Generac Holdings Inc (GNRC) 2014 Q4 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the fourth-quarter and full-year 2014 Generac Holdings Incorporated earnings conference call.

My name is Katina, and I will be your coordinator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Please proceed.

Thank you.

Good morning, and welcome to our fourth-quarter and full-year 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 will begin our call today by commenting on forward-looking statements.

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

Please see our earnings release or our SEC filings for a list of words or expressions that identify such statements and the associated risk factors.

In addition, we will make reference to certain non-GAAP measures during today's call.

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

I will now turn the call over to Aaron.

Thanks, York.

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

Net sales in the fourth quarter of 2014 improved to $404 million as compared to $376 million in the prior year, an increase of 7%.

Home standby generator sales exceeded our expectations during the fourth quarter, with product activation rates proving to be resilient as we leveraged our innovative sales and marketing techniques to help create awareness for the product category.

Commercial and industrial products continued to represent a growing portion of our business during the quarter, as we grew 17% on an as-reported basis through the combination of strength in oil and gas markets and the contributions from recent acquisitions.

We also generated a record amount of free cash flow during the quarter of nearly $100 million.

Despite a power outage environment that remained well below normal levels nationally, the number of home standby activations or installations were at elevated levels during the quarter.

This strength can be attributed to a variety of factors, including an increase in targeted media spend during the second half of 2014 that drove a greater level of in-home consultations, or IHCs.

Coupled with the increase in IHCs, we saw a notable improvement in the conversion rate of consultations to sales, which we attribute to our focus throughout 2014 on training centered around our PowerPlay selling system.

Another contributing factor to the outperformance during the quarter was strength within the Midwest region of the US as well as select areas of Eastern Canada, which both experienced particularly strong levels of activations resulting from heightened levels of localized outage activity in 2014.

We also experienced notable strength during the fourth quarter of shipments of mobile products that serve the oil and gas markets.

Increased utilization of this equipment throughout the fourth quarter continued to drive strong orders from our broad base of rental equipment customers.

However, heading into 2015, the decline of energy prices experienced in recent months is expected to have a near-term negative impact on demand for oil and gas related products.

Before further discussing additional details of the quarter and our outlook for 2015, I want to review some key financial highlights for 2014 as well as share with you several important accomplishments that we believe have positioned Generac for growth going forward.

For the full year, net sales declined slightly in 2014 to $1.46 billion as compared to $1.49 billion in 2013.

Overall organic sales for the Company improved slightly over the prior year, when excluding the approximately $140 million sales headwind related to Superstorm Sandy despite certain of our end markets performing below our expectations during the year.

While this level of organic growth is modest relative to our strong historical track record, we believe holding the new and higher baseline level of demand during 2014 is an accomplishment worth recognizing.

Residential product sales increased approximately 3% when excluding the prior-year sales headwind just mentioned.

It also improved organically when excluding the Pramac Americas acquisition, once again with the backdrop of a below-normal power outage environment for the year.

Commercial and industrial product organic sales growth was approximately flat year-over-year, as strength in oil and gas markets helped to offset reduced capital spending with certain telecom customers and overall softness in Latin America.

With the annualizing of the Tower Light and Baldor acquisitions during the year, along with the MAC acquisition that closed in early October 2014, our revenue base for C&I products continued to increase in scale and now represent nearly half of our total sales for the Company.

We also continued to generate a strong level of free cash flow during 2014 totaling $218 million, representing 93% of our adjusted net income, which is consistent with our solid cash flow conversion average over the past four years.

We enter 2015 as a more diversified Company with a strong balance sheet and the capability to generate significant free cash flow, providing us with the flexibility to drive our Powering Ahead strategic plan forward.

In 2014, we executed on a number of initiatives involving our residential products, in particular, within our home standby category.

As previously mentioned, overall sales of residential products improved organically during the year on an adjusted basis.

Portable generators declined again in 2014 as a direct result of the lower outage environment experience, but this was more than offset by organic year-over-year growth in orders for home standby generators.

This was very encouraging to see given the lack of power outages nationally both big and small over the last two years, and we believe that we have been very effective at offsetting a naturally lower demand environment through our continued investment in innovative sales and marketing efforts within this important product category.

These efforts are highlighted by our four-step system to identify and qualify sales leads and improve the sales closure rate for home standby generators.

Specifically, this system includes our A.M.P.

targeted marketing process to find the most likely sales prospects; the optimal selection of media to communicate our message including national television advertising campaigns, telemarketing, and direct mail; the scheduling of in-home consultations for qualified sales prospects through our Generac lead team; and the improvement in close rates through our PowerPlay in-home selling solution.

These four elements are interconnected and have been successful in generating new sales leads and improving closure rates for our residential dealers.

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

When coupled with the leads that we generate and qualify for our distribution partners, the PowerPlay selling system has become an important tool for our residential dealers, and we ended the year with approximately 25% of our dealer base using this approach.

As a result of all the above factors, we believe we further expanded our market share for the home standby product category during 2014, improving from approximately 70% share in 2013 to 75% share at the end of the year.

Heading into 2015, we will continue to focus on our main strategy of increasing the awareness, availability and affordability of home standby generators.

We look to accomplish this through a variety of initiatives including some important projects focused on further reducing the total cost of ownership and by using advanced data analytics to further improve how we identify the most likely buyers for these products.

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 underinvested electrical grid, favorable demographics, and the frequency of severe weather that we believe will continue well into the future.

With only approximately 3.5% of US households owning a stationary back-up generator, we believe there remains substantial opportunity to grow this market over the longer-term.

Innovation is a core value of Generac and remains an important element of our future growth.

In 2014, we introduced a large number of new products throughout the year while continuing to build a substantial portfolio of future development initiatives.

A few notable introductions include a new 22-kilowatt standby generator which provides the highest output for an air-cooled generator currently available on the marketplace.

Another new product introduction during 2014 was the Guardian Synergy, the industry's first variable-speed home standby, a best-in-class, much quieter, more fuel-efficient generator with exceptionally clean power output.

Also during 2014, we launched the industry's most cost-effective home standby generator called the PowerPact, which combines all the benefits of automatic operation with many of the features found in Generac's market-leading Guardian series of generators, with the 7-kilowatt unit starting at an affordable $1,899 retail price.

We also launched the Rapid Start, or RS, series, of portable generators in 2014 that provide back-up power with the turn of the new PowerDial, an innovative feature that dramatically simplifies starting and operation, making RS series portable generators the easiest to use product on the market today.

We also introduced several new commercial and industrial products in 2014.

We further expanded our broad lineup of natural gas generators with the introduction of a new 400-kilowatt power node at an industry-leading price point.

In addition to new stationary products, we also introduced a new vertical mast light tower that provides the most compact footprint in industry, improved ease-of-use, transportation, run time, and serviceability.

We believe our ability to innovate is something that separates us from others in our industry, and we have used the growth in our business over the past several years to accelerate our product development efforts and dramatically expand our research and development capabilities.

As a result, we expect 2015 will be another important year of new product launches across our business.

The integration of the Baldor Generators acquisition was a key product for our team throughout 2014.

We saw significant revenue synergies during the year through the sale of several gaseous fuel generator models that were part of the Baldor product line for use in oil and gas applications, and we experienced strong growth for these products selling directly to Magnum's existing rental equipment customers as well.

We also implemented some meaningful product cost savings as we transitioned the acquired products and facility into the Generac portfolio.

We completed the consolidation of the manufacturing footprint for our larger industrial generators from our Eagle, Wisconsin, facility to the Baldor-acquired facility in Oshkosh, Wisconsin.

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

The additional capacity we now have is critical to providing our industrial business the ability to aggressively pursue the larger end of the industrial generator market, a market we had largely not participated in prior to the Baldor acquisition.

In addition to added production capacity, we were particularly focused throughout the year on increasing our sales bandwidth to better enable our distribution partners to sell the larger generators and systems now available to them.

This includes a greater level of interfacing with the engineering firms and electrical contractors responsible for specifying and selecting these products in an effort to improve their awareness of our expanded product offering and our innovative solutions.

We continued to remain active on the M&A front during 2014 by making two strategic acquisitions.

In early September, we purchased the brands and assets of Pramac Americas LLC.

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 licensing of the DeWalt brand.

We remain focused on building out and enhancing our competitive position within the portable generator market as we look to further solidify our leading market share position by providing a full range of back-up power products for the residential market.

In early October, we acquired 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.

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

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

We have been talking in recent quarters about the notable strength during 2014 from rental equipment customers in the US as a result of strong demand in the oil and gas market.

This has come from the broad product line of mobile and stationary equipment that we've assembled through our Magnum and Baldor acquisitions including gaseous fuel generators that are capable of running on wellhead gas generated at drilling and production sites.

A more stringent regulatory environment around the flaring of natural gas at these sites has been an important catalyst for increased awareness and demand for these generators throughout the year.

We've also talked about the attractive secular opportunity related to domestic energy production for other support equipment such as light towers, mobile heaters, and portable pumps that are essential at these oil and gas sites.

We made good progress during the second half of 2014 in 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 end market over the longer term.

This evaluation, combined with our initial success in selling products in this market during the year, clearly validates that there is an opportunity to further invest and better position Generac to participate in what we believe will be an attractive long-term up cycle in this end market.

However, with the rapid decline in oil prices seen in recent months, we believe it is necessary to take a more measured approach, at least in the short term, with respect to our level of investment.

Also, until we fully understand the impact of lower energy prices on the demand for capital equipment, we're holding off on discussing any specifics regarding the overall addressable market opportunity for Generac's products within oil and gas.

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

York?

Thanks, Aaron.

Net sales for the fourth quarter of 2014 were $404 million, a 7.4% increase as compared to $376.2 million in the fourth quarter of 2013.

Looking at net sales by product class, residential product sales during the fourth quarter of 2014 were $194.9 million, which improved sequentially as compared to $183.7 million in the third quarter of 2014.

This quarter-over-quarter improvement was driven by a solid increase in shipments of home standby generators which exceeded our expectations for the variety of reasons as discussed previously.

In addition, the current-year fourth quarter benefited from higher organic portable generator shipments and a modest contribution from the Pramac acquisition that closed in early September, which was partially offset by a seasonal decline in power washers relative to the current-year third quarter.

Comparing on a year-over-year basis, residential product sales declined slightly from the $199.1 million shipped during the fourth quarter of 2013, which was a strong prior-year comparison that still benefited from the one-year anniversary of Superstorm Sandy.

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

These factors resulted in a modest year-over-year decline in both home standby and portable generator sales.

However, in spite of the low outage environment, we continued to see demand for home standby generators above our expectations for the quarter.

Looking at our commercial industrial products, net sales increased 17.1% to $185 million in the fourth quarter of 2014 from $157.9 million in the fourth quarter of 2013.

The improvement was driven primarily by continued strong demand for mobile generators and light towers going into oil and gas and other general rental applications during the quarter.

Contributions from the recent MAC acquisition also contributed to the year-over-year sales growth.

These increases were partially offset by a continued decline in telecom shipments as compared to the prior year due to reduced capital spending by certain national account customers.

On a sequential basis, C&I product shipments improved compared to the third quarter of 2014 as we were able to ramp our operations in Oshkosh, Wisconsin, during the fourth quarter and return to normalized lead times for our larger industrial generators.

As previously discussed, the consolidation of our manufacturing footprint for these products took place in the third quarter of 2014 and resulted in the deferral of certain C&I shipments in the fourth quarter of 2014.

Finally, although we have been experiencing a softer demand environment within Latin America over the past several quarters, shipments during the fourth quarter increased at a solid rate over the prior year, as we believe the economic environment has stabilized in that region.

Our other product sales category improved to $24.1 million in the fourth quarter of 2014, an increase of 25.7% from prior-year fourth quarter sales of $19.2 million.

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

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

Gross margin for the fourth quarter was 34.3% compared to 38.7% in the prior-year fourth quarter.

The decline was driven by the combination of a higher mix of organic C&I product shipments; the impact from recent acquisitions including Baldor, MAC, and Pramac Americas; and a temporary increase in certain product overhead-related costs.

During the fourth quarter, we incurred incremental costs associated with the West Coast port congestion, short-term transition costs related to the consolidation of our manufacturing and raw material storage footprints, manufacturing underabsorption due to the reduction in telecom capital spending, and copper forward contract mark-to-market adjustments.

We expect these costs to continue into Q1 2015 and then moderate in Q2 2015.

Operating expenses for the fourth quarter of 2014 increased $4.8 million, or 8.9%, as compared to the fourth quarter of 2013.

The increase was driven by the addition of recent acquisitions, a more favorable adjustment to warranty reserves in the fourth quarter of 2013 of $5.3 million as compared to the current year of $2.7 million, along with increased marketing and advertising expenses.

These increases were partially offset by a $1 million reduction in amortization of intangible assets versus the prior year.

Excluding non-cash intangible amortization expense, operating expenses as a percentage of net sales during the fourth quarter of 2014 were 13.4% as compared to 12.8% in the prior-year quarter.

Adjusted EBITDA was $92.2 million, or 22.8% of net sales, in the fourth quarter of 2014 as compared to $103.6 million, or 27.5% of net sales, in the same period last year.

This decline in adjusted EBITDA margins compared to the prior year was attributable to the 4.4% decline in gross margins combined with the modest increase in operating expenses as a percent of net sales as a result of the factors just discussed.

Adjusted EBITDA for the full year 2014 was $337.3 million, or 23.1% of sales.

GAAP net income for the fourth quarter of 2014 was $49.4 million as compared to $48.5 million for the fourth quarter of 2013.

GAAP income taxes during the fourth quarter of 2014 were $17.5 million, or a 26.1% tax rate, as compared to $29.9 million, or a 38.2% tax rate for the prior year.

The decline in GAAP tax rate was primarily due to the impact from certain state R&D tax credits that were recognized during the current-year fourth quarter.

Adjusted net income as defined in our earnings release was $68.4 million in the current-year quarter versus $77.5 million in the prior year.

This decline over the prior year is the result of the overall decline in operating earnings as previously discussed partially offset by $2.9 million in lower cash income taxes.

Diluted net income per share on a GAAP basis was $0.70 for the fourth quarter of 2014 compared to $0.69 per share in the fourth quarter of 2013.

Adjusted diluted net income per share as reconciled in our earnings release was $0.98 for the current-year quarter compared to $1.11 per share in the prior year.

With regards to cash income taxes, the fourth quarter of 2014 includes the impact of a cash income tax expense of $6.3 million as compared to $9.1 million in the prior-year quarter.

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

The lower cash income tax rate was driven partly by the state R&D tax credits that were recognized during the current-year quarter.

For the full year 2014, cash income tax rate increased to 13.3% as compared to 9.3% during the prior year due to our NOL carryforwards and certain tax credit carryforwards becoming fully utilized during 2013.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was $98.5 million for the fourth quarter of 2014 as compared to $88.2 million in the same period last year.

This record level of free cash flow was driven by a reduction in primary working capital compared to the prior-year fourth quarter along with a reduction in cash taxes and capital expenditures partially offset by a decline in operating earnings during the current-year quarter.

Free cash flow for the full year 2014 was $218.3 million.

Our uses of cash during 2014 included $34.7 million for capital expenditures, $61.2 million related to acquisitions, and $87 million for the prepayment of term loan debt, including a $25 million payment made during the current-year fourth quarter.

This debt prepayment will be applied against our 2015 excess cash flow payment that is required pursuant to our term loan credit facility.

As of December 31, 2014, we had a total of $1.09 billion of outstanding debt net of unamortized original issue discount and $189.8 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $898.3 million.

Our consolidated net debt to LTM-adjusted EBITDA leverage ratio at the end of the fourth quarter of 2014 was 2.7 times, a level that remains within our targeted range of 2 to 3 times.

Additionally, at the end of 2014, there was approximately $150 million available on our ABL revolving credit facility.

Given our current liquidity profile and strong free cash flow generation, we're confident in our ability to continue to invest in the future growth of the business both organically and through acquisitions.

With that, I would now like to turn the call back to Aaron to provide comments on our 2015 outlook.

Thanks, York.

Today we are initiating guidance for full-year 2015, as we expect net sales to increase in the low to mid-single-digit range as compared to the prior year.

Importantly, this top-line outlook assumes no material changes in the current macroeconomic environment and no major power outage events during 2015, but does assume a more normalized baseline level of power outage activity severity relative to the below-normal levels experienced in the prior year.

We expect the seasonality of quarterly results to demonstrate a normal historical pattern assuming no major power outage events occur throughout the year.

As a result, we currently expect the first half of the year to represent approximately 44% to 46% of total sales and the second half to represent approximately 54% to 56% of sales.

We anticipate that the first quarter will be the lowest revenue quarter of the year and to be in the range of $315 million to $325 million, as we expect that normal seasonality, a subdued level of investment in the telecom market, and sequential declines in oil and gas will all have an impact on the quarter.

Looking at our guidance by product class, for residential products we expect net sales to increase in the mid- to high-single-digit range during 2015, which assumes mid-single-digit organic growth with the balance of growth attributed to the Pramac Americas acquisition.

This sales growth guidance is driven by number of factors including the execution on a number of strategic initiatives to increase the awareness and demand for home standby generators, the assumption a more normalized baseline level of power outage severity during 2015, and an overall favorable environment for residential investment.

The strategic initiatives we are working on include an expanded focus on lead generation and further improvement in lead conversion for home standby generators, increased and improved retail shelf placement of products, the full-year benefit of new product launches, and the expansion of participation by our dealers in various programs such as PowerPlay and PowerPro among others.

With regards to our commercial and industrial products for 2015, we expect net sales to be down slightly on an as-reported basis but flat on a constant currency basis, as strong headwinds in the oil and gas and telecom markets will be offset by gains in our industrial distribution channel, improvements in Latin America, and contributions from the MAC acquisition.

Organic C&I growth is expected to be down in the mid-single-digit range.

Our 2015 outlook for C&I products is driven by the expectation of a favorable non-residential construction market, the continued secular shifts in the market toward natural gas generators used in light commercial and oil and gas applications, as well as the general preference toward the rental of mobile power equipment.

However, we expect the telecom capital spending environment to remain subdued throughout 2015, particularly during the first half of the year.

In addition, as discussed earlier on the call, the significant decline in oil and gas prices experienced over the past several months is expected to have a notable impact on demand for our mobile equipment that is primarily used in upstream oil and gas applications.

We also expect a modest level of foreign currency headwinds from the stronger dollar, particularly against the euro.

Partially offsetting these headwinds is the expectation for Ottomotores to experience an improvement in larger project bid activity despite modest overall economic growth in the Latin American region driven by improved infrastructure spending and execution on strategic initiatives.

In addition, we expect to see further progress on our efforts to gain share in the larger end of the power generation market, continued optimization of our industrial dealer network, and various initiatives to improve our specification and close rates.

In summarizing our sales growth assumptions for 2015, we expect total organic growth to be flat compared to the prior year despite the strong headwinds from declines in the oil and gas and telecom sectors as well as negative impacts from foreign currency.

The acquisitions of Pramac Americas and MAC are expected to contribute approximately 3% growth for a total year-over-year net sales increase in the low- to mid-single-digit range.

Gross margins for 2015 are expected to improve by approximately 150 to 175 basis points as compared to the prior year.

The increase is primarily attributed to a reduction in product costs, a more favorable pricing environment driven by a lower level of promotional activities, as well as improved product mix partially offset by the full-year impact of the Pramac Americas and MAC acquisitions.

Operating expenses as a percentage of net sales, excluding amortization of intangibles, are expected to increase approximately 75 to 100 basis points as compared to 2014.

This increase is due to a combination of higher warranty expense resulting from $5.1 million in favorable adjustments to warranty reserves in 2014 that are not expected to repeat in 2015, an increase in certain compensation costs and additional headcount to support strategic initiatives, as well as higher marketing and advertising expenses.

Adjusted EBITDA margins are expected to remain attractive and be in a range of 23.5% to 24%, and are expected to experience some variation as a result of normal seasonality.

Second-half 2015 adjusted EBITDA margins are expected to be approximately 300 basis points higher than the first half as a result of additional SG&A leverage on higher sales volumes, a more favorable product mix, and increasing benefit from product cost reductions.

Specifically regarding the first quarter of 2015, adjusted EBITDA margins are expected to be approximately 21% and then improve each quarter sequentially throughout the year.

I will now turn it back over to York to walk through some guidance items to help model out our cash flows and earnings per share for 2015.

Thanks, Aaron.

Finishing up, in 2015 we expect interest expense to be in the range of $47 million to $48 million, which represents a similar level compared to $47.2 million for the prior year, given a full-year impact of our interest rate swaps that were entered into during 2014.

The forecast for interest expense includes $40 million to $41 million of cash outflow for debt service costs plus approximately $7 million for deferred financing costs and original issue discount amortization for our credit facility.

The interest expense guidance assumes no additional debt prepayment during 2015, our existing interest rate swap contracts remain in place, and that LIBOR rates do not increase beyond our current LIBOR floor of 0.75%.

Based on our guidance provided for 2015, our cash income taxes for the year are expected to be approximately $47 million to $49 million, which translates into an anticipated full-year 2015 cash income tax rate of approximately 18%.

This represents a notable increase as compared to $34.3 million for cash income taxes in 2014, or a 13.3% rate.

The projected increase in cash income taxes in 2015 is primarily due to expected higher overall pretax profitability levels and, to a lesser extent, less of a benefit from certain discrete tax deductions that were taken in 2014 and are not expected to repeat in 2015.

The projected higher cash income tax rate is a function of the expected increase in pre-tax profitability levels as each incremental dollar of pre-tax profits over our tax shield is taxed at the expected GAAP income tax rate of approximately 36%.

It is important to note, however, even though we are paying increasing levels of income taxes, our favorable tax shields for 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 seven years.

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

As we drive higher profitability over time, cash income taxes can be estimated by applying a projected 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 shield each year through 2021.

Depreciation expense in 2015 is forecasted to be approximately $16 million to $16.5 million.

GAAP intangible amortization expense in 2015 is expected to be approximately $21.5 million to $22 million.

In 2015, stock compensation expense is expected to decline to approximately $10 million to $10.5 million, primarily the result of the remaining unvested equity gain in France related to the 2010 initial public offering becoming fully vested.

Finally, in 2015, our capital expenditure spending is forecasted to increase to approximately $36 million to $37 million, which is still less than 2.5% of our forecasted net sales for the year as we continue to invest in certain infrastructure and technology expansion projects to drive organic growth and build a common global platform across our businesses.

We expect to continue generating significant free cash flow in 2015 given our superior margin profile together with our low cost of debt, favorable tax attributes, and capital-efficient operating model.

For full year 2015, we expect the conversion of adjusted net income to free cash flow to be approximately 90%, resulting in improved levels over the prior year.

In closing this morning, our Powering Ahead strategy has been guiding our investments in Generac for the last four years, allowing us to capitalize on the compelling secular growth drivers for our business and contributing to the evolution of Generac into a more diverse and globally focused Company.

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 opportunities for our business, we believe Generac is well-positioned to drive future growth and shareholder value.

This concludes our prepared remarks.

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

(Operator Instructions) Jerry Revich, Goldman Sachs.

I'm wondering if you gentlemen could talk about what surprised to the upside in the quarter?

Top line, I think was better than your guidance and I think better than most of us expected.

Relative to your expectations, can you talk about what went better?

Yes, I think -- Jerry, when we pull it apart, as we mentioned, home standby, I think, was probably the biggest part of the upside surprise for us during the quarter.

We saw really strong activation rates, which are installations, which is a lagging indicator for us just to point out.

But installations were strong throughout the balance of the fourth quarter.

And the seasonality in this category continues to surprise us a little bit.

Obviously, we are thinking a little bit stronger for third quarter than we ended up and not quite as strong in the fourth quarter, so we continue to kind of learn the cadence of this market.

And especially in years without any kind of major events and even without any minor events, frankly, we didn't have much in the way of outage events at all.

So home standby was good.

We attribute most of that increase in home standby, by the way, to -- as we peel it apart, to a lot of the additional spending that we've been doing on targeted advertising, in particular the Power You Control infomercial that we've been running the balance of 2014 in a lot of markets.

We really ramped that up in the second half of the year, and our PowerPlay selling app in concert with that.

We are driving leads and driving those leads to distribution through our selling system, and that really has picked up.

And we saw that start to accelerate in the third quarter and really do quite well for us in the fourth quarter in terms of the results of activation.

So it was driven by home standby.

And then I think to a lesser degree, the Magnum business -- our Magnum business had a great year last year.

Fourth quarter was a -- in fact, it was a record year for Magnum in all of 2014 in the three years we've owned it.

And they had a very strong fourth quarter as well.

Again, going into the oil and gas markets in particular, we saw particular strength there.

We have tried to temper our enthusiasm about where that's going to go here in 2015 as oil prices have come down.

But -- and then actually in Latin America, we had a good quarter at Ottomotores.

We think we found a bottom there throughout the year in 2014.

We've made some significant changes and investments in that business over the last several quarters, put some new leadership in, done some things to consolidate our operating footprint, and done some things down there that we feel are going to be an important catalyst for future growth.

And we also saw -- I think the market in Mexico has somewhat settled out as well.

So we are going to see what that brings for 2015 with oil prices being down.

But we did have a good quarter in the fourth.

So those are the things I would think I would point out.

Okay.

Thank you.

Can you talk about how the lead generation numbers look for you heading into the first quarter?

You mentioned seasonality has been less of a factor for the standby business in the fourth quarter.

We're looking at a pretty easy compare in the first quarter in the year-ago -- any color you can give us on what lead generation tells you and how we should think about standby seasonality 2015 compared to what we saw in 2014?

Yes, when you look at the seasonality of this business, when it gets cold and when it snows, installations, activations really slow down.

In particular, we have got some very strong markets in the Midwest and the Northeast which have, over the last several weeks, been pounded with winter finally arriving.

So that has dampened installation and activation activity similar to what we saw last year in Q1 relative to the polar vortex which was more cold driven, but this year it is probably a little more snow driven.

And unfortunately those events haven't led to any major outages.

So I guess if you're in those areas, that's a fortunate thing; but if you're selling generators, not so much.

But it -- so what we've seen is that come down.

We think that our guidance that we issued here -- kind of the discrete guidance for Q1 kind of takes all of that into consideration and is reflective of at that point -- of our expectations here and where things are going to end up.

Jeff Hammond, KeyBanc.

So it sounds like you want to wait on the size in the oil and gas opportunity.

But if you can -- you've done a number of deals.

Can we size what you think your oil and gas exposure is overall as a percentage of your sales, and maybe while you're at it, touch on telecom?

And then can you talk about order rates within the different components of the business -- the heaters, the lighting towers, the gaseous generators, and where you are seeing or expect to see the greatest weakness?

So I think -- you are right, Jeff.

We kind of pulled back on quantifying the oil and gas opportunity given the rapid decline in energy prices here.

But when we look at 2014, to answer your question -- and, again, it's not a perfect number because when you sell to a rental equipment company, you're not exactly sure where the equipment ends up in terms of application -- in terms of end application.

And it could be in one application one day, and then the next week it's in a different application.

So it's a little bit tough, but we can look at the general geographies that we are shipping into and kind of make a guess there -- an educated guess.

And so we think about 10% of our revenues topline last year were in that oil and gas space, if you will.

And that's everything from the heaters -- and again, we didn't have a full year of the MAC business under our belt, so that's not a pro forma number; that would be on an as-reported basis.

So that might -- you might consider that up a bit from there when you think about MAC on a full-year run rate.

But obviously that's going to pull back this year from that level.

And we think that our guidance is modeling that appropriately.

We've modeled a pretty fair headwind here for oil and gas.

And then the other one, as you mentioned, is telecom.

There was a point in the curve here earlier this year where we saw telecom start to come out -- we had a very good first half of 2014 with telecom.

So we've got a tough comp we are up against there as we come into 2015.

But in the second half, we really saw that come down.

We attributed that primarily to a couple of things.

First, it's a cyclical business.

But secondly, there were some major M&A activities that were announced in that space.

And we've seen that movie before where -- and when you do a consolidation like that in the industry, typically equipment purchases slow down as the acquired companies or the acquiring companies evaluate what they bought in terms of footprint and equipment.

What's happened now is -- I think it's going beyond that.

With the net neutrality discussion that's out there, some of the customers that we sell to directly in that space have been very clear in their remarks -- their public remarks about capital spending as it relates to building out their networks as this net neutrality -- the new rules develop here with the FCC.

So it's kind of a wait-and-see.

We think we've modeled a very subdued 2015 as it relates to telecom capital investment, so I think we are appropriately reflecting how we see the market playing out.

There still are opportunities there.

Don't get me wrong; it's not like it's gone to zero, but it is certainly off of its pace from the first half of last year.

And then I think when you look at what pieces of equipment in general we see as getting impacted by all of this, to answer your question, it's the mobile equipment business primarily as it relates to oil and gas.

And then the telecom business is more stationary diesel sets -- smaller stationary diesel sets that are primarily delivered to those markets.

So -- and that's hurting us.

As we mentioned on the small stationary diesel sets, we had some absorption issues that we were up against in Q4.

We were doing some consolidation of our operating footprint, and we continued that -- those projects here in the first quarter.

But with -- that's kind of a lot of volume, if you will, in terms of on a unit basis running through our factories here, those stationary diesel sets for the telecom market.

So that -- again, we think we have reflected in our guidance kind of an appropriate hedge against the fact that we could be faced with some absorption headwinds here first quarter and maybe relaxing a little bit further in the year as volume builds.

Okay.

Can you give us a sense of within your commercial guidance, how much you are thinking telecom and oil and gas are going to be down?

Yes, I think when we look at the headwind, it's -- I think we are kind of modeling somewhere in that $50 million range.

If you want to think of it that way, it's kind of the number we have put on it.

Again, it's not a perfect science, but we think that it's -- we think that that's reflective of the -- what we're going to see in the market here for 2015, that kind of a pullback.

No growth obviously.

It's about a 20% decline over prior year.

Yes, about a 20% decline over prior year when you look at those two: oil and gas and telecom.

Okay, great.

And then just on the cost side, can you quantify what this port issue cost you and when that resolves itself and then the added marketing spend?

And do you think that persists through 2015?

Yes, the port issue is amazing.

We have had a lot of great planning earlier in the year in 2014 around that.

We saw it coming, and we were ordering inventory, extending lead times on our -- or extending our ordering windows and talking to our supply chain.

That's gone nine months.

So even the best-laid plans unfortunately didn't anticipate a nine-month stretch on this -- what is turning into just a frigging nightmare for -- I've got to imagine -- I saw the retail federation obviously getting things on retail store shelves.

But obviously in the manufacturing sector and other sectors of the economy, we all depend on a global supply chain.

A lot of that global supply chain comes through West Coast ports.

And so we haven't really quantified the amount, but it's a little hard to quantify.

We can look at air freight costs and everything else, and that's easy to put a number on.

But it's really the impact, the disruption that is going on in our business.

When you are trying to run products down a production line and you run out of one component and you've got to shift to a different production, there's switching costs.

And you are sending people home some days early; you're working overtime other days to catch up.

So it's the general disruption of the business.

From a resolution standpoint, I think what I've heard is there is hope that they are close on an arrangement here, some kind of a contract, but that it could take six to eight weeks to unwind.

There are 25 ships at anchor out in the West Coast just off of Long Beach.

And up and down the coast, there's elevated levels of traffic that needs to be resolved.

So it has led to all kinds of shortages in chassis, trucking chassis, and rail shortage capacity and all kinds of dislocations.

So it's been a mess, and we're going to continue to manage it, but it's been a mess.

Mike Halloran, Robert W Baird.

So just one quick follow-up on Jeff's question.

Are you guys assuming a -- that the second half of the year run rate on telecom is what just carries through 2015, or are you guys thinking, given all the headwinds you mentioned, a modest step down from the second half and that's more the normalized run rate?

We are actually modeling, Mike, kind of a modest increase in telecom throughout the year --

In the second half.

In the second half 2015 --

Aaron, I meant relative to the back half of 2014 run rate that you saw.

Ah, I got you.

I'm sorry.

Yes, it's probably up slightly from that point, Mike, from the back half of 2014 just when you look at the comp.

So I guess our views on that -- there are some projects in the pipeline; there are some potential customers that have told us about some plans.

But, again, I temper the enthusiasm around any of this.

I think we have modeled it appropriately, but we're just -- overall for the full year, I think until some of the net neutrality stuff becomes a little clearer, I think these guys are a lot less inclined to continue the buildout rate of their networks until they know where things are going to head.

Yes, first-half 2015 is only slightly up from the flat back half of 2014, and then it builds into the --

Then it builds in the second half.

Okay.

Normal seasonality from that level then makes sense.

So on the residential side of things, maybe just an update on the dealer count side of things and how you think that's tracking, what the pipeline there looks like.

And then also how inventories for you guys track.

I know you don't have a lot of standby inventory, but how the portable inventory bled through the fourth quarter and into the first quarter here.

Yes, so I will talk to dealer count one first before I get to inventories.

Dealer count -- approximately 5,200 dealers is where we kind of are today, and that's a -- that's down from where we ended the year last year.

I think we ended the year about 5,400, so down a couple hundred dealers on a net basis.

Certainly not what we were expecting, but given the challenging power outage environment, it's not only difficult to create demand at the end-market level, it's difficult to create an interest at the distribution level.

And so -- and that comes off of three very large years.

We added over 1,000 dealers -- almost 1,100 dealers, as a matter of fact, in a three-year period there -- two- to three-year period.

So the count today is pretty stable.

What we do like is that we see improvements in the engagement level of the dealers we have in the channel.

So even though the dealer count overall is down, their engagement in the tools that we put in front of them with PowerPlay and PowerPro have really been affected.

We just had our annual dealer meeting down in Orlando, Florida, here in early January, and we had 1,200 dealers at that meeting, 1,300 dealers at that meeting.

And that's a record number for us.

And just a tremendous amount of interest in not only new products, which of course is always the life boat of distribution, but the sales process and techniques that we are doing to make them more effective salespeople.

And the leads that we are driving them; we are driving tens of thousands and tens of thousands of leads to these guys, which is -- when you can give sales opportunities to distribution, that's when you get a very close relationship going.

So we are pretty pleased with that effort and have focused very hard on that over the last several years.

And then your question on inventory levels, you're right.

We don't keep a lot of standby inventory in our warehouses.

And because they are big, heavy, expensive boxes, we don't see a lot.

It stays in channels.

We would say that the standby inventory level is pretty normal, where we were about a year ago in terms of channel levels and our own levels by the end of the year.

And then portable generator inventories are elevated.

Those are fourth quarter -- we were off, I think -- I don't know that we quoted it in our prepared remarks, but our fourth-quarter outages were 70% plus below kind of the normal baseline we've been tracking.

So it's fourth quarter was just really, really low.

And so I guess, again, it's what gives us some hope on the standby side that the things that we're doing are having an impact.

They certainly are overcoming the softness from -- the natural softness that we are seeing in the end market.

But portables are different game.

That was down again in 2014, down in 2013.

So, you know -- and without some catalysts to propel those sales forward, we're going to have elevated inventory levels for a while.

We try to burn that stuff off over the next six to nine months.

That's kind of how we calibrate in terms of -- we kind of corporately set the inventory levels at a certain rate going into the season like we did last fall.

And then if you don't get a season, then you are burdened with that inventory and the carrying costs of the inventory, which is -- for us, our carrying costs are relatively low, so it's not a huge burden, but we do have a lot of inventory.

And then on the tools that you guys are giving, I think you cited about 25% of the people -- of your distribution is using some of these great tools you guys introduced.

Maybe you can help frame how that's impacting the P&L from a growth perspective.

What's that 25% seeing?

And compare that to maybe the 75% or so that hasn't adopted A.M.P., PowerPlay, and all of the other stuff?

How would you differentiate what that looks like from a growth perspective and from a prospecting perspective?

It's a great question.

And these are things that we talk to dealers that we try and move to the system, we talk to them a lot about.

We want to tell them how -- the 25% that are using the system, how they are succeeding in terms of growth rates ahead of the 75% who don't use it.

And we see double-digit increases in sales for the guys who are on the system and quite a bit less than that for people that aren't.

So the leads don't go to people unless they're on the system.

So the leads that we generate -- you only get those as a dealer if you are part of the PowerPlay -- if you're using the PowerPlay system because the scheduling application is built into that system.

And so it creates a tremendous amount of alignment between ourselves and the dealers.

And the information flow coming back, Mike, the other way is really powerful as well in terms of just giving us, dealer by dealer, specific close rates and what their average quoted prices are so that we can help them try and sharpen their pencil when it comes to things that -- if we see dealers from a best-practice standpoint in one market that are closing sales at a certain percentage and we see dealers in another market at 2X that percentage, we want to take those best practices and we want to share them amongst the distribution.

A lot of times, we see a high correlation, though, between price points.

So the higher the price point that is quoted out there, the lower the close rate.

So we see it's a directly inverse calculation.

So our desire here is to not only get people on the system but to continue to reduce the total cost of ownership, and we're going to be focused very much on that next year.

But we definitely see the difference in close rates for -- and growth rates for dealers that are on the system versus dealers that aren't.

Charley Brady, BMO Capital Markets.

So I just want to understand -- you've got essentially a flat dealer network, it sounds like, but you are seeing a pickup in Q4 sales.

So can you give us any color on, I guess, maybe kind of a same-store sales for existing dealers?

It sounds like, at least in Q4, maybe that's gotten better.

But I don't know if there's just some seasonality around to it, or if it's anything you track that directly.

Yes, we haven't quoted a same-store sales number.

We're not going to probably do that.

But from -- what drove this, Charley -- again, we think that we can point very clearly within our own data to the fact that the -- when we talk about what we've been doing on the sales and marketing side in terms of this four-step process of driving awareness for the category is really critical.

And what we did, and we probably didn't attribute enough value to in terms of our guide on fourth quarter, was the fact that we were ramping our spending and our focus on this not only throughout all of 2014, but we really accelerated that in the second half.

So we got to the third quarter, and there's a lag.

It takes time from when you start that spending and you start those efforts in terms of a ramp on that for you to see it in the activation rates and the sales rates for the dealers.

And so what we saw was just we saw positive traction with that in the third quarter that led to improved shipment rates and activation rates for products in the fourth quarter.

So if you want -- mathematically, yes, that would lead to an improvement in the same-store sales just on a raw math basis across the average dealer, certainly.

I think there are pockets also that we called out where there were -- even though activations -- or excuse me, outages were very low nationally last year, there were pockets where -- like the parts of the Midwest here -- Michigan in particular; Eastern Canada; you get into the Toronto area and some parts of Canada where activation rates were particularly strong on the back of elevated outage activity on a localized basis in those markets.

And so we didn't get a lot of outages, but where we did get them were in a couple of targeted few markets that ended up being -- and have historically, frankly, been good markets for us.

The Midwest has been a tremendous market for us, and it's a market that doesn't get hurricanes.

It doesn't get really ice storms.

You get winter weather and you get some severe summer weather, and that's typically what drives it as well as the tree cover here and the age of the grid in this part of the country.

But even the Northeast, which, you know -- it didn't -- it wasn't up in Q4, but it certainly started to come back.

Very slow first three quarters of the year, and then we saw the Northeast rebound very nicely for us in the fourth quarter in terms of stabilization.

We fell down year over year on a comp basis based on the Sandy impact, but that region was up very nicely on a sequential basis for us in the quarter.

All right.

And just on the commentary on your -- within your guidance, moving back towards normal outage activity -- again, in the guidance in 2015, I guess can you help us frame if we don't get back to that normal, what the top-line impact might be?

Because we are down, what, 70%, and obviously, you're offsetting some of that, just internal stuff you're doing.

So you're not getting the full brunt of it.

But if we don't snap back to a normal 2015, what's the downside risk, I guess, is what I'm trying to drive to.

Yes, Charley, this is York.

Fair question.

I think the challenge with that question -- obviously, when we project and forecast and put our budgets together, all we have to go by is historical averages, so that's why we guide the way we do.

Now, having said that and to answer your question, if you look at 2014, we've been talking pretty clearly that last year was a period pretty much every quarter where we had below-average normalized baseline level of outages.

So you can start with 2014, look at our resi business for 2014, that's a period of time that experienced below-average outages.

So now you've got to layer in Powermate.

So we acquired Powermate, so there's some acquisition growth -- modest acquisition growth from Powermate.

And then, to your point, you've got to give us some credit for all of our internal initiatives to drive awareness regardless of outages.

We are doing lots of things to really create our own awareness -- the sales and marketing and then the tools and driving penetration and PowerPlay and getting our dealers aligned with us and all those things to drive growth regardless of outages.

So you've got a give us credit for that.

So you will be able to model a number, then, based on that, and that should give you an idea of where -- what could 2015 look like with below-average outages.

Now, I think the other side of the coin is we haven't assumed any major outages either.

So there's upside to that if we get a landed hurricane.

And I know you are trying to put a collar around it, but you have to keep that in mind as well.

Brian Drab, William Blair.

So in the first quarter, you gave us the guidance -- this range of $315 million to $325 million.

I don't know that you've given any granularity here in terms of what we should expect for the segments.

But I guess from the call, what I would model here, what I'm gathering, is that maybe residential and portable is down a little bit year over year and a pretty steep decline in C&I year over year in the first quarter.

Is that fair?

Yes, that's fair, Brian.

I think Aaron mentioned, we talked about seasonality of the residential business.

And with snow on the ground and very cold conditions, it is tough to install.

So seasonally, historically, Q1 is always our lowest point in time for resi.

So you would expect some moderation from Q4 to Q1 for resi.

But to your point about C&I, there's some things on the C&I business that -- there's still a seasonality on the C&I business in particular with the mobile products.

There's just less construction in Q1, so therefore the mobile gens and mobile light towers seasonally will be off from Q4 to Q1.

Our heater business -- the heat business has -- the season is Q3, Q4.

Q1 comes around, and order rates don't fall off at that point.

So that's a seasonal thing, seasonal impact.

But there is sequential decline in our guidance for oil and gas, so we had a strong oil and gas quarter in Q4.

We are expecting moderation off of that in Q1 for sequential decline in oil and gas.

Telecom -- year over year now for telecom, that's going to be a really tough comp, Aaron mentioned.

We did ship a good amount of telecom products in the first half of 2014.

So year over year, that's going to be a tough one for C&I.

But I think we already commented about sequentially what telecom will look like.

And then there is the transition -- the moving our manufacturing footprint from Eagle to Oshkosh, that did cause a deferral of sales from Q3 to Q4 that -- now that we've caught the normalized lead times, that won't repeat in Q1.

So that will be sort of an artificial sequential decline from Q4 to Q1.

So I think the way you framed it, Brian, is probably right that C&I will be impacted more so sequentially.

Okay.

As we look at -- I guess the way I was framing it -- thanks for all that.

But the way I was framing it was year over year as well.

And I'm wanting to make sure that I am modeling down year over year for both of those segments, but just down more for C&I, is that fair?

I guess -- we haven't given discrete guidance, but I think Jeff pointed out there was some easier comps with the polar vortex last year.

But we still see that -- a seasonal challenge with installations and lots of snow on the ground and lots of cold.

So I wouldn't expect resi to be dramatically off that prior year, but C&I I gave my comments there.

Yes.

And then any impact recently from the winter storms that we are seeing on the East Coast on the portable sales here in January?

No, they're very minimal.

There just haven't been a lot of outages associated with those storms.

There have been pockets, but it's been mostly just snow events.

And I think from a portable gen standpoint, we really haven't seen much uptick.

Okay.

Then could you give us acquisition revenue in the quarter?

Yes, in the quarter -- so for C&I, because it was up 17%, a good chunk of that -- the vast majority was acquisition related.

So organic growth for C&I was in that low single-digit range.

Keep in mind that -- so we had a very strong oil and gas organic growth, and then that was tempered by very tough comps on telecom, so that's really the reason for sort of the muted organic growth in the C&I side of the business.

So the majority of that 17% is in fact the MAC business coming on board and actually one month of the Baldor business.

And then on the resi side, a very small amount where we reported minus 2% year over year.

A very small amount of that was related to the Powermate.

So a little bit more negative from an organic standpoint for resi.

Ross Gilardi, Bank of America Merrill Lynch.

Hi, Aaron, I was just wondering, can you help us at all with a more updated view of the geographic dealer network representation with everything that's going on over the last couple of years?

You mentioned the strength in Eastern Canada and Midwest.

Just -- and I know you don't fully disclose these numbers, but any help on Northeast versus the Midwest versus the Southeast that you could provide?

No.

I don't mean to -- we haven't provided that level of detail, Ross.

The Northeast is obviously a very strong reason for us in terms of -- are you talking dealer count or are you just talking --

Dealer count, yes.

(multiple speakers) 5,200 dealers like -- can you --

No, we haven't broken that level down, no.

(multiple speakers) that broad pie chart?

Okay.

It's solid population and outages.

If you were to map -- if you would overlay a US map of population centers and outages, you would find a pretty good --

Our investor relations deck has that map --

Yes, we've got a map.

I mean, we don't have the accounts broken out necessarily.

But -- yes, we haven't done it that way.

Okay.

Fair enough.

You have been pretty clear on what happened with oil and gas in Q4 and what you expect earlier in the year.

But can you kind of give any more color on what physically you are actually seeing with some of your rental customers?

Because, clearly, they must have overbought in the fourth quarter and have got a lot of idle fleet to contend with in some of the energy-producing states.

So are they now liquidating that fleet in the used market?

Are they moving it around to other parts of the country?

Just curious how that dynamic plays out.

What physically unfolds that spills back into your business.

They watch utilization rates very closely in the rental market.

That's kind of their key metric in terms of the ROI on the equipment.

It's one of the key metrics.

There's a number of them.

But utilization rate is the big one.

So they are constantly dialing that in.

And obviously with pullback in energy prices, depending on -- some of the rental companies are definitely a lot more exposed to that than others.

I would say generally the smaller regional players are the guys who are in the Bakken shale, they are in the Permian basin, they are in the Eagle Ford shale.

They are in these shale plays in the Marcellus directly.

Those are the guys who are definitely having some challenges with idle equipment.

But the big national accounts have a bigger footprint.

I think they have more flexibility to move things around.

I can't tell you that I've heard directly that somehow there's bigger liquidations going on out there in the auction markets and things like that.

We do know that utilization rates have come down in the areas of the country that are in these direct energy plays.

So that's definitely one.

Some of that is being offset by a continued improved environment around non-res construction.

So non-res construction, road construction, other non-res construction has been decent here -- has finally shown some signs of life, which is helpful.

But I think beyond that, if you are directly associated with a specialty rental type of company in the energy plays, I think you're looking at some of the same things we've modeled in terms of pullbacks in oil and gas.

Stanley Elliott, Stifel Nicolaus.

Quick question.

In North Dakota, there was a lot of push to run the generators right off of the wellhead.

Have you seen any sort of regulatory moves in other shale plays to where that would be the norm going forward?

The Bakken is the place where flaring occurs most prevalently.

So that's been the concentration of regulatory environment both the state level -- really at the local level, the state level, and the national level.

EPA has got some stringent rules there in the state of North Dakota, as you mentioned.

Stanley has also got some pretty strong rules that are being put in there.

When you get down into the Permian basin, as an example, it's only about 3% of wells.

It flares.

So it's a much higher number in the Bakken, and that's where we've seen early legislation now.

As some of these shale plays continue to develop out in the Marcellus out East and in some of the other parts of the country, I would suspect if -- and a lot of this is because of the type of drilling.

Right?

It's frac drilling, so that is where you tend to get more of that by-product from that as gas and it gets flared off.

The Bakken is primarily a frac type of environment in terms of the technique used.

So where fracking is used more prevalently, that's where you're going to see a general increase in flaring.

And in particular in new shale plays like the Bakken.

The Permian is an older shale play.

It's pretty well-developed, so there are ways to actually capture that gas and put it into commerce -- clean it up, put it in commerce, and do something else with it -- sell it or turn it into electricity or something like that.

Very helpful.

Thanks, guys, and best of luck.

John Quealy, Canaccord.

Hey, just real quick, on the new home builds, can you characterize them -- sorry, Aaron, if you gave it in your comments, but what penetration is like in the new home on the resi side right now?

I don't know that we've actually talked about that.

It indexes higher than our current 3.5% penetration rate across, but we have said probably 2X is what we've seen it.

I don't have a direct read in front of me on that, John, just in terms of most updated stats for the quarter on that.

But obviously it's a nice thing to see, and we continue to make efforts there to -- we've put a lot of effort on that, in fact, with our sales teams here to bring new homebuilders in.

We have had some wins in the back half of 2014, in particular, getting some homebuilders who are doing whole developments with home standby generators either as an option for as a standard feature on the homes that they are putting in.

And that's something we haven't seen really ever.

And so that -- we like that, and obviously it's an area of the country you expect to possibly see that like the Northeast and the Midwest, where outages have been more prevalent here in the last several years.

But it indexes about 2X to the overall penetration rates.

Okay, great.

Thanks.

And just a real quick follow-up, just in terms of -- you have had some really good revenue growth and capture on, I call it, more of a centralized channel where you are helping these distributors close deals in homes.

Is there a cost to capture from your standpoint at Generac that you measure?

And would we likely see that number grow with national advertising, et cetera?

It is still going to be pretty early innings for this effort, but I just wanted to get a feel on how you think about cost to capture from a Generac perspective.

Thanks, guys.

Yes, thanks.

It's a great question John.

We look at our cost per lead that we generate.

We look at the close rates.

And technically, you work all the way down to a cost per sale in terms of the efficacy of those efforts.

Not only the direct marketing spend -- if it's direct mail, television, print, those types of things -- but also we are starting to look at the total cost of capture in terms of the efforts to produce those selling platforms, the efforts to improve those selling platforms, the cost of the headcount that we need to take the leads, qualify the leads, and to push those leads out.

The training --

Analyze the data.

Analyze -- we've got a massive effort going on.

As you can imagine, we have accumulated a tremendous amount of data over the last four years on activation data.

And we are mining that data now at a level we've never done before.

We have brought analysts on board that are pouring through that data to try and find cues in the data that help us sharpen our approach to our sales and marketing efforts so that we are more targeted.

So that we can keep those costs to capture at a relative range.

But you are right: it's early innings.

And we're trying a lot of things right now, so the cost to capture is pretty high.

Thankfully, our scale with 75% share gives us the opportunity to really go after this hard and spend a lot of money on this.

And you see it reflected in our SG&A.

We're spending millions and millions of dollars on these efforts, and it's not a small effort.

But we think that we've got an opportunity here -- a rare opportunity to take a market that's only 3.5% penetrated US single-family homes and do something pretty unique in growing that.

And that's going to come from us; that's not going to come from anybody else in this market.

We're not going to sit around and wait for Mother Nature to deliver the next catalyst or leg up in terms of demand; we're going to do it on our own.

And when those outages happen, we're going to be in a really good spot in terms of being able to tell the story about these products and to capture those leads and close those leads.

So we really like what we're doing there.

We think the payoff is well worth the effort at this point, but it's expensive.

Ladies and gentlemen, this concludes the question-and-answer session.

I would now like to turn the call back to Mr. Aaron Jagdfeld for closing remarks.

Thanks, operator.

We would like to thank everybody for joining us this morning.

Appreciate the time.

We look for to our first-quarter 2015 earnings release, which we anticipate will be scheduled for sometime in late April.

This concludes the call.

Thank you very much.