Generac Holdings Inc (GNRC) 2016 Q1 法說會逐字稿

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

first-quarter 2016 earnings conference call.

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

I would now like to turn the conference over to your host, York Ragen, Chief Financial Officer.

You may begin.

Good morning, everyone, and welcome to our first-quarter 2016 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.

Our overall financial performance for the first quarter exceeded our most recent guidance expectations as the increasing diversification of our business helped to offset the ongoing headwinds being experienced within oil- and gas-related end markets.

Shipments of our legacy residential products came in modestly ahead of our expectations, benefiting from higher home standby activation levels, due to a relatively mild winter season, along with a more favorable power outage environment as compared to our assumptions.

Also, we experienced better than expected shipments from the recent acquisitions of Country Home Products and Pramac, and shipments to telecom national account customers were also more favorable due to higher levels of capital spending by certain customers.

This outperformance helped to more than offset additional weakness within portions of our commercial and industrial products, primarily driven by lower than expected sales of mobile products as a result of low and volatile energy prices.

Adjusted EBITDA margins also came in slightly ahead of our expectations, benefiting from lower operating expenses as a percentage of net sales.

On a year-over-year basis, net sales in the first quarter were $287 million as compared to $312 million in the prior year as we face stronger comparisons for both residential and commercial and industrial products.

As compared to the prior year, shipments of home standby and portable generators declined as expected, due to higher levels of backlog and lower levels of field inventory entering the prior year first quarter of 2015 as compared to the first quarter of 2016, which more than offset the improvements in end-user demand during the quarter.

Although the first quarter experienced a more favorable power outage environment when compared to our assumptions, this represents only a single quarterly data point, and outage levels were still well below the long-term baseline average.

While the power outage environment is obviously beyond our control, when market conditions inevitably improve at more sustained levels, we believe we are very well-positioned to fully leverage the innovative sales and marketing programs for home standby generators, which have only been implemented within the past three years.

In the meantime, we remain focused on a number of strategic initiatives to increase the awareness, availability, and affordability for home standby generators, including specific projects and activities targeted towards generating more sales leads, improving close rates, and reducing the total overall cost of these products.

Regarding our mobile products, energy prices experienced another sizable move downward during the early portion of the first quarter of 2016, particularly with the price of oil, but have improved significantly from the trough levels seen in mid-February.

However, the volatility and overall low levels of prices continues to have a worse than expected impact on capital spending for mobile products as our rental equipment customers deferred new equipment spending during the quarter.

Accordingly, this has had a significant impact on our current quarter mobile product shipments relative to the prior year.

As a result of this ongoing and significant downturn in capital spending within the oil and gas industry, we initiated a number of meaningful but necessary expense reduction actions during the first quarter to better align our current cost structure with customer demand.

The cost actions being taken include the consolidation of the Bismarck, North Dakota heater facility into our Berlin, Wisconsin facility by July of this year.

In addition, we are implementing other facility footprint reductions, numerous headcount and operating expense adjustments, along with recording certain non-cash asset write-downs and other one-time product charges related to the MAC heater line.

Given these actions, first-quarter results include the impact of $7.1 million of nonrecurring, pretax charges related to these business optimization and restructuring costs.

While these cost reduction actions are significant, we believe they are necessary to address the adverse impacts from the severe and extended downturn in energy prices that continue to have a negative impact on industry fleet purchases.

We estimate the cost actions will yield between $4 million to $5 million of annualized cost savings once fully implemented by the fourth quarter of 2016.

Although near-term market conditions are challenging, we remain optimistic on the long-term need for mobile products that are essential to oil and gas drilling and production activities.

Now, a couple of quick comments on the remainder of our C&I business.

Shipments to our telecom national account customers were down during the quarter as the overall soft capital spending environment that persisted in 2015 continued into the early part of 2016.

We also saw a decrease in shipments to our North American industrial distributors in the quarter as a result of lower quotation levels experienced in the second half of 2015.

The Latin American region remained challenging as well as a result of weakening local currencies, lower energy prices and reduced infrastructure spending in these countries.

While these broad-based headwinds affected our C&I business in the first quarter, we are seeing encouraging signs of increasing demand for these products as we enter the second quarter.

Improving nonresidential construction trends, the relative stabilization as of late of Latin American currencies, a firmer capital spending environment for telecom, and normal seasonality are all contributing to an increase in quoting and order activity, which is expected to lead to a sequential improvement in shipping shipments for C&I products.

The first quarter of 2016 includes the results of the Pramac acquisition, which closed on March 1. Headquartered in Siena, Italy, Pramac is a leading global manufacturer of stationery, mobile, and portable generators sold in over 150 countries through a broad distribution network.

Pramac employs over 600 people across its four manufacturing plants and 14 commercial branches located across the globe.

It is important to note the vast majority of Pramac's net sales are classified within C&I products with the balance relating to portable generators classified within residential products, along with a smaller portion of aftermarket parts sales classified within other products.

Although not much time has passed since closing, our integration efforts are well underway, and we are making encouraging progress in evaluating and pursuing a variety of synergies.

These include the pursuit of global cross-selling opportunities, including selling Pramac's stationery, mobile, and portable generators through Generac's existing international distribution channels, while also selling Generac's natural gas generators and our broad array of mobile equipment into Pramac's distribution.

Also, we have made good initial progress in evaluating some compelling cost synergies and opportunities to better optimize existing facilities and use the combined scale of the two companies as we leverage our collective global supply chain.

We are excited about the diversification benefits from Pramac as the acquisitions significantly expands our geographic footprint and revenue base, essentially doubling our international sales mix outside the US and Canada, and elevating us to a major player in the global power generation market.

We are also making encouraging progress with the integration of Country Home Products, which closed in October -- or excuse me, in August of 2015.

Recall that CHP is a leading manufacturer of professional grade engine powered equipment sold primarily under the DR brand and used in a wide variety of property maintenance tasks.

The Company's products are largely sold in North America through catalogs, outdoor power equipment dealers, and select regional retailers and include field and brush mowers, chippers and shredders, trimmers, leaf vacuums, stump grinders, and log splitters.

We are excited about the potential cross-selling opportunities for these products, and we are gaining valuable insights as CHP's direct to consumer expertise is helping us further refine our targeted marketing skills as we work to broaden the awareness and appeal of home standby generators.

This acquisition also provides additional scale to our existing platform of power equipment products, allowing us to target certain cost synergies as we leverage our global sourcing and manufacturing capabilities.

We believe the benefits that Country Home Products provides, particularly as we enter the seasonally strong peak demand second quarter for CHP's products, is an important part of our overall strategy of further diversifying our company.

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

York?

Thanks, Aaron.

Net sales for the first quarter of 2016 were $286.5 million as compared to $311.8 million in the first quarter of 2015, including $37.2 million of contribution from the recent acquisitions of Country Home Products and Pramac.

Looking at net sales by product class, residential product sales during the first quarter of 2016 increased to $159 million as compared to $156.8 million in the prior year quarter.

The increase was due to a combination of contributions from the recent Country Home Products and Pramac acquisitions, which was mostly offset by a decline in organic shipments of home standby generators and, to a lesser extent, portable generators.

The decline in home standby generators was primarily due to higher levels of backlog and lower levels of field inventory entering the first quarter of 2015 as compared to the first quarter of 2016.

Recall that as we enter 2015, we were coming off a period of record activation rates as a result of heightened power outage activity.

This situation did not exist entering the first quarter of 2016 and, as a result, caused the tough prior-year comparison.

However, as Aaron mentioned, end-user demand in the form of home standby activations were up modestly year over year in Q1 2016, which helped to partially offset these prior-year headwinds.

Looking at our commercial industrial products, net sales for the first quarter of 2016 were $103 million as compared to $133.8 million for the comparable period in 2015.

The decline was primarily due to a significant reduction in shipments of mobile products into oil and gas and general rental markets as a result of lower capital spending caused by the substantial decline in energy prices.

To a lesser extent, shipments of C&I products were also impacted by a decline in Latin America, along with lower shipments to industrial distributors and telecom national account customers.

Partially offsetting these declines was a modest contribution from the Pramac acquisition which closed on March 1, 2016.

The negative impact of foreign currency on C&I organic product sales was only approximately 1% during the quarter.

Net sales for the other products category were $24.6 million in the first quarter of 2016, as compared to $21.2 million in the prior year.

The increase was primarily driven by the addition of aftermarket parts sales from the recent Country Home Products and Pramac acquisitions.

To a lesser extent, the increase is also due to additional service parts sales resulting from our growing base of stationary and mobile products in the market.

Gross profit margin for the first quarter of 2016 was 34.2%, compared to 32.9% in the prior year first quarter, which includes the impact of $2.7 million of nonrecurring charges related to the oil and gas downturn that are classified within cost of goods sold.

Excluding the impact of these charges, gross profit margin was 35.2%, an improvement of 230 basis points over the prior year.

The strong increase in gross margins was driven by a variety of factors, including the following: a favorable, overall product mix, given a higher sales of mix of residential products in the current year quarter, including the acquisition of Country Home Products, partially offset by the addition of Pramac sales; the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger US dollar in recent quarters; and the fact that gross margin in the prior year was negatively impacted by temporary increases in certain costs associated with the West Coast port congestion, as well as other overhead related costs that did not repeat in the current your quarter.

Operating expenses for the first quarter of 2016 increased $13.4 million as compared to the first quarter of 2015, which includes the impact of $4.4 million of nonrecurring charges related to the oil and gas downturn that are classified within operating expenses.

Excluding the impact of these charges, operating expenses for the quarter increased $9 million as compared to the prior year.

This increase was driven by the addition of recurring operating expenses associated with Country Home Products and Pramac acquisitions, partially offset by reductions in certain organic selling, general and administrative expenses.

Adjusted EBITDA attributable to the Company was $49.1 million in the first quarter of 2016 as compared to $57.1 million in the same period last year.

Adjusted EBITDA margin before deducting for noncontrolling interest was 17.4% in the first quarter of 2016 as compared to 18.3% in the prior year quarter.

The decline in adjusted EBITDA margins compared to prior year was primarily attributable to the increase in operating expenses, partially offset by the improvement in gross margins as a result of the factors just discussed.

GAAP net income attributable to the Company for the first quarter of 2016 was $10.2 million, as compared to $19.7 million for the first quarter of 2015.

The current year net income includes the impact of the $7.1 million nonrecurring pretax oil and gas charges as previously discussed.

GAAP income taxes during the first quarter of 2016 were $5.7 million or a 35.9% tax rate as compared to $11 million, also a 35.9% tax rate for the prior year.

Adjusted net income attributable to the Company as defined in our earnings release was $30.9 million in the current year quarter versus $34.1 million in the prior year.

This decline over the prior year is primarily the result of the overall decline in operating earnings as previously discussed, partially offset by $3.3 million in lower cash income taxes.

Diluted net income per share attributable to the Company on a GAAP basis was $0.15 in the first quarter of 2016 compared to $0.28 in the prior year.

Adjusted diluted net income per share attributable to the Company as reconciled in our earnings release was $0.46 for the current year quarter compared to $0.49 in the prior year.

With regards to cash income taxes, the first quarter of 2016 includes the impact of a cash income tax expense of $1.8 million as compared to $5.1 million in the prior quarter.

This year-over-year decline in cash income taxes for the quarter was primarily the result of lower pretax earnings, along with a lower expected cash income tax rate for the full year 2016 of approximately 9% as compared to the prior year of approximately 17%.

As a reminder, our favorable tax yield through annual intangible amortization in our tax return results in our expected cash income tax rate being significantly lower than our currently projected GAAP income tax rate of approximately 36% for 2016.

As we drive profitability over time, 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 the approximately $50 million of annual cash tax savings from the tax shield each year through 2021.

Free cash flow, defined as net cash provided by operating activities, less capital expenditures, was consistent with typical first-quarter seasonality and only declined modestly to $15.1 million in the first quarter of 2016 as compared to $18.7 million in the same period last year.

It is important to note, the Pramac acquisition added approximately $50 million of primary working capital to our balance sheet as of March 31, 2016.

As of March 31, 2016, we had a total of $1.09 billion of outstanding debt, net of unamortized original issue discount and deferred financing costs, and $69.4 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $1.02 billion.

Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the first quarter of 2016 was 3.9 times on an as reported basis and was 3.7 times on a pro forma basis with the Pramac and CHP acquisitions.

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

The Company did not repurchase any shares of its common stock during the first quarter of 2016 under its existing share repurchase program announced in August of 2015.

Remember that this program authorizes the Company to repurchase up to $200 million of its common stock over a 24-month period, and to date a total of 3.3 million shares of common stock have been repurchased for approximately $100 million.

With that, I would now like to turn the call back over to Aaron to provide comments on outlook for 2016.

Thanks, York.

We are maintaining our prior guidance for full-year 2016.

Net sales are still expected to increase 10% to 12% with organic sales -- with total organic sales on a constant currency basis still anticipated to be down between 5% to 7%.

Nearly all of this decline is expected to be from ongoing weakness in mobile product shipments into the oil and gas and general rental markets.

Importantly, this top-line outlook assumes no material changes in the current macroeconomic environment and no improvement in power outage severity for the remainder of the year relative to the very low levels experienced during 2015.

We still expect the seasonality of quarterly results to demonstrate a normal historical pattern, assuming no major outage events occur during the year with the first half representing approximately 44% to 45% of total sales and the second half approximately 55% to 56%.

Specifically for the second quarter, we anticipate net sales to increase sequentially on an as reported basis and to be in the range of $350 million to $360 million, primarily due to normal seasonality and a full quarter contribution from the Pramac acquisition.

Looking at our guidance by product class, for residential products, we still expect net sales to increase in the low teens range during 2016, which assumes approximately flat year-over-year organic growth with the difference attributed to the Country Home Products acquisition and to a lesser degree some residential product sales from the Pramac acquisition.

As previously mentioned, this sales guidance includes the assumption that power outage severity does not improve for the remainder of 2016.

As a reminder, should the baseline power outage environment normalize relative to the very low levels experienced in 2015, or if there is a major power outage event in 2016, it is likely we could exceed these expectations.

With regards to our commercial and industrial products, we still expect net sales to increase approximately 10% on an as reported basis for 2016, which includes the benefit of C&I products acquired in the Pramac transaction.

Organic net sales for C&I are now expected to decline in the midteens arrange, which includes only a modest expected negative impact from foreign currency of less than 1%.

The decline in organic net sales is primarily due to the continued strong headwinds with shipments of mobile products into oil and gas and general rental customers as these markets continue to search for a bottom during 2016.

Gross margins, excluding the $2.7 million of nonrecurring charges recorded during the first quarter, are expected to improve by approximately 125 basis points as compared to the prior year.

Operating expenses as a percentage of net sales, excluding amortization of intangibles and the $4.4 million of nonrecurring charges recorded during the first quarter, are expected to increase approximately 200 basis points as compared to 2015.

Adjusted EBITDA margins before deducting for noncontrolling interests are still expected to be approximately 20% for full-year 2016 with some variation throughout the year as a result of normal seasonality.

Similar to the pattern experienced in the prior year, second-half 2016 adjusted EBITDA margins are expected to be approximately 450 basis points higher than the first half as a result of increasing benefit from product cost reductions, a more favorable product mix, and improving SG&A leverage on higher sales volumes through the back half of the year.

Specifically for the second quarter, adjusted EBITDA margins are expected to be approximately flat sequentially as compared to the first quarter of 2016, which is similar seasonality to the prior year, but then improves sequentially during each of the third and fourth quarters.

As a reminder, we have a majority interest ownership position in Pramac, and there will continue to be a minority noncontrolling interest with this acquisition that must be deducted when forecasting adjusted EBITDA, adjusted net income, and adjusted EPS for full-year 2016.

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

We are maintaining our guidance for full-year 2016 free cash flow generation with the conversion of adjusted net income still anticipated to be over 90%, resulting in improved levels over the prior year.

Lastly, regarding our outlook commentary, we are providing an update to some guidance details to help model out the Company's earnings per share and cash flows for 2016.

We expect interest expense to be in the range of $46 million to $47 million.

The forecast for interest expense includes $41.5 million to $42.5 million of cash outflow for debt service costs, plus approximately $4.5 million for deferred financing costs and original issue discount amortization for our credit facility.

Cash taxes are expected to be approximately $14 million to $15 million, which translates into an anticipated full-year 2016 cash income tax rate of approximately 9%.

Depreciation expense is forecasted to be between $21 million and $21.5 million.

GAAP intangible amortization expense is expected to be between $33 million and $33.5 million.

Stock compensation expense is forecast to be approximately $11.5 million to $12 million, and capital expenditures for the year are expected to be approximately $35 million to $36 million, which is still only approximately 2.5% of our forecasted net sales for 2016.

In closing this morning, although our first-quarter results reflect continued softness in certain of our end markets, we have been focused on controlling costs, and we continue to make strategic investments in new products and technologies, as well as the necessary infrastructure to support the next leg of growth that we believe will occur as markets eventually improve.

The integration of the Pramac business will be an important area of focus for us as this strategic acquisition builds significantly upon the transactions we have completed over the past five years that have transformed Generac from a North American focused, power generation only company into a global power products company.

As we think about the future for Generac, we remain optimistic regarding the long-term secular growth opportunities that exist for several areas of our business, and we intend to leverage our strong liquidity position as we evaluate our priority uses of capital to increase shareholder value.

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

Operator?

(Operator Instructions) Jeff Hammond, KeyBanc.

This is James Picariello.

A quick question.

For the C&I guidance, you did take that down a bit from down low teens organically to now down midteens.

Can you just sort of flesh out the incremental weakness that you are obviously seeing in mobile versus the pickup in telecom that you did mention with respect to orders in the quarter?

Yes.

This is York.

As we highlighted, we have seen continued weakness in oil and gas as we try to find a bottom there.

We have reflected that in our organic C&I outlook.

You're correct in terms of highlighting now expecting a decline -- organic decline in C&I in the midteens range.

There are offsets to that, though, we are seeing some outperformance in -- on the Pramac outlook, which is helping to offset that.

So, if you recall, our as reported C&I outlook is still approximately 10%.

So we are holding that.

But the pieces inside that are organically down a little bit more because of oil and gas, but offset by outperformance with Pramac.

So that is where a lot of the puts and takes are relative to our previous guidance.

I would just add that that previous guidance, when given, oil took another leg down during the first quarter, and I think that kind of continued to put a damper on the fleet purchases that normally happen in oil and gas.

And then the spillover effect into the general rental markets that we are witnessing as a result of that, I think, is properly reflected in this updated guidance for the organic piece of C&I.

Got it.

No, that's fair.

I'm sorry, what?

Yes.

There is some contribution of increased telecom outlook in that number as well, but, as you pointed out.

Got it.

And then, can we just go back to the quarter and -- to get a better sense of the organic assumptions or the organic growth rates broken out by resi and the C&I?

I mean, we know that residential is the smaller piece for Pramac.

Can you provide just a little more detail as to what that breakout might be so we can get a stronger sense of the core growth in the quarter?

If you're looking for core growth for resi, it is more -- I mean, CHP is the biggest piece of that in terms of the acquisition contribution.

There is a small amount for Pramac, for resi.

But if you are looking for just core growth, year-over-year for resi, it was down about 11%.

And that is mainly from home standby for the reasons we talked about in terms of the prior year headwinds with backlog and field inventory.

Brian Drab, William Blair.

Can you talk a little bit more about the seasonality from first quarter to second quarter?

There is just a lot of moving parts here, including CHP, Pramac, just general seasonality in home standby and industrial, the Magnum Tower Light business.

So there is a big step up, I think, in models in general from first quarter to second quarter, and it would be helpful if you could, in any way, further quantify those factors.

This is York.

Yes, I mean getting specifics in terms of quantification, but you are right.

We posted $286 million first-quarter net sales, and second quarter, our prepared remarks talked about $350 million to $360 million.

So Pramac, in the first quarter, there was only one month of contribution there.

So we will have three months in second quarter.

So right off the bat there, you will get a large sequential increase just by getting a full quarter from Pramac.

But, beyond that, there is -- I mean, there is some normal seasonality in our business that Q1 is always the lowest quarter for us in the year, and it builds, then, up throughout the year.

And especially -- so CHP is where it hasn't quite annualized, but when you look at their business, they are a spring and fall business.

So you should expect --

Q2 is definitely their best quarter.

Yes.

You should expect a definite increase from Q1 into Q2 as their bigger quarters in the spring.

Even in the mobile business, there is some seasonality where Q1 is just typically your lower quarter.

So you build off of that.

On the home standby side, same thing.

Q1 is typically your lowest quarter, and you build into the year from Q1 into Q3 -- I'm sorry, from Q2 into Q3.

So it is really, I think, what it is highlighting is, there is a good amount of seasonality that will explain that sequential increase.

And then, Aaron highlighted, I think, in his prepared comments about we are seeing some stronger quoting and order rates on the industrial side, which should support a sequential increase on some of that legacy C&I business from Q1 into Q2.

Okay.

And then, I guess, one other factor is, you had, I think, some modest pull forward from Q1 into Q4 in the telecom space.

Is that another reason why this this is going to step from first quarter to second quarter and could look amplified?

Yes.

A think it was more of a budget burn situation for some of those customers in Q4, Brian.

So coming into Q1, we saw a kind of return to some of the lower levels that were occurring from a CapEx environment standpoint.

But, again, in our prepared remarks, we think that that CapEx spending environment for telecom appears firmer as we go forward.

I wouldn't say materially so, but at least it gives us some encouragement that, as we come around the year here, that we would anticipate seeing improvement there.

It supports an increase (multiple speakers).

It supports an increase, certainly, off of Q1.

And, again, I think our remarks on C&I for Q1 to Q2, the improvement we are seeing there, those are real improvements.

I mean, that is kind of a backlog business in terms of leadtimes on products and things.

So we have a pretty decent visibility into C&I, at least for the next quarter.

So we feel very comfortable with the kind of increase that we are projecting there.

So it definitely feels like the C&I market took a pause in Q1 off on the back of some lower quoting activity in the second half.

Kind of that industrial recession maybe that happened in the second half of last year, I think, put a pause on some of the ordering of that type of equipment.

And that seems to have freed up here as we go from Q1 into Q2.

Okay.

Thanks.

And then, if I could just ask, you mentioned $4 million to $5 million, I believe, in savings that you will achieve as an annual run rate by fourth-quarter 2016.

What do you expect to realize within 2016?

And, secondly, did restructuring impact first-quarter 2016 OpEx?

So I guess when you annualize -- or quarterize that $4 million to $5 million, it is about $1 million a quarter.

So -- and we expect that to start in Q4.

So just quarterize the $4 million to $5 million and that is what we expect to start in Q4.

And then, in terms of what hit OpEx in Q1, what as the question, Brian?

I apologize.

Yes.

No.

Sorry.

I am just saying, you said $4 million to $5 million is going to be the run rate you achieve, but what amount will you recognize within this fiscal year?

It is something less than $4 million to $5 million.

Correct.

And then I am wondering, did we get enough of this restructuring -- these restructuring actions complete in the first quarter of 2016 to where it actually impacted the quarter, or is it all kind of going to flow through later this year?

Yes.

The vast majority of the actions were implemented here in the first quarter, and that is part of the $7.1 million restructuring and optimization charge.

There may be a small amount that may be gets announced in future quarters, but the vast majority is here in Q1.

Ross Gilardi, Bank of America.

I am just trying to understand what the real message is, just sort of on the current environment for standby.

On one hand, core growth is down 11%.

When you are talking about activations, I am not -- I wasn't really clear on what you are saying about field inventories there.

So can you just flesh that out a little bit more?

Is the overall environment getting better or worse?

Yes.

It is a great question and one that it is a bit -- there is a lot of moving pieces in that, too, just looking at the quarter.

So we look at a couple of things, Ross, as you know.

We look at kind of end-user demand for us, we have real-time activation data.

So every machine that is installed, we know exactly where it is installed and when it gets turned on for the first time.

So we believe that gives us very good insight into what is going on in the end market.

We saw activations year over year in the quarter were up, and we think that that is primarily related to a milder winters.

So more of those machines were able to get put in.

And also, power outage severity was -- there was a little more in terms of outages in the quarter.

Now, nothing relative to where we have been historically, but over this kind of trough period over the last three years, it was kind of in line with that.

So a little bit up from the really superlow levels from last year, but -- so we think those two things.

A milder winter and a little bit more power outage activity drove activations higher.

I think where the 11% decrease in the shipments come from is the fact that when you wind the clock back and you look at how we came into Q1 of 2015, we were coming off of a Q4 in 2014 that was a very strong quarter in terms of activation rates.

And so what it led to is, there was actually a bit of backlog -- quite a bit of backlog coming into 2015 that was satisfied.

Those shipments were made in the first quarter of 2015, and we didn't have that same situation repeat here.

So that is the backlog piece of that.

Field inventories also coming into 2015, then, because of the backlog were lower at the beginning of 2015, and we had higher field inventories, for lack of a better term, in first quarter of 2016 on a like-for-like basis.

So when you wash all that out, that is the 11%.

I think what we look at -- again, we watch this activation data very closely and the power outage data, of course -- we like the trends.

Kind of as we ended the quarter here, field inventories were very much in line with where we were last year, but because of the higher activation rate in the first quarter, we are actually seeing those inventories turn a little faster.

So we like that as kind of a -- in terms of how that translates to market sentiment, in terms of buying for Q2, and that is really the inverse of what happened in Q2 last year.

So we were coming out of the first quarter last year.

Activation rates were actually slowing in the back half of that first quarter.

So the buying mood turned decidedly negative in Q2 on us last year.

So our promotions and other normal things that we would do in Q2, we just didn't get a lot of uptake in that in Q2 last year.

We don't believe that that same situation is going to happen this year, and we are appropriately reflecting that in our guidance.

Okay.

Could you just explain the significance of the activation?

My understanding is, at the time of the activation, you already recognized the revenue from shipping to the dealer.

Is the significance of the activation that that essentially moves that product out of dealer inventory?

Correct.

Correct.

That is exactly what happened.

So by the very nature of our shipments to distribution, we know how much inventory, if you will, is in the field very precisely, up to the point when it is activated, and then, effectively, as you are saying, it comes out of field inventory at that point.

Okay.

Can you guys just also talk about the year-on-year increase in receivables and inventory?

I think you mentioned that Pramac added $50 million of working capital, but I think, even if you stripped that out, you would be up.

And maybe Country Home Products is contributing to that, too, but any help there.

Yes.

I will help you out there, Ross.

So the Pramac opening balance sheet for AR will have about $56 million.

So that, then, organically will have a decline in AR.

Inventories is about $40 million inventory balance coming on from Pramac.

So that would show an increase in inventories, and the highlight there is we are doing some strategic volume engine buys here in the first quarter, and that was the main driver for the organic increase in inventory.

So that maybe helps you out a little bit more.

Got it.

Thank you.

And your operating expenses were a little bit higher, tied to these acquisitions.

I imagine there is part of the rationale in doing the Pramac deal is that you take out some SG&A.

So how quickly do you think you can get that SG&A associated with that transaction down to more like Generac ratios?

Yes.

There is two things there, Ross.

First, on the Pramac side, actually, most of the synergies that we are looking at are going to come in the cogs side -- in the cost of goods sold.

So optimization of the manufacturing footprint and then most of the synergies that we are targeting are going to come out of the combination of the global supply chain of the two businesses.

On the SG&A side, their cost to serve as a global business with 14 branches worldwide, four plants worldwide, is a bit higher than what you would see for us.

I mean, we have a -- we have a fairly simple operating structure in North America here with core Generac in comparison.

So there may be some opportunities as it relates to combinations with our Tower Light business over there.

There might be some SG&A, but, to be frank, we are not putting a lot of math behind that.

I think we are hoping to leverage that SG&A.

We don't think it is going to grow a lot more in terms of raw dollars.

We just think we're going to be able to leverage it as we work on the revenue synergy side of that, and then, again, the savings are going to come out of cogs.

And then, the second piece on the SG&A -- overall SG&A, is the Country Home Products business, as a primarily direct to consumer business, they have very good gross margins, but then there is a high cost to serve as a result of that direct to consumer model.

So there is no distribution channel.

So the costs, quote-unquote, that would normally be borne by distribution, are borne by, in this case, CHP directly, and that is reflected in the higher SG&A load as a percentage of sales.

Charley Brady, SunTrust Robinson Humphrey.

On the 7.1 optimization restructuring, I just want to understand that a little bit better.

Can you remind me, you mentioned it, but I missed it -- when are you going to consolidate that plant -- the Bismarck plant?

Yes, the Bismarck plant should, by the end of July, should be completed.

So we announced that in the first quarter, and we are in the process of that transition as we speak.

It should be completed by July.

Is the headcount reduction piece of restructuring completed?

It is substantially completed at this point.

There is a few -- I mean, as we wind down the facility, there is a few more heads there.

And then there are some heads within the mobile business in totality -- the broader business there that we are continuing to work through here in the second quarter.

Okay.

And on the asset write-down, was all of that from MAC, and can you quantify that?

Yes.

The vast majority was -- we haven't provided the specific details on that, but the vast majority was on the MAC side.

As you transition the inventory over from one plant to another, you just -- there is some inventory you just don't want to move.

So there are some write-downs related to that.

Most of that -- you are correct -- is inventory related to MAC.

Okay.

And then, I guess -- I don't know if I missed the answer or not, but on a prior question about the $4 million to $5 million that you had a run rate by Q4, I guess what I am trying to get to really, what is the run rate for Q2 and Q3 and the rest of the year?

Obviously, as you said earlier, you're not going to get the full $4 million to $5 million until you're done with everything.

But there is some percentage of that that you are going to get a piece of prior to the end of Q4.

Yes.

That's fair.

That is fair.

However, the building is still there, so you are not going to get everything.

But, as volume comes down, you're going to need -- you're going to get those savings.

But to your point, Charley, there are some savings that get realized here in Q2 and Q3 as we are transitioning the MAC business into the Berlin location.

But the biggest driver of the cost is the closure of the facility and the headcount reduction.

So Q3, although it won't happen until the end of July, see you are already into Q3, there is -- you will see a significant part of that quarterized version of that $4 million to $5 million.

I don't know that it is quite $1 million at that point, but because you have only got two months.

By the fourth quarter, we will be pretty close to run rating that.

Yes.

Is that facility owned right now or leased?

It is an owned facility.

Okay.

So at some point, presumably, you're going to put it up for sale, and there will be a gain or something on that at some point.

At some point, we will evaluate after we get out of it, just kind of what we want to do.

It is an older facility.

So, to be frank, the value, both on the books and from a market standpoint, is pretty minimal.

So I wouldn't expect any massive gains from that.

Jerry Revich, Goldman Sachs.

Aaron, can you talk about how the supply chain review is going at Pramac?

I think you had mentioned the 90-day period that was a key milestone for where you folks would do -- it would be fairly reasonably far along in terms of evaluating how the supply chain fits within the broader Generac purchase organization, and can you just give us an update how that review is going and what the cost saving opportunity looks like today versus compared to when we last spoke on last quarter's call?

Yes.

Obviously, it is a major area of focus for us, Jerry, given that we think that a lot of the opportunity in combining these businesses is in the supply chain.

It is front and center in the integration activities, so we are kind of, call it, maybe halfway through that process.

60 days into the 90 days we have called out.

What we are finding is that there is a lot of moving pieces, as you know -- as you can expect with factories all over the world now trying to figure out the optimized logistics spots of the supply base from one plant to another -- from their plants, from the suppliers' plants to our plans.

So that is actually playing a bigger role in some of these -- in some of this analysis.

And then, as it relates to things like Brazil, you have got imports, duties, and other things that you have to put into consideration.

So not dodging the question, but it has turned into a pretty elaborate exercise.

I think the biggest piece is -- would be engine supply on the diesel engine side and our alternator supply for the facilities outside the US where we don't manufacture our own alternators, in particular, and we have suppliers that do that for us.

Those two pieces of the supply chain are the pieces that we are evaluating first and foremost because they represent the largest spend items.

And we are knee-deep in the evaluation process.

So we have sent out, frankly, these are big RFP processes that we are currently underway, and we have got teams, both combined with Pramac and Generac people and also with our Tower Light folks, we are dealing with the stationary side of the business first, and then we will move to our mobile business later.

Because, in many parts of the world, specifically here in North America, as it relates to engines, anyway, you have got a different emissions requirement for mobile products versus stationary products.

So that enters another variable into the analysis.

So there is -- there is a lot of pieces here.

We hope to have some more information around being able to quantify the savings.

But right now, we are still very encouraged by what we are seeing and, as we talk to the supply chain partners, we think that partnering with Generac or many of these suppliers gives them just a wonderful opportunity to access the global power generation market in a way that they couldn't before with a single customer.

And I think that a customer who has not only the footprint to serve, but also the technical capabilities to work with these partners, to make sure that we have got the right products and the right applications.

So we are evaluating it and we are going through the process, but it is going to be a big project.

And, Aaron, when do you expect to be done with the RFP process and to get -- to give us a sense for what the cost structure looks like?

How should we be thinking about that?

Yes, I mean, we are hoping to get most of that work done -- leg work done here in the second quarter, Jerry.

And so from our standpoint, our original target date was to try to get it all done by June.

It may be might more towards the back half of June or July.

Then we have to notify suppliers.

And then, the fact of the matter is, the realization of the savings is going to take longer because many of the changes, whenever you are changing anything within the major power head configuration of a product -- either the engine or the alternator or both -- there is design work to be done there.

So, in some cases, it may be easy because it might be a supplier that we are already using that we are just going to realize a better pricing structure on or better delivery or some other improved set of terms.

But in a lot of cases, it may mean changes to the product lines, and those changes are going to need engineering resources to get done.

So the true realization of a lot of these changes and a lot of these savings really won't come until 2017.

And that -- I think we were consistent on that when we called this out early on, but we have said that we really won't see much of this until next year.

Okay.

Thank you for the color.

And then, for the residential standby business, can you talk about how in-home consultations are tracking?

I guess normal seasonality is for residential standby sales to be up 10% to 15% sequentially Q2 versus Q1.

I'm wondering if the in-home consultations are supportive of that normal seasonal ramp.

They are.

They look -- right now, they are somewhat flattish in terms of IHCs as it relates to the prior year.

But everything that -- as we look at it, I think the one underlying difference when I look at IHCs, our close rate has actually improved a bit.

We continue to focus on training, not only from a sales standpoint, but also from a quality of lead standpoint.

I think one of the really interesting things that what we are finding right now and we are kind of in the early innings of it, but the Country Homes Products acquisition for us was -- included within that Company is a really good direct to consumer marketing entity.

They buy their own media.

They produce a lot of their own media.

They have an eye towards consumer interaction and how to maximize consumer interaction.

We always talk about the sales funnel here.

They really help us kind of open up our eyes a bit to just how wide the funnel can be and how much more can go in that funnel based on certain techniques that they have done and have used over the years.

In particular, as it relates to some of their larger ticket items.

When you go after one of their walk-behind brush cutters, you're talking about a $3000, $4000 machine.

So it is not so dissimilar from what we are talking about with our home standby generator.

And so I think their experiences are pretty applicable here.

And what we are just kicking off now is, we have got some things in test around IHCs where they are actually doing the in-home -- they are not doing in-home consultations, but they are driving the leads for the in-home consultations.

And so that is a new twist for us, and we are excited about some of the earlier returns on that and looking to expand and ramp that up here in Q2 as we go into the season.

So between that and the improving close rate underlying IHCs, those two things are things that give us the kind of confidence that I think is framed around our guidance here for the balance of the year with residential.

Christopher Glynn, Oppenheimer.

So Pramac certainly has a totally different scale relative to your prior acquisitions, if I am not mistaken.

So congratulations on that step.

And just wondering in terms of integration if that raises any interesting questions on the cultural integration side, and I know you already have some Italian blood going there with Tower Light, if I am not mistaken.

Correct.

No, I that is a good question, Chris.

There are two things that I would point to.

Clearly, just from the outside looking in, it is a bigger -- it is our biggest transaction to date by a high percentage.

It is a complex organization in terms of 14 sales branches, four manufacturing plants, 600 people.

It is a global organization which presents its own unique challenges with integration of systems, just within Pramac itself.

So from the outside looking in, clearly, a tough challenge.

But -- so there is two things I would point two, though, and what we have tried to do to mitigate the challenge that exists there in integration.

The first is, we don't own 100%.

I think it is really important from an alignment standpoint the founding family of this business is remaining a significant owner.

And so they are a great partner for us.

They are people that I have known for quite a long time in our industry -- seven, eight years -- and have worked with them on a number of things, and we have a very good relationship in terms of very open, very frank discussion about where we think we can grow, about some of these supply chain discussions that I have talked about this morning.

That, notwithstanding, I think their complete alignment with us in terms of the performance of the business is an important element of taking de-risking some of the what I would call the overarching integration issues or performance issues, anyway, with the business that could exist.

Secondarily, we took a very seasoned person from our team here -- our management team here, and we actually have deployed him within Pramac's walls in Siena in their headquarters to help really as an integration lead.

We have never done that before.

We have never really kind of, I would say, helicoptered somebody into an acquisition, solely for the purposes of being an integration lead in that fashion.

And it is somebody with a supply chain background, which is, again, where we think we have the biggest opportunity.

It also happens to be an individual who speaks Italian.

So that does help in terms of some of the language barriers.

But, as you mentioned, we do -- we have already a pretty good presence in Italy with the Tower Light acquisition.

That also is helpful here in mitigating some of the risks of integration, not only because of our familiarity with some of the cultural things that go on in Italy, but, basically, we have got a team on the ground just two hours north of Siena.

So that team is very -- has already been very helpful and particularly on the finance side.

As we just to our normal process of consolidating financials, that team has been very helpful with helping the Pramac team navigate our process there and they are on the ground and very hands-on.

So we feel good about it.

It is not that there is no risk to it.

It is certainly, as you pointed out, there definitely are some risks.

But we think we have taken the appropriate measures and actions to mitigate that.

Okay.

And can you remind the percent you have?

We own about 65% of the Company.

Okay.

And sticking with bookkeeping for second, the comment on Q2 EBITDA was for that margin rate to mirror the first quarter.

Is that right?

Correct.

That was all prepared comments.

Correct.

Okay.

And then, on the resi standby with sales down, activations up, field inventories to clear plugs, so this dynamic seems to be a couple times a year variant that kind of plays with the, quote-unquote, normal seasonality.

Is that something you see ironing out as your channel matures over time or just something that we can expect updates on fairly regularly?

This is York.

I think Q1 of 2015, there was a number of unique things going on, and that is when we really started having these discussions about field inventory and backlog.

And it was all exacerbated by the fact that Q4 of 2014 was very strong, and then, in Q1, part of the end market softened pretty fast, and, as a result, that field inventory really increased in Q1 more so than ever.

And then, we also talked about that the other extra piece to that is the backlog was high coming into 2015 because of that strong market conditions in Q4 2014.

So those two things together caused Q1 of 2015, the prior year Q1 quarter, just had to be elevated.

And so, therefore, you flash forward to this quarter, and we have some tough comps as a result.

So I think that period there of very strong record activations in Q4 of 2014 is really what caused a lot of this.

I think I would add to that, too, Chris, that every quarter that goes by we get a little smarter.

In terms of our -- the value of the information that we compile internally with activation and field inventory.

As I said before, we actually have a pretty clear picture on those two pieces.

And I think, based on that and we know -- obviously, we know what backlog is and when it does exist as it did when we came into Q1 of 2015.

So I think, as the situation plays out, as the channel matures, as different things occur that could move those pieces, we will give updates accordingly.

And I think, in my mind, those updates have become clearer from our standpoint because we have continued to mature the way that we look at the business and the way we understand the things that kind of trigger, moves up or down, either an end demand or in the field inventory levels and their impact on current run rates.

So while we do not have a ton of visibility to the future in that business and we obviously you could get a power outage tomorrow and that thing could take off like a rocketship and that is kind of that we have been saying is that, if you go three years like this without outages and still have the kind of end demand that we have today, we are actually very pleased with that.

And I won't say we are surprised by the strength of it, but, in some respects, we look at some of the regions around the country that we continue to see strength in activations and end demand in the West and the southern parts of the country, and it is very encouraging for us that, when that we normalized outage environment, we keep referring to that, and it hasn't happened for a long time.

So it is difficult to say that.

But it will happen again, and when that does happen, and we've never really pressure tested all the new stuff we put in.

So with PowerPlay and with our PowerPro dealer programs, all the talk around IHCs, those are all things that were post the last elevated period of outage activity.

So how those things play out into the future will be interesting to see, both, I'm sure, not only from our standpoint, but from yours as well.

John Quealy, Canaccord.

Two quick questions.

I'm sorry if these are remedial here.

First, on the telecom trends, I think you guys said they are firming up.

What sort of evidence do you have for that, or what gives you some conviction in there, if that is the right assumption?

And then, secondly, how is the early selling season look for CHP?

Thanks.

Yes.

So, on the issue of telecom, John, I think, for us, we are just -- again, I think it was a pretty poor year in 2015 in terms of the CapEx spending environment, and it goes in cycles.

So what we look at is, obviously the discussions we are having with the customers in that channel have, I would say -- have been decidedly more positive year over year in terms of their planning around projects.

And so, as they plan for projects, that doesn't necessarily mean it has materialized in the orders, and it doesn't necessarily mean that they will spend those dollars.

But the budget -- it appears to us that the budgets that they have set aside for purchases are greater this year than they were last year.

So that is a big part of it, I think, in terms of just how we feel about the overall -- as it relates to telecom specifically.

We are not saying it is going to be materially up year over year, but we just feel like it is a firmer environment in general.

And based on the discussion.

And then as far as sell-in on the CHP, that side of that question, because it is primarily a D&C business, there is not a tremendous amount of sell into a channel.

So 80% of what they do -- more than 80% of what they do is direct to consumer.

So a lot of that is transacted real-time and so -- in fact, it is pretty amazing, actually, how quickly they see changes in buying habits for and consumers.

We don't have to wait for something to work through the channel.

We don't have this discussion of field inventory and all these other things like we have in our core business.

They actually see real-time phone traffic and web traffic.

It is really kind of real end demand, and it is real time.

So kind of an interesting business that way.

We have not had a direct to consumer channel before that we have been associated with, and this has been kind of interesting to watch how even simple things like moves in the stock market day to day have impacts on just how consumers feel about their household wealth and then what that translates into in terms of buying patterns on a day to day basis, week to week basis.

So it is pretty interesting.

Okay.

So there is no precedent with your big-box relationships.

I know, obviously, that is one step to the consumer, but the broader question, Aaron, was just based on where we are with weather and economy and your comment about stock prices, order trends shaping up like you thought they would have.

I know it is a smaller piece, but.

Yes.

So not a lot of retail channel there, so that is what I was referring to.

But in terms of just order trends or, call it, consumer sentiment around those types of products, housing remains very strong.

And so new construction has been a bullish segment of the economy here, and that, obviously, is good for all those types of products.

And Q2 is kind of the peak season for this business, as we said, in terms of seasonality, and we believe that is going to play out.

CHP had a nice first quarter for us.

We like the trends.

It is up year over year in terms of the amount of -- even though we haven't annualized the acquisition yet, in terms of just looking at them and their results year over year.

They like the trends.

They think the consumer feels pretty -- is on solid footing with energy prices lower, housing up.

Even though the stock market is -- you can pick your number on where you think the market is going to end, but right now they feel very good about the consumer trends.

As I said, I think the one thing that is interesting about this business is changes can happen pretty quickly in that end demand because of the direct nature of the channel.

So it is kind of interesting to watch the pure consumer reaction as we go week to week in terms of order patterns.

Weather does impact that as well.

It has been a pretty decent spring so far around the country, and that also helps those types of products.

So those are all positive factors as we go into Q2.

I am showing there are no further questions at this time.

I would now like to turn the conference back over to Mr. Jagdfeld.

Thank you.

Well, we want to thank everyone for joining us this morning, and we look forward to our second-quarter 2016 earnings release, which we anticipate will be issued sometime in late July.

With that, we will conclude our call.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and have a wonderful day.

You may all disconnect.