Generac Holdings Inc (GNRC) 2015 Q3 法說會逐字稿

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

third quarter conference call.

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

Later, we will conduct a question-and-answer session, and instructions will be given at that time.

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

At this time, I would now like to introduce your host for today's conference, Mr. York Ragen, Chief Financial Officer.

Sir, you may begin.

Thank you.

Good morning and welcome to our third quarter earnings call.

I'd 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 a 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.

We are pleased with our overall financial results for the third quarter of 2015 as net sales increased 2% to $359 million as compared to $352 million in the prior year as both residential and C&I products experienced low single-digit growth with the benefit of recent acquisitions.

Third-quarter results also met our most recent guidance expectations which called for a strong sequential quarterly improvement in both sales and margins as net sales increased 25% and adjusted EBITDA margins improved 440 basis points compared to the second quarter of 2015.

Despite the ongoing low power outage environment shipments of home standby generators increased significantly relative to the first half of the year as field inventory returned to a more normalized levels during the quarter.

Regarding our C&I products, the quarter benefited from an expected strong seasonal increase in mobile heater shipments from the recent MAC acquisition along with recent -- along with increased shipments of stationary equipment to industrial distributors.

However, the significant decline in capital spending levels within the oil and gas sector continued to have a negative impact on year-over-year growth for our mobile products during the third quarter.

In addition we are active on our recently announced share repurchase program as we use $64 million to repurchase shares in the quarter which we believe is an attractive use of capital for shareholders given our long-term growth opportunities.

As assumed in our previous guidance the power outage environment continued to remain challenging.

However in-home consultations and installations of home standby generators improved seasonally at a stronger rate than expected leading to a faster reduction in field inventory levels which improve the effectiveness of our sales, marketing and promotional programs in the quarter.

As a result, shipments of standby generators improved significantly on a sequential basis and exceeded our expectations.

In addition despite the lower power outage environment shipments of portable generators increased slightly on an organic basis as compared to the third quarter of 2014 as cross-selling synergies from the Powermate acquisition will further realize and as we begin the first shipments of our new IQ 2000 Inventor Generator, the quietest most intelligent portable generator on the market.

We remain optimistic on the long-term growth opportunities for residential standby and portable generators.

As we've commented many times previously, we believe that growth in the home standby category occurs in a step function manner but the penetration rates for these products accelerating during periods following major outage events and slowing again is the impact of those events subsides.

Each success is step that the category takes is representative of a new and higher baseline rate of demand resulting from increased awareness and expanded distribution.

We believe the recent performance of the product category demonstrates this pattern continues to hold despite the decline in year-over-year shipments of home standby generators in recent quarters after the robust growth period following the major outage events in 2011 and 2012.

In fact, the current baseline level of demand is still much higher relative to the prior baseline period of lower outages which occurred in 2010.

Specifically residential product shipments on a trailing last 12 months basis have grown organically at an approximately 12% compounded annual growth rate as compared to the 2010 period despite the lower baseline level of power outage severity over the past three years.

We believe this growth is a testament to the under penetrated nature of home standby generators along with the significant investments we have made during the past three years including our innovative sales and marketing program to increase the awareness of the product category as well as our focus on new products introductions and expanding distribution.

While the timing of an improvement in the power outage environment is obviously beyond our control, we will continue to focus on a variety of strategic initiatives to increase the awareness, availability and affordability of home standby generators.

These initiatives include specific projects and activities targeted towards generating more sales leads, improving close rates and reducing the total overall cost of a home standby system.

Residential product net sales for the third quarter included two months of contribution from the Country Home Products acquisition that closed on August 1. Country Home Product or CHP is a leading manufacturer of high quality innovative professional grade engine power equipment used in a wide variety of property maintenance task for larger residences light commercial properties municipalities and farms.

The acquisition provides additional scale to our existing platform of engine power tools which includes portable generators, power washers, water pumps and inverter generators.

Integration efforts for the acquisition are well underway and we are making encouraging progress in evaluating and pursuing a variety of synergies.

These include cross-selling opportunities with our existing distribution most notably with our national retail customers as well as certain cost synergies as we leverage our global sourcing and manufacturing capabilities.

Regarding our C&I products the significant decline in oil and gas prices that began towards the end of last year continues to have a negative impact on capital spending from mobile equipment that is primarily used in upstream oil and gas applications.

In fact, the price of oil which had shown some signs of stabilization above the $50 a barrel level after the second quarter dropped further during the third quarter and is remained well below the $50 level since that time.

Accordingly shipments into this market during the third quarter were below our expectations as we continue to see the negative effect of lower energy prices play out with regard to the impact on the broader general rental markets.

Our key national realm of customers have been actively reposition their underutilized equipment from oil and gas for their applications to other rental opportunities.

Resulting in a deferral of new equipments spending and playing a role in decline in the overall demand from mobile equipment because it is starting in the second quarter of 2014 we experienced a significant increase in demand for mobile equipment used in the oil and gas sector with this strength carrying through the end of the prior year.

The contrast of this heavy oil and gas related demand in the prior year and the significant pull back in the current year continues to create a very challenging year-over-year comparison for our C&I products.

We remain steadfast and our reviews regarding the long-term opportunity related to domestic energy production and the need for mobile products that are essential for activities.

However the adverse impacts from the drop in oil and gas prices including the recent additional weakness continues to have a negative impact on industry fleet purchases.

Accordingly we are taking a cautious approach to outlook for this end market as we further evaluate the impact of lower energy prices on the demand for capital equipment.

As previously mentioned we experienced the strong seasonal increase in mobile heater shipments during the third quarter from the MAC acquisition which closed in early October 2014.

Recall the MAC is a leading manufacturer of premium grade commercial and industrial mobile heaters within the US and Canada.

Shipments for these products can be highly seasonal with peak volumes typically experienced during the third quarter as rental equipment company's dealers and end users prepare for the upcoming winter season.

Although a key used for these products are within the oil and gas markets MAC's broad product line is also used in construction market the airline industry and other general rental application.

The third quarter of 2015 was our first peak season experience of MAC and we are pleased with resiliency of demand for their mobile heaters in light of the softer oil and gas environment.

We remain excited about the cross-selling opportunities available to us as we combine MAC heater product line with Magnum's broad relationships in the equipment rental market which will allow us to further penetrate the energy, construction, airline and general rental markets over the long-term.

We also continue to make progress and building out and expanding our capabilities for larger industrial generators.

In area we have been intentionally focused on for the past two years after acquiring the Baldor Generator business in late 2013.

This include significantly expanding our product line to include a broader more competitive offering of larger output systems as well as improving our distribution capabilities to better enable our industrial distributors to sell these more complex systems.

As a result of these efforts, shipments of larger output generators have increased at an encouraging rate throughout 2015.

We have also continued to experience growth for our industrial gas generators as we further leverage our core competencies with natural gas engines and expand the power range of gaseous products available.

We remain committed to a number of important initiatives targeting an improvement and the specification and closure rates for our industrial distributors that we believe will provide greater opportunities for Generac's future growth in these markets.

Our Tower Light acquisition which closed in August 2013 reached the two year anniversary of our ownership during the quarter.

Tower Light with headquarter outside Milan, Italy is a leading developer and supplier of a broad lineup of mobile light towers throughout Europe, Middle East and Africa with distribution in over 60 countries.

Our product line today includes the industry's widest range of LED-based lighting towers as well as several hybrid lightening solution that drive significant improvements in fuel efficiency and important consideration in many high class diesel fuel areas of the world.

Through their broad product offering and diverse geographic reach Tower Light is having a strong year despite challenging economic growth conditions in several of its key geographic markets.

However this performance is being masked within our financial results due to the strength of US dollar relative to the prior year.

The Company is working on several initiative to drive growth going forward including a number of new product introductions and increasing distribution presence in other penetrate areas of the world.

Tower Light is a well-run business with higher margins and power our acquisition strategy of targeting companies that diversify our business with new products customers and end markets well also expanding our geographic reach.

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

York?

Thanks, Aaron.

Net sales for the third quarter of 2015 were $359.3 million as compared to $352.3 million in the third quarter of 2014.

Sequentially net sales in the current quarter increased 24.6% as compared to $288.4 million in the second quarter of 2015.

Looking at our net sales by product class, residential product sales during the third quarter of 2015 increased to $185 million as compared to $183.7 million in the prior year quarter.

Contributions from recent acquisitions including Country Home Products which closed on August 1 were mostly offset by a decline in shipments of home standby generators during the quarter.

The year-over-year decline in home standby shipment was primarily driven by the continuation of a record low power outage environment that was significantly below the prior year and to a lesser extent by a modest level of inventory destocking in certain channels.

However, as expected shipments of home standby generators improved significantly during the third quarter relative to the first half of 2015 as field inventories returned to a more normalized level during the seasonally stronger back half for the year.

Lastly, shipments of portable generators increased modestly during the third quarter as compared to the prior year due to cross-selling synergies achieved from the Powermate acquisition, new product introductions and some incremental demand driven by power outage threats.

Looking at our commercial industrial products net sales increased to $148.2 million in the third quarter of 2015 as compared to $146.4 million in the prior year third quarter.

Strong seasonal shipments of commercial mobile heaters from the October 1, 2014 MAC acquisition contributed to this increase.

Furthermore, increased sales of larger output stationary equipment through our industrial distributors are being more than offset by a significant decline in shipments of other mobile equipment going into oil and gas markets.

Within our telecom vertical shipments in national count customers during third quarter declined only modestly compared to the prior year as a more challenging year-over-year comparisons have annualized.

Currency impact on C&I product sales sold in Latin America and EEMA markets was approximately $2 million during the current year third quarter.

On a constant currency basis sales increased modestly year-over-year at our (inaudible) subsidiaries.

Net sales for the other products category were $26.1 million in the third quarter of 2015 as compared to $22.1 million in the prior year.

The increase was primarily driven by additional service part sales resulting from our growing base of stationary and mobile products in the market into a lesser extent the addition of aftermarket part sales from recent acquisitions.

Gross profit margin for the third quarter of 2015 was 36.3% compared to 37% in the prior year third quarter.

The decline was driven by a number of factors including unfavorable product mix unfavorable absorption of manufacturing overhead related costs and the impact from recent acquisitions.

These declines were partially offset by improved pricing along with the favorable impact from lower commodity cost and benefits from overseas component sourcing due to the stronger US dollar.

Overall, unfavorable mix in acquisitions impact the gross margins negatively by 90 basis points while price cost impacted gross margins positively by 20 basis points.

Operating expenses for the third quarter of 2015 increased $3 million or 5% as compared to the third quarter of 2014 primarily as a result of the additional recurring expenses associated with recent acquisitions including a $1 million increase in amortization of intangible assets over the prior year.

Partially offsetting the increase was a decline in certain other selling, general and administrative expenses during the quarter.

Operating expenses as a percentage of net sales excluding amortization of intangible assets was 15.6% for the third quarter of 2015 as compared to 15.4% in the prior year period.

Adjusted EBITDA was $81.2 million or 22.6% of net sales in the third quarter of 2015 as compared to $83.1 million or 23.6% of net sales in the same period last year.

This decline in adjusted EBITDA margins compared to the prior year was attributable to the 70 basis point decline in gross margins along with the modest increase in operating expenses as a percent of net sales.

Sequentially, EBITDA margins in the third quarter improved 440 basis points over the second quarter.

This sequential increase was driven by a 300 basis points improvement in gross margins primarily as a result of favorable product mix and to a lesser extent favorable price cost.

In addition to a 140 basis points improvement in operating expenses from the improved leverage on higher sales volumes.

GAAP net income for the third quarter of 2015 was $34 million as compared to $36.5 million for the third quarter of 2014.

Included in the current year other expense income section is a $2.4 million loss on change in contractual interest rate as a result of an increase in our term loan interest rates spread of 25 basis points for an anticipated period of four quarters.

GAAP income taxes during the third quarter were $19.2 million reflective of a 36.1% effective tax rate as compared to $18.4 million or a 33.5% rate for the prior year.

This increase in GAAP effective tax rate was attributable to a decline in our section 199 manufactures deduction during the third quarter of 2015 compared to the prior year.

Adjusted net income as defined in our earnings release was $63.4 million in the current year quarter versus $57.9 million in the prior year.

This increase over the prior year is primarily the result of lower cash income taxes in the current year.

The third quarter of 2015 includes the impact of cash income tax expense of $500,000 as compared to $6.5 million in the prior year quarter.

This year-over-year decline in cash income taxes was primarily the result of a lower expected cash income tax rate for the full year 2015 of approximately 4% as compared to the full year 2014 rate of approximately 14% expected for the prior year third quarter.

The cash income tax rate of approximately 4% expected for full year 2015 is a reduction relative to our previous expectation of approximately 6% primarily due to a modest reduction in expected pretax earnings.

As a reminder our favorable tax shield grew annual intangible amortization in our tax return resulted in our expected cash income tax rate being significantly lower than our currently projected GAAP income tax rate of approximately 36% for 2015.

As we drive profitability overtime cash income taxes can be estimated by applying a projected longer term GAAP income tax rate of 36% on pretax profits going forward and then deducting approximately $50 million of annual cash tax savings from the tax shield each year through 2021.

Diluted net income per share on a GAAP basis was $0.49 in the third quarter of 2015 compared to $0.52 per share in the third quarter of 2014.

Adjusted diluted net income per share, as reconciled in our earnings release, was $0.92 for the current year quarter compared to $0.83 per share in the prior year.

The increase was due to the combination of $0.08 from lower cash income taxes, $0.03 from lower interest expense, $0.01 from lower diluted share count from the share repurchases during the quarter partially offset by a $0.03 impact from lower operating earnings.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, was $29.4 million in the third quarter of 2015 as compared to $47.8 million in the same period last year.

The year-over-year decline was primarily the result of higher working capital investment, as inventory reductions were converted into receivables that will primarily be collected in the fourth quarter.

This use of cash for working capital during the quarter was partially offset by a decline in cash income taxes into a lesser extent lower capital spending levels versus prior year.

With regards to primary working capital the Country Home products acquisition added approximately $11 million of primary working capital to our balance sheet as of September 30, 2015.

At quarter end we had a total of $1.05 billion of outstanding debt, net of unamortized original issue discount, and $46.5 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $1.01 billion.

Our consolidated net debt-to-LTM-adjusted EBITDA leverage ratio at the end of the third quarter 2015 was 3.6 times on an as reported basis.

Additionally, at the end of the quarter, there was approximately $149 million available on our ABL revolving credit facility.

As already mentioned we repurchased $2.15 million shares of common stock during the third quarter for $64.4 million under our recently approved share repurchase program.

The share repurchase program announced on August 6th, authorized with the company to repurchase up to $200 million of common stock over 24 month period.

In total between the Country Home Products acquisition and share repurchases we deploy approximately $140 million of cash during the quarter.

We believe this to be a very attractive use of capital for shareholders and demonstrates our confidence in the long term growth prospects and strong free cash flow generation capabilities of our business.

With that, I'd now like to turn the call back to Aaron to provide additional comments on our updated outlook for 2015.

Thanks, York.

Full year revenue and adjusted EBITDA are expected to approximately $1.3 billion and $270 million respectively.

This guidance assumes the power outage during the fourth quarter remained at the very low levels experienced thus far in 2015 and also assumes that energy prices remain at current levels.

Should the power outage environment improve during the fourth quarter results could exceed these expectations.

Looking at our guidance by product class we expect 2015 net sales for residential products have declined between 8% to 9% as compared to the prior year as a result of the challenging outage environment.

However this represents an improvement from the previous expectation of down approximately 11% given the improved end market demand.

With regard to C&I products for 2015 we now expect net sales to decline between 15% to 16% as compared to the prior year which compares to our previous expectation of down approximately 10%.

The reduction from prior guidance is primarily due to strong and incremental headwinds in the oil and gas market.

As we discussed during the second quarter free cash flow generation during the first half of 2015 was impacted by higher than expected inventory levels.

We began to amortize the portion of this inventory investment during the third quarter and expect to make further progress during the fourth quarter.

In addition, we expect to monetize a significant amount of receivables during the fourth quarter and as a result we now anticipated generating well over $100 million of free cash flow during the second half of 2015.

It is important to note that when looking at the seasonality of our cash flow generation over the past several years the company generates a significant amount of its total free cash flow during the second-half of any given year particularly during the fourth quarter.

In closing this morning despite a weaker demand environment that persist in key portions of our business we view the current softness to be temporary in nature and we remain optimistic on the long-term growth prospects for our business.

We continue to remain focused on matters that we can control including driving awareness for our products developing and expanding our distributing launching innovative new products and controlling cost.

In addition we will leverage our strong liquidity position going forward to further diversify our revenue base and expand our geographic presence as well as continuing to opportunistically return capital to shareholders.

This concludes our prepared remarks.

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

Operator?

(Operator Instructions) Our first question comes from Brian Drab from William Blair.

Your line is open.

Hey, good morning Aaron.

Good morning, York.

Good morning, Brian.

Good morning, Brian.

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Youve mentioned the inventory level as normalized.

Can maybe comment a little bit more specifically on that is where is inventory in the channel at the end of 3Q relative where it was at the end of 3Q last year and do you expect that destocking would have any impact on your 4Q results this year?

So Brian we talked a lot about this at the end of the second quarter because obviously second quarter was adversely impacted by the field inventory position.

And so as we indicated and as we expected we saw a kind of balance that destocking take place during the third quarter so more specifically where we ended the third quarter in terms of our view and field inventories in terms of rough numbers very close to where we were last year just in terms of total inventory balance for home standby.

Now activations the end market installations of product are slower this year than they were last year as we have talked about.

So in terms of days of inventory it is a little bit more but we do not think that that is going to impact the first quarter and we think that we have appropriately guided around that in comments we have made this morning.

Okay, thanks.

And then on the C&I side in the rental channel, can you give me sense for what percentage of C&I sales went through the rental channel in the third quarter and how is that playing out and how is the oil and gas situation effects in that?

Yes.

I know we havent typically broken that out separately we talked about how last years oil and gas was about 10% of our 2014 sales and you know with our new guidance we think that is going to be down about 40% to 45% year-over-year so that obviously has an impact.

But we havent necessarily broken it out specifically on a quarter-on-quarter basis but more commentary.

I guess the second part of your question was what again, Brian?

Well, I guess the one thing that I was looking for have you said in the past what percentage of C&I sales are going through the rental channel I think you have talked about that recent quarters revenue.

Yes, I think weve said roughly about 15% of the consolidated sales consolidated full sales run through that.

But again that was prior this year so this year will be lower as a result of the pullback in oil and gas prices.

So --

And again that is more in the mobile side of the business.

Yes.

And I think we have commented more in a general base in terms of what it was that 15% is actually the prior year the 2014 total consolidated net sales.

A large percent of the mobile business is sold through rental that is how you should look at it.

Okay.

Maybe I follow-up a little bit more on that later.

Just two quick ones here on the second quarter call you said that outage activity was down 40% year-over-year in first-half 2015.

Did you give us an update in number today for first nine months?

We didnt but its about the same.

Okay.

It remains in that kind of 40% down so our guidance for Q3 kind of anticipated that and that is kind of where it played out.

Okay.

And then acquisition revenue anything more specific you can tell us about absolute dollars contributed to C&I segment and resi segment from acquisitions in the third quarter?

Yes, if you looked at our as reported growth was about 2% headline number.

The organic piece of that was actually down about 7%.

So acquisitions had about 9% impact there and if you break that out organically between residential part and C&I, it's residential organically it was down around 6% and C&I was down just North of double digits.

Okay, perfect.

Thanks guys.

Thanks, Brian.

Our next question comes from Jeff Hammond of KeyBanc Capital Market.

Your line is open.

Hey, guys.

Just another one kind of free cash flow.

Can you talk about what really drove the receivables up in the quarter and then maybe a little more precision around this well over $100 million of free cash flow you expect to produce in the second half?

Yes.

Hey, Jeff, it's York.

So just the receivable number, if you look at where sales went up sequentially -- sales went up sequentially about 25% receivable went up about 29%, so they are about inline and those more heavily waited for sort of the back part of the quarter.

So I guess if you calculate the DSOs there they are not out of whack we weren't extending terms for sales and trading up sales for terms.

So I'm not worried about the receivable position.

What I'm actually pleased about two of them on the foot side is on the inventory side we reduce inventories around $25 million now that obviously will get those into receivables and then will collect that in the fourth quarter.

So typically if you look at our the seasonality of our free cash flow fourth quarter is typically a big quarter for us from a free cash flow standpoint this year will be no different and probably even more.

So this year because we did have that higher inventory levels coming out of the second quarter that we're monetizing that we'll monetize in the fourth quarter.

So we feel good about our guide there relative to the free cash flow in the fourth quarter.

Okay.

And then just can you talk about near misses on some of these hurricane, Patricia Hurricane.

How that does or doesn't impact your business in terms of it could be an awareness of that even though there is not a lot of power outage?

Yes, it doesn't have much impact.

There is a little bit of pre-activity with the Joaquin event and a lot of pre-activities focused on portable Gen.

So there is a little bit of that which we called out in our prepared remarks today that impacted some of the growth that we saw in portable generators in the quarter.

But it's a very small amount and then like Patricia -- I mean it's not a populated area.

So not even any really pre-storm type of activity and unfortunately that was such a short lived events.

Those types of storms any kind of tropical storm they don't like mountain ranges.

So unfortunately that's you get the mountains pretty fast inside of Mexico there.

So not a tremendous amount of uptick.

Jeff, I mean, obviously it gives us a platform that continue to remind people about from awareness and awareness standpoint around home standby, but unless you actually lose power it doesn't have a major impact.

Okay.

And then finally total comps sounds like you haven't use your comps.

But any kind of green shots or expectations for improvement in the 2016 there?

Yes, I mean we are obviously we're gathering our guidance year for 2016 and talking to our customer base there.

So we'll give a more finite read on that, I think once we get around the bend here with our full 2016 guidance.

But at least for the fourth quarter we've kind of maintained basically the same kind of pacing that we've been seeing here as of late which one of somewhat muted CapEx spending is.

There is a possibility that these guys they tend from a calendar standpoint, they tend to maybe burn a little bit of budget before the end of the year, that we are not sure if that's going to exist this year in our guidance's.

I think properly reflecting our views on that.

But as far as green suites for 2016 I think we'll hold our commentary till we provide full 2016 guidance and we'll have a better read on at that point.

Thanks.

Our next question comes from Jerry Revich from Goldman Sachs.

Your line is open.

Hi, good morning.

Good morning, Jerry.

Good morning, Jerry.

I'm wondering if you could talk about how conversion rates have tracked for your direct mail and infomercial activities and can you comment on power play dealer adoption over the course of the quarter as well.

Yes, I mean those are those programs that you mentioned Jerry are they continue to be very effective even more so in this quarter as we said with these talking that took place and the improved kind of end market demand around in home consultations which is the front into that process kind of a leading indicator for us and that comes out of the stand that we do on to drive leads mainly around our in commercial related spend but also we've recently hear this year in particular branched out furthermore on digital campaigns as well as some of the like kind of traditional mail stuffer.

The cost for lead if you well has remained actually relatively constant across it vary seasonally.

So I think the one thing we are learning is the pacing of that seasonally kind of when to dial up spending and when to dial back.

We watch very closely our cost per lease, cost per IHC.

The conversion rates of those lease in IHC and that kind of helps us pace our spending around the different media things that we chose.

And we obviously we evaluate the different media spent items kind of in relation to one another in terms of where we get our best ban for the box.

So there is still in my opinion there is still more to be done there.

But in like of the fact that we haven't had any kind of major event in three years.

We're really quite happy with that.

I think the one think we've recently done some updated brand awareness studying internally here and we do this on an annualized basis or every other year in the category and also the brand.

I'm talking home standby now.

We continue to see very nice increases in general awareness for the category and more specifically of the Generac brand within the category.

And we think that those are really positive things for us when we do finally get those outage events once again and they'll happen again.

We're kind of a little bit unsure of how positive that kind of uptake maybe the next time around given that we've been doing a lot to feed the market with a lot of those types of awareness building thing.

So I would say all indications today are this is the positive thing that we're going to continue to do.

We got to keep it fresh.

We've been changing up the things that we do and trying some new things but by large it's I think we're nicely offsetting some of these headwinds and there are being naturally created by not having any major outage events.

And Aaron the past couple of years your standby sales that looks like have been up in the fourth quarter versus the third quarter.

Does the magnitude of in home consultations that you hopes of had in the third quarters or to similar trend this year?

Can you quantify it all how much in home consultations have improved for you?

Yes.

They've kind of picked up in the second quarter into the third quarter and that's kind of our pacing here.

What we saw as home standby shipments for the third quarter we feel as probably pretty relative but what we're going to see in the fourth quarter and I think there's any not we're anticipating any major lift off for that.

Now, if you recall last year we did see a very nice build in home standby sales but there were some underlying event that occurred even though they were up some of localized in kind of the Michigan area around the Troy and also the Toronto area experience some fairly significant outages that drove high sea levels even higher into the fourth quarter and created a situation where that market was very good for us and we call that out last year but really all performed our expectations.

That will be a tough comp.

That's going to be a tough comp for us in Q4 and we're not anticipating that in the guidance we've offered today.

Okay.

Thank you.

You're welcome.

Our next question comes from Christopher Glynn from Oppenheimer.

Your line is open.

Thanks.

Good morning.

Good morning, Chris.

Hey, guys.

So just kind of put the channel inventory conversation on the terms that we talked about last quarter.

I think you said entering to the third quarter they were flat year-over-year on the channel and that was improved from up about 10% entering the second.

So is that kind of flat dynamic entering the third that is kind of a static situation now?

Is that correct?

It is.

It was just to clarify on that.

The first quarter was up to slightly when we ended the first quarter year-over-year, second quarter was up considerably.

Yes.

Coming in the third quarter the clarification it was up slightly as well.

In comment it's flat but it was actually up slightly.

Yes.

And then by the end -- coming in the fourth quarter now the (inaudible) inventory is flat but higher on a days basis.

Okay.

And then sequentially on the fourth quarter I just guess you just kind of answer that for residential.

But it looks like fourth quarter pretty similar to the third quarter overall.

Could you comment on any kind of nuances relative to that comment that are obviously to you guys internally.

Again I think our comments there as IHDs and activations typically move up seasonally in the second half of the year.

So we saw that ramps start in the third quarter we think that the pace for the third quarter is going to extend in the Q4.

That's how we've modeled it.

Again I think I have to preface those remarks by saying that we are in an ultra-low outage environment and so any kind of outage activity could impact that positively.

Although we've not contemplated that in the guidance we're issuing today.

But it is something that to remember I mean we're a little bit we get around the corner here three years in a row without any major events 10 years in Florida without a hurricane.

Yes, these are pretty low numbers and these patterns tend to role in cycles we seen it before.

They typically runs a couple of years two or three years and kind a feels like just statistically speaking we should be around horn here and probably we'd see we would expect to see probably something in the future just mathematically from a probability standpoint.

But again we don't control that all we can do it would be ready for it and get our business in a position to react when it does happen.

Okay.

And then the upside on residential in the third quarter relative to your expectations.

That was just kind of elbow recent traction around the power play and amp and the different things that you guys work so hard on.

It was.

I mean we saw even the a lot of just kind a remains pretty much in the same that kind a 40% down year-over-year and actually in Q3 it maybe even kicked down a bit over the first half average.

We saw some again nice receptivity to some of the awareness building things that we do some of our sales promotions and things had a better a better effectiveness in the third quarter than the second quarter mainly as a result of that destocking that we've talked about.

So I think the channel was just in a better place.

First quarter was just to put it in perspective I mean there's a psychology here a bit when you look at our look at -- we've got 5300 dealers.

And that dealer base coming out of a really strong Q4 Q1 was just really quite in terms of end market demand.

And so that really kind a shell shock the dealers we ended up a little bit higher inventory position there and then obviously Q2 that is the issue around uptake in the normal seasonal patterns we would have expect it around kind a loan in for the season.

By normalizing field inventories during the third quarter, we saw that there was I think the end market and our distribution our channel was in a little bit better buying mood relative to kind of the pace of installations out there and the pace of kind of kind of activity around in home consultations and some of the things we do.

But again there is a psychology piece of this and it kind of ebbs and flows a bit and trying to kind a kneel it one quarter to the next it can be a little bit challenging because there is just not a lot of visibility there other than some of the things like IHDs that we have is as leading indicators.

But even that is really just one data point.

So I think it was just to answer your question more directly, just a lot of the initiatives that we've got working on and being diligent about continue to push our messaging to get powerfully adoption at the dealer level which was another question asked earlier.

We continue to see improved adoption of the power place selling system in dealers and so all of those things contributed I think to a stronger Q3 unless than we originally were anticipating.

Yes, that's really interesting and helpful.

And you're mentioned of the distribution being in a better buying mood relative to the pace of installations.

Would you characterize that as all in balance with one another?

Yes, it is.

Yes, definitely.

I mean that the psychology of a small business.

I mean these 300 guys are -- that's the majority of our sales.

They're all small businessmen and so small business people.

And so from the standpoint that these are big decisions for them to take a chance to even buying one or two units for a season.

And if they're not in a buying mood because they just don't see the activity of the phones are ringing if they're not seeing the lead which was the case kind a coming out of the first quarter and into the second quarter.

It can really put a really dampen their buying kind a mood again to use a same word.

And we saw that improve in Q3 and I think that goes to the heart of what is in the improvement in Q3's number the outperformance in Q3 home stand by numbers in particular.

Thank you.

Yes.

Our next question comes from Charley Brady from SunTrust.

Your line is open.

Yes, thanks.

Good morning guys.

Good morning, Charley.

Hey, Charley.

Have you guys mentioned expectations for gross margin for the year?

We didn't flat out mentioned --

Gross margins.

Gross margins but it's when you look at the updated outlook and we talked about $270 million of EBITDA that would be just out for 21% EBITDA.

And the gross margin assumption underlying that wouldn't be any different than our previous guidance, whereas that slight degradation is just OpEx leverage on the slightly lower sales volume.

Got it, okay.

Thanks.

And then can you just talk a little bit about Australia.

Yes, I guess the partnership where distributor agreement, but I didn't think you mentioned what's going to happened with that kind a potential growth engine.

Yes the Australia market continues to be an interesting space where we think frankly we do that as it should be a good home standby market I mean it's an Ireland surround by water they get severe weather now and again.

And it has higher home values that are similar to actually the home values in Australia on average are higher than that of the US which is the unique situation of itself.

So we call that out try that we have partnership in place for numbers of years ago from a distribution standpoint.

That's had a mixed results to be very frank.

The partnership has actually done a little bit better with some of our engine power tool business than it has with home standby.

And I think the challenges of an installed home products and using a distributor who is a little more focused on outdoor power equipment really kind a manifesting itself in that not turning out quite to our satisfaction.

And now we continue to focus on the other challenge when we announce that partnership in the Australia market it's gone through a bit of a pullback economically with the drop in commodities and mining in particular.

So it's not been the market that it was back when we sign that deal.

So we remain kind a committed to really developing the home standby by category on a much more global basis.

But distribution remains probably some of our biggest hurdle there.

So our M&A pipeline continues to contemplate geographic expansion which is the important piece of that would be distribution.

And it would be more likely companies that are more adopted dealing with installed stationary products as appose to either mobile products or engine powered tools.

It's not to say that our M&A pipeline doesn't have any of that in it and it just our focus near term here is expanding our geographic reach in our stationary products.

And that would also be in terms of the impact it could have positively on Australia as well as other regions.

Great.

Thanks guys.

Thanks, Charley.

Our next question comes from John Quealy from Canaccord.

Your line is open.

Hey good morning guys.

Good morning.

Good morning,, John.

Hey York.

So on the distributive base, it sounds like you guys have battled tested that number 5300.

You've talked about the order patters getting back to normal maybe in Q3.

When you go back in is that in Q1 and Q2 period did you see a lot of churn.

The folks you have you think you're sticking with.

How do you feel on the constitution of that base as we're pass was seems to be a bad patch.

Yes I'll tell you our dealer base and obviously it's an area of intense focus for us because it's an important channel for a lot of reasons.

But Yes there has always been historically a fair amount of churn in that channel.

So just small contracting businesses by their very nature have somewhat of specific halfway.

So I think the average length of time and business is about seven years.

And those businesses consolidated the vaporized people go out of the business.

They sale their business they retire.

And again these are small kind of small businesses that generally only a few employees very using not a lot of access to working capital.

So we do a lot to help them and I would say that the churn that we've seen is not any different than what we've seen historically.

In fact we had at a 100 dealers on a net basis here in the quarter over last quarter which was I think an again in light of the backdrop with outages here.

The fact that we continue to grow that base.

Now we're only a little bit off of our original our peak from several years ago.

So I'm very pleased with the fact that we've held in there on that base.

And that we also it's not just holding in there, but actually getting better alignment with that base.

The programs that we put in place with power play many of our programs around training not only the technical training around the product of course.

But the sales training that we do and now more recently the focus on installation training as we've talked about in order to expand this category kind of to the next level, we believe that affordability is an important part of that equation and so today that average ticket when we look across our power play a book of business there and all the power play proposals that we generated.

We're still on that kind of $7,000 to $8,000 range really closer to $8,000 in terms of all in cost and that's a fully installed that includes permitting fuel hookups everything.

It's still just too high.

We really just need to bring that down and from my advantage point we've got a lot of opportunity to continue to work with distribution to make them more efficient at installing products.

So it also improves our bandwidth when times do get in times of heavy demand one of our constraints in expanding more quickly is the fact that distribution base doesn't expand rapidly, it expands over the time and if you have a spike in demand from a major events, we get constraint on both sales and installation bandwidth.

So anything we can do on our side to help make those dealers more efficient in both selling and closing sales as well as installing products behooves us positively when we do get spikes in demand.

So we're very focused on that, we are very focused on the partnership that we have with our distribution, we are very focused on building our brand.

As I said before we've done a number of studies here over the years that we continue to monitor kind of the impact that the things that we doing to create awareness in the category and more specifically around our brand are having in the marketplace and we are very happy with that.

I mean we believe that Generac brand is becoming very synonymous with the category.

And we see that in parts of the country not only with our dealers but end users who refer to their product as a Generac as opposed to home standby.

In fact we even get calls from some of our competitor's product when there is problem with those products.

They call us because they think it's -- they think the category is Generac and they look at up on the internet and they end up calling us to ask for service.

So obviously we are flatted with that but can't really help them.

So we send them back to wherever they need to be otherwise we can sell them a new system.

But we are very happy with our progress on those events and also the progress that we made with distribution.

And then my last question here could be considered unfair, but I'll ask it anyway.

So there is a lot of talk about your underlying earnings power and we've seen that seasonally change, but you came back pretty strong in Q3 after a tough Q1 and Q2.

Do you think you wanted Q2 the representative of some of the worst market that you can imagine.

I know you get some new businesses with home country MAC and things like that, but what do you think about the underlying earnings power here with $50 million plus in a week quarter and we've seen [$80 million] to well over [$100 million] in good quarter.

I know it's unfair, but what your thoughts on that?

I know many of us are talking about it.

Thanks, guys.

It's great that you guys are talking about it and I don't think it is unfair because we are talking about it and this company we peaked it over $400 million in EBITDA couple a years ago.

So the earnings potential for the company is dramatic in my opinion and I am biased of course.

But the things that we've done since that point not only in the acquisition we've done as you pointed out John.

But also I think in things that I just talked about in terms of alignment with distribution, the programs we've put out there, the efforts that we put forth in growing that residential standby market and some other things that we've done to grow awareness of the category in our brand.

In my previous comments, we are not exactly sure how some of that stuff when it does get back to an environment of stronger outage activity.

I'm not exactly sure how that's going to play out.

I can only say it's going to be positive.

I just don't know how positive.

So in terms of how much the earnings power can expand.

I know that I have seen it my history here.

We get into periods like this when we have cycles their down cycles.

I have to admit I have seen very few cycles like we've experience this year where basically all of the end markets we serve have been down.

Now I think the one qualification I would make would be around oil & gas which kind of took a second leg down from second quarter to third quarter.

Pricing kind of oil seem to be stabilize above $50 a barrel and now it's come back down and there is talk that it could be headed into the [$30s].

That I think the mobile equipment business it's going to be searching for a bottom here as we get into as we exit 2015 and I think though that there are some other good things that are going to come on that and we'll talk more deeply about 2015 guidance on the next call but I feel this company has tremendous earnings potential.

I mean the leverage that we get when we expand the top-line is dramatic, you guys have seen what our EBITDA margins have done and even in times with when you take into account the dilutive impact that some of these acquisitions have had on EBITDA margins.

The core of this business is going to has just tremendous upside and I think that as initiated the repurchase program because we just feel the shares are undervalued at the current prices and we feel that the best use of our capital is to buy back shares because we believe so much in the future of the business and the earnings potential of the business down the line.

So I think everything that we are doing is reflective of our confidence in the business.

It is reflective of our kind of our capital deployment strategies that we have talked about kind of ad nauseam with investors and with the analyst community and obviously internally here with our board.

But again on buyers so I mention in your question whether fair or unfair but that is my answer.

At this time, I am showing no further questions.

I will like to turn the call back over to Mr. Aaron Jagdfeld, President and CEO for closing remarks.

Thank you.

We want to thank everyone for joining us this morning and we look forward to our fourth quarter report and full year 2015 earnings results, which we anticipate will be in the mid-February timeframe of next year.

So with that, we'll end the call.

Thank you very much for your time this morning.

Ladies and gentlemen, thank for your participation in today's conference.

This does conclude the program.

You may all disconnect.

Everyone, have a great day.