but being at 30% to 35% penetration and knowing that just, you know, kind of everything that's going through wireless today from data to critical communications, it's -- I mean, that's only advancing further.

It's not relaxing.

As the leader in that industry, we just think there's, you know, great opportunity long term, great runway in that.

It's just, you know, unfortunately, the visibility we get is low.

It can be a bit from quarter to quarter, and year to year, can be a bit -- we hate to use the word volatile but in that particular segment there can be some puts and takes that unfortunately, we don't get the visibility we like.

It's a challenge to run the business that way.

I'll tell you that much.

One of the reasons these guys like us is we're incredibly flexible.

Our serve model for them is one of flexibility.

It's, you know, some of the inventory we've got that was asked about earlier, there is some inventory in telecom because we don't know when they may turn it on and go after a project or spend some budget.

And so we keep ourselves kind of in the game that way and make sure that we're being responsive to their plans and their project plans.

Thank you.

The next question is from the line Brian Drab from William Blair.

Please go ahead.

Good morning.

Good morning, Brian.

First question just -- Latin America.

What percentage of revenue did that account for in the quarter, roughly?

We never hand that out discretely.

It is relatively small on a relative basis.

Yes, that's an area --

Yes, okay.

-- percentage wise, Brian, if we broke it out, we would be giving the Ottomotores rev.

I think we've said Ottomotores revs before, I don't have the number in front of me.

The quoting of the percentage is something mathematically could be done.

We haven't done it that way.

You can probably do the math.

You know, that business, it's a great business.

A 60 year history.

It's had a really difficult end market.

They depend on big projects.

There's a baseline business within that business of everyday, kind of, you know, GEN sets and then there's the bigger projects and the bigger projects are an important element of that business.

Unfortunately, you know, the bigger projects with the, you know, the tepid economic environment down in Latin America, both in Mexico, but also in some other countries that, frankly, you know, were important kind of elements of that of what was going on at Ottomotores.

Venezuela is one call-out.

That's an important market that has, you know, a lot of need for backup power on a big project basis with their dependence on hydro and the way they can wax and wane from year to year.

But with the dislocation going on economically in Venezuela and in other parts of Latin America, those big projects have really cooled off.

That unfortunately hurt the business.

I would say the other side of the equation with Otto has been, you know, the transition away from one of the major engine suppliers there to a new supply chain has been a bit more difficult than they probably estimated, probably than we estimated.

We're through it now, and, you know, I think we feel like -- we're at a point where, you know, it's good things ahead.

We're seeing improvements second half over first half in our Otto business, so in 2014 here, so we think that is something that -- and as those big projects return, as the economy improves, with some of the things we're hearing in Mexico and other parts of Latin America, you know, we're, I guess, you know, we remain, you know, we're taking a little bit of a wait-and-see approach but, at the same time, we like the fact that it gives us a great base to operate from in Latin America.

And we're continuing to invest there because we believe it will be a great market over the next decade.

It's going to take a little bit longer time to get around that process than maybe we thought.

Okay.

Really appreciate the detailed answer there.

In the past, I think you've quantified for us in some way where we are in terms of outage activity.

You mentioned your enormous database there and you have the baseline historically, but clearly we're at a low level.

Can you quantify how low we are relative to history?

Yes, so in the quarter I mean, we said last time, 65% below.

When we were talking about Q2 and baseline we were referencing was through the end of 2010.

2012.

Excuse me, 2010 to 2012.

Without major outages.

So the baseline from 2010 to 2012 without major outages.

That was the baseline.

Q2 outage level was 65% below that level.

When you compare, if you look at Q3 and you use the same 2010 to 2012, you know, it's about mid-50s, 56%, something like that below that.

Q3 was about 56% below that.

We think that taking a conservative view on that, you have to kind of build the baseline, you have to add in the other quarter that has happened since 2012.

Yes.

Without major outages, which are all of 2013.

And what's going on in 2014 and we would be so -- if you kind of recalibrate the baseline to include the more recent activity, the third-quarter's outline -- outage activity would be about 40% below that recalibrated baseline.

So the baseline continues to grow every quarter you add to it and as we do that going forward, we'll try and get that information out there but we'd be about 40% below that in third quarter, so well below.

It was really hard to see.

If you looked at the month progression, September was just, like awful below.

It was terrible.

Below.

Thank you.

And the last question is from the line of Stanley Elliott from Stifel.

Please go ahead.

Thank you very much.

A question on the SG&A spend.

You're reworking the C&I distribution and you talked about some additional sales training on the residential side and we'll see what happens with the go to market on the oil and gas side.

But should we think of that business, ex amortization on a go-forward basis is kind of running at higher levels than what you have had historically?

On a dollars basis, are you talking, Stanley?

Yes.

Or percentage sales, however you want to frame it.

Part of your answer is looking on to 2015 -- we're rolling those numbers up as we speak so I would be speaking, you know, prematurely to talk about 2015.

I think we have talked about, over time, as we have grown, we do invest in the SG&A to support not only the baseline, new and higher baseline, but also to drive the future growth of the business.

You tend not to -- you have step functions in that SG&A as well is where I'm going with that.

I would say this, Stanley.

I hate to keep coming back to history as a guide post, because I know it's no guarantee of the future, but having been around the business as long as we have and our experience levels, one thing that -- I think it's a classic mistake of others, perhaps, either in this industry or other industries when they experience, you know, kind of end market, you know, kind of cycles that are below, like, long-term averages like we're experiencing with outages, as our example.

Continuing to invest in infrastructure is a really critical part about being able to take advantage fully of the next up cycle.

If you don't do that, you'll find yourself unable to really capitalize on the next leg up in growth.

We have said this before and unfortunately as a public company -- we have only been a public company for four years, so the public markets haven't seen the step function that occurs in this business from time to time.

As we look at it and look at it over history, those step functions do occur and those legs up can be aggressive and the flat part of the step or the tread part of the step, if you will, you know, that is the part that we feel that, at least here in the back half of this year, we're certainly in.

And I think you're seeing in the SG&A that level of spending that we're at today reflects our belief that, you know, the infrastructure investments are necessary to make sure that we fully capitalize on the next leg up.

As York said, we'll give better guidance on that as we go into 2015 in terms of where our thoughts and views are on that as we go forward, but at least as it relates to the back half of this year, I think what you're seeing reflected in the face of the P&L and in our guidance for Q4 definitely speaks to the fact we're going to continue to invest in.

Whether it be sales training, or whether it's R&D for products, or infrastructure of the Company, we think that's really important to continue to do.

Great, guys.

Thank you very much.

Thanks.

Thank you.

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

Thank you.

Great.

We want to thank everyone for joining us this morning and we look forward to our fourth-quarter and full-year 2014 earnings release, which we anticipate we'll be talking to you in mid-February of next year.

So with that, we'll thank you and have a good morning.

Thank you for joining today's conference.

This concludes the presentation.

You may now disconnect and have a very good day.