Generac Holdings Inc (GNRC) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Generac Holdings third quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions). As reminder this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Mr. Mike Harris the Vice President of Finance. Sir, you may begin.

Good morning and welcome to our third 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, and York Ragen our Chief Financial 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 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, Mike. Good morning, everyone an thank you for joining us today. Third quarter results exceeded our expectations in terms of net sales adjusted EBITDA and adjusted EPS. Shipments of home standby generators were better than expected as they benefited from successful promotional programs and portable generator sales were also higher than expected as a result of an increase in power outage activity during the third quarter. Importantly power outages have moderately increased so far during the second half of the year relative to our previous assumptions and we expect this to further benefit our -- our business during the fourth quarter.

The higher shipments of residential products during the third quarter helped to offset a weaker than expected performance of mobile products within domestic and international markets. During the third quarter we also generated a strong level of operating and free cash flow which enabled us to remain active with our share repurchase program. In fact despite the headwinds experienced across several of our end markets we have generated approximately $210 million of free cash flow over the last four quarters. Which was a key factor in allowing us to complete our share repurchase program nearly a year ahead of schedule.

On a year-over-year basis net sales in the third quarter increased 4% to $373 million that's compared to $359 million in the prior year. Which includes a one month benefit from the Country Home Products acquisition and a full three month contribution from the Pramac acquisition. Although exceeding our expectations for the quarter shipments of home standby generators declined modestly over the prior year as field inventory levels entering the current year third quarter were elevated when compared to last year and demand in the Northeast region remained soft and a year-over-year basis.

Regarding power outages since reporting second quarter results in early August power outage activity has increased relative to the low levels experienced over the past several quarters. This has been primarily driven by a more active Atlantic hurricane season relative to recent years, but also the result of a pickup in localized activity during the third quarter. Earlier this months hurricane Matthew impacted the Southeast region of the US and although not making land fall anywhere along the Florida coast it still resulted in a large number of customers without power. While the duration of outages for Matthew wasn't to the magnitude of a major event it did result in a large increase in portable demand.

In addition we believe Matthew should serve to help -- should help to serve as an important awareness event in demand catalyst for home standby generators in the months ahead. As a company focused very heavily on backup power generation our business model is built around providing a very high level of services and support during outages. I'm very proud of our team's at Generac as they stepped up their efforts by shipping product to the affected regions assisting thousands of customers with their questions and providing technical support to our distribution partners. In addition we're working on various activities to allow us to execute on the anticipated increase in demand for home standby generators in the Southeast including ramping up our targeted marketing efforts and supporting our dealer base in that region as they focus on the resulting sales leads.

As we have previously discussed we remain focused on a number of strategic initiatives to increase the awareness, availability and affordability for home standby generators including specific projects an activities targeted towards generating more sales leads, improving close rates and reducing the total overall cost of these products. The improved power outage activity experienced thus far during the second half of 2016 should provide us a good opportunity to better leverage the innovative sales and marketing programs for home standby generators that we have implemented over the last several years. In addition we believe we have enhanced our market position for our residential backup power products during the downturn as retail placement is at all time highs and the number of active residential dealers peak levels experienced at the end of 2013.

Looking at our Country Home Products acquisition we continue to be encouraged by the overall performance of this business. Including solid growth in sales and earnings and improved adjusted EBITDA margins compared to the prior year on a pro forma year-to-date basis. As we commented last quarter, the main drivers of the improvement are CHP's introduction of new value oriented price point on several flagship models. The CHP acquisition annualized during the third quarter and looking back over the last year we have executed on a number of identified synergies and continue to pursue additional initiatives to capitalize on the combined strengths of the two companies. One area of our business that remains particularly challenging however is our domestic mobile products offering primarily serving the rental market.

While average energy prices have continued to improve over the past several months from the trough levels seen in mid-February they remain below levels required for a meaningful recovery in oil and gas related capital equipment spending. As a result this has had a significant impact on third quarter mobile products shipments to our broad base of rental customers in comparison to the prior year as they wait for a sustainable recovery in fleet utilization, rental rates and used equipment values. As discussed in recent quarters we have taken a number of restructuring and cost reduction actions and continue to pursue other expense adjustments to better align our current cost structure with customer demand for mobile products.

Now let me provide a few comments regarding the trends for our international segment. Recall that included is these results is the former Tower Light which we acquired in August of 2013. Demand for mobile equipment in the marked served by Tower Light continued to be soft during the third quarter and we're below our expectations primarily driven by the deferral of capital spending by several larger rental customers across the United Kingdom and other parts of Europe. In addition the weakness within the UK market is being magnified by the devaluation of the British pound against the basket of foreign currencies which is further negatively impacting both sales and gross margins. As a result we remain cautious regarding our views on rental fleet spending particularly in the UK markets.

The international segment also includes the results from the Latin American experienced a modest year-over-year decline in sales during the third quarter. Although demand has been soft over the last several years in this area of the world as a result of volatile local currencies, lower energy prices and reduced infrastructure spending the rate of decline continues to slow providing further support that end market demand maybe stabilizing. Completing our discussion of the international segment is an update on the Pramac acquisition which closed on March 1st of this year.

Similar to our recent CHP acquisition we continue to be encouraged by the overall financial performance of Pramac which is also shown solid growth in sales and earnings and improved adjusted EBITDA margins compared to the prior year on a pro forma year-to-date basis. The integration of the Pramac business remains an important focus or 2016 and we have made good progress in evaluating and pursuing a variety of revenue and cost synergies. The acquisition of Pramac greatly 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 and lastly as announced this morning our Board of Directors has approved a new share repurchase program which the Company to purchase up to an additional 250 million in common stock over the next two years. Given our ongoing strong free cash flow generation-- share repurchases represent an attractive use of capital at these valuation levels. Having an additional share buy back program in place will continue -- will give is you continued flexibility to deploy capital in the most beneficial way on behalf of our shareholders.

I would now like to turn call over to York to discuss third quarter results in more detail, York?

Thanks, Aaron. Net sales for the quarter were $373.1 million as compared to $359.3 million in the third quarter of 2015 including $60.8 million of contribution from the recent acquisitions of Country Home Products and Pramac. As reminder the Country Home Products acquisition closed on August 1, 2015 so results for the third quarter of 2016 include one month of contribution before becoming annualized. And the Pramac acquisition closed on March 1, 2016.

Looking at consolidated net sales by product class, residential product sales during the third quarter of 2016 which are predominantly sold through the domestic segment increased 4.3% to $192.9 million as compared to $185 million the prior-year quarter. The increase is primarily due to the contribution from the recent acquisitions of Country Home Products and Pramac partially offset by a decline in shipments of home standby generators. As Aaron mentioned year-over-year decline in home standby generators was modest and shipments during the quarter came in ahead of our expectations benefited from increased power activity coupled with successful promotional programs.

The organic decline in home standby generators as compared to the prior year was impacted by excess field inventory levels entering the third quarter as well as ongoing headwinds in activation rates in the Northeast region. As we enter the fourth quarter we believe field inventory levels for home standby generators are now better balanced when compared to the prior year levels. Looking at our commercial industrial products net sales for the third quarter of 2016 increased 1%, $149.7 million as compared to $148.2 million for the prior-year period in 2015.

The increase was due to the contribution from the recent Pramac acquisition which was mostly offset by a significant reduction in shipments of mobile products giving continued softness in the domestic oil and gas market as well as declines within the European region primarily driven by a deferral in capital spending by key rental equipment customers. Net sales for the other products category were $30.6 million in the third quarter of 2016 as compared to the $26.1 million in the prior year. The increase was primarily driven by the addition of after market part sales from the recent Country Home Products and Pramac acquisitions.

Gross profit margin for the third quarter of 2016 was 36.9% compared to 36.3% in the prior-year quarter. The increase in gross margins was driven by a variety of factors including the ongoing favorable impact of lower commodity costs and overseas sourcing benefits from a stronger US dollar coupled with a favorable overall organic product mix primarily due to the higher sales of home standby generators. These improvements by the addition of Pramac sales as well as lower margins for mobile products. Operating expenses for the quarter increased $19 million or 30.4% as compared to the third quarter of 2015. This increase was primarily driven by addition of recurring operating expenses associated with the Country Home Products and Pramac acquisitions.

Recall these acquisitions both carry a higher level of operating expense infrastructure and CHP's case it's to support direct-to-consumer business model and in Pramac's case its due to its global commercial presence selling in over 150 countries. An increase in amortization of intangibles of $3.2 million also contributed to the year-over-year increase which includes a $1 million write-off related to a trade name as a result of a new product transition. Lastly, the higher operating expenses in third quarter of 2016 are also due to increased promotional activities which helped drive higher than excepted home standby shipments during the quarter.

Adjusted EBITDA attributable to the Company as defined in our earnings release was $72.1 million in the third quarter of 2016 as compared to $81.2 million in the same period last year. Adjusted EBITDA margin before deducting for non-controlling interest was 19.5% in the quarter as compared to 22.6% in the prior year. The decline in adjusted EBITDA margin was solely driven by the acquisitions of CHP and Pramac as organic EBITDA margins were consistent with prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales were $299.1 million as compared to 332.2 million in the prior-year quarter.

The vast majority of the decline was due to the ongoing significant declines in shipments of mobile products into oil and gas and general rental markets. In addition, as we have discussed, shipments of home standby generators declined modestly over the prior year but it exceeded expectations. Partially offsetting these reductions was the contribution from the Country Home Products acquisition which annualized on August 1st. Adjusted EBITDA for the segment was $69.3 million or 23.2% of net sales as compared to $77.1 million in the prior year also at 23.2% of net sales. Adjusted EBITDA margin in the current year benefited from overall favorable product mix as well as lower commodity costs and overseas sourcing benefits from a stronger US dollar. This was offset by increased promotional activities and reduced overall leverage of fixed operating expenses.

International segment sales primarily consisting of C&I products increased to $74 million as compared to $27.1 million in the prior quarter. The increase was primarily due to the contribution from the Pramac acquisition partially offset by declines in organic shipments of mobile products into the European region. Adjusted EBITDA for the segment before deducting for non-controlling interests declined to $3.5 million or 4.8% of net sales as compared to $4.1 million or 15% of net sales in the prior year. The decline in international adjusted EBITDA margin as compared to the prior year was primarily due to the addition of recurring operating expenses associated with the Pramac acquisition unfavorable product and geographic sales mix, foreign currency impacts and reduced operating leverage on lower organic sales volumes.

Now switching back to our financial performance for the third quarter of 2016 on a consolidated basis GAAP net income attributable to the Company for the quarter was $26.2 million as compared to $34 million for the third quarter of 2015. Included in the prior year other expense income section is a $2.4 million loss on changing contractual interest rate as a result of an increase in our term loan interest rate spread of 25 basis points for an anticipated period of four quarters. Included in the current year other expense income section is an additional $3 million loss on the changing contractual interest rate as a result of a continuation of the 25 basis points spread increase for an anticipated period of five additional quarters.

GAAP income taxes during the third quarter of 2016 were $15.5 million or a 37.5% tax rate. As compared to $19.2 million or a 36.1% tax rate for the prior year. The increase in GAAP tax rate is due to a non-recurring discrete tax item impacting the current year quarter. Adjusted net income attributable to the Company as defined in our earnings release was $53.2 million in the current year quarter versus $63.4 million in the prior year. Diluted net income per share attributable to the Company on a GAAP basis was $0.40 in the third quarter of 2016 compared to $0.49 in the prior year. Adjusted diluted net income per share attributable to the Company as reconciled in our earnings release was $0.82 for the current year quarter compared to $0.92 in the prior year.

With regards to cash income taxes the third quarter of 2016 included the impact of a cash income tax expense of $2.3 million as compared to $0.5 million dollars in the prior-year quarter. The prior year reflected a cash tax rate of only 1% for the quarter due it a year-to-date true-up adjustment to revise cash taxes downwards based on the latest projections at that time. The current year cash taxes reflect a cash tax rate of approximately 6%. As a reminder our favorable tax shield 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 rate of 36% on pre-tax profits going forward and then deducting the approximately $50 million of annual cash tax savings from the tax shield each year through 2021.

Cash flow from operations was $48.3 million as compared to $35.3 million in the prior-year quarter. Free cash flow as defined in the Company reconciliation schedules was $41.4 million as compared to $29.4 million in the third quarter of 2015. The improved cash flow versus prior year is primarily driven about a reduction in working capital investment during the current year quarter as compared to the larger investment in the prior year. This improved use of cash for working capital was partially offset by an overall decline in operating earnings. As of September 30th, 2016 we had a total of $1.09 billion of outstanding debt, net of unamortized original issue discount and deferred financing cost and $54.2 million of consolidated cash and cash equivalents on hand resulting in consolidated net debt of $1.03 billion.

Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the third quarter was 3.9 times on an as reported basis. Additionally at the end of the quarter there was approximately $145 million on available on our ABL revolving credit facility. The Company repurchased 1.8 million shares of its common stock during the quarter for $65.4 million which completes the total authorized amount under the share repurchase program which was announced in August of 2015. Under the program a total of 6 million shares of common stock were repurchased for $200 million. Or approximately $33.00 her share. With that I would now like to turn the call a back over to Aaron to provide additional comments on you are updated outlook for 2016.

Thanks, York. We are revising upwards our prior guidance for revenue growth for the full year 2016 which is primarily due to an increased outlook for portable and home standby generators as a result of the higher power outage activity being experienced during the second half of 2016 as previously discussed. Net sales are now expected to increase between 9% to 10% over the prior year which is an improvement from the 6% to 8% growth previously expected. Total organic sales on a constant currency basis are now anticipated to be down between 8% to 9% which is an improvement from the previous assumption of down between 10% and 13%. Looking at our guidance by product class on a consolidated basis the residential products we now expect net sales to increase in the low to mid-teens range during 2016.

Which assumes an organic increase in sales in the flat to low single-digit range. This compares to the previous expectations for net sales to increase in the mid-to-high single-digit range and organic sales to decline in the low to mid-single-digit range. As discussed the increase in organic net sales for residential products is primarily to due to a large increase in demand for portable generators in response to hurricane Matthew along with an improved outlook for home standby generators benefiting from the more favorable outage activity thus far during the second half of 2016 along with the success of our promotional programs.

With regards to our commercial and industrial products we now expect net sales to increase in the low single-digit range a slight reduction from the previous expectation of a low to mid-single-digit increase due to the lower shipments of mobile product. Organic net sales for C&I are now expected to decline in the low to mid 20% range which is a slight decline from our previous guidance of low 20% range. Our expectations for gross margins operating expenses as a percentage of sales and adjusted EBITDA margins remain the same as prior guidance. As a reminder gross margins are expected to improve approximately 100 basis points to 125 basis points over the prior year when excluding the $6.1 million of non-recurring expenses recorded during the first half.

Operating expenses as a percentage of net sales excluding amortization of intangibles and the $4.4 million none recurring restructuring charge recorded in the first quarter are still expected to increase approximately 225 basis points to 250 basis points. Adjusted EBITDA margins before deducting for non-controlling interests are still expected to be approximately 19.5% for the full year 2016. Importantly, recall that we have a majority ownership position in Pramac and there is a minority non-controlling interest with this acquisition that must be deducted when forecasting adjusted EBITDA, adjusted net income and adjusted EPS for the full year 2016 ,similar to the presentation reflected in the reconciliation schedules included with our earnings release today. Operating free cash flow are still expected to increase significantly over the prior year benefiting from the strong conversion of adjusted net income.

As a result of our upward guidance revision for sales and adjusted EBITDA dollars for 2016 we now expect the generate approximately $200 million of free cash flow for the full year. Regarding the outlook for our reporting segments we expect the net sales during 2016 for the domestic segment to decline approximately 2.5% from the prior year base sales of $1.2 billion with adjusted EBITDA margins expected to be approximately 22.4%. For the international segment net sales are expected to increase to approximately $275 million primarily as a result of the Pramac acquisition. With adjusted EBITDA margins of approximately 7% before deducting for the non-controlling interest. Lastly, regarding our outlook commentary we're providing an updated summary of some guidance details to help model the Company's earnings-per-share and cash flows for full year 2016.

As a result of the increase in earnings outlook specifically for the fourth quarter 2016 the cash tax rate for the fourth quarter is anticipated to be approximately 11%. Which results in cash taxes for the full year 2016 to be approximately $13 million to $13.5 million and the full year tax rate of approximately 8.5%. We now expect interest expense to be in the range of $45 million to 45.5 million dollars. The forecast for interest expense includes $41 million to $41.5 million of cash outflow for debt service cost plus approximately $4 million for deferred financing costs and original issue discounts amortization for our credit facility.

Depreciation expense is still expected to be between $21 million and $21.5 million. GAAP intangible amortization expense is now expected to be between $33.5 million and $34 million. Stock compensation expense is still expected to be approximately $10 million to $10.5 million and capital expenditures for the year are now expected to be approximately $32 million. In closing this morning the moderate improvement in power activity experienced during the second half of 2016 should serve as an important reminder of the need for backup power and act as a catalyst for increased demand for our residential products.

In addition we'll continue to make strategic investments in new products, technologies and infrastructure across the business to support the next leg of growth that we believe will occur as more of our end-markets improve. 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 priorities to 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?

Thank you. (Operator Instructions). Our first question is from Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Hey. Good morning, guys.

Morning, Jeff.

Morning, Jeff.

Hey. So good color on the additional power outage activity. Can you just talk about Aaron, maybe what you think are the one or two biggest things that you have changed in your approach or tools that are going to favorably impact kind of the reaction from these outages and maybe some of the early feedback you have gotten from those initiatives.

Sure, Jeff. I think for us one of the interesting things is a lot of tools that we put in the hands of distribution and frankly in our own hands are relatively new since the last kind of increase in outages occurred back in the kind of 2011, 2012 type of period. So as an example our PowerPlay iPad based selling solution, which is a -- it's basically a sales system which is -- which has given us tremendous visibility into the markets and has really helped us understand the performance dealer to dealer, market to market what's going on in terms of close rates in terms of activity, in terms of quoting, all things that we never really had visibility to before. The difference is in installation costs all those additional pieces of information have been great for us to kind of really focus on tightening up. I think one of the unknowns for us is really how does that lead system, which is really what it is, how does that perform in a period of increased outage activity.

So one of the things that -- that is very evident to us is this area of the country where the most recent outages took place so kind of the eastern coast of Florida all the wait up through the Carolinas as is an area that hasn't had a lot of outage activity in a number years. We're not going back to just 2011, 2012. Really Florida ten years, Carolinas a little bit longer in some parts. So that's an area where you might argue that distribution has been a bit atrophied just in terms of engagement and just -- we actually have quite a few dealers in the affected area. Over 400 dealers in that area. But in terms of alignment and in terms of just some of the program elements that we have offered over the years we see probably a little bit lower engagement level in those areas because of the muted power outage environment. So as -- as we ramp-up what we have to be mindful of is that we're going to need to help these dealers kind of walk before they run.

They need to take some of these solutions like power play and we are going to have to do some additional training we're going to have to get in the market and help them accelerate their use of some of these tools because they -- they haven't been as advanced using them as maybe say some of the areas of the country like the Midwest or the Northeast. So that's -- that's kind of my commentary on that. Early returns from these markets have been as you would expect, with portable generators very good initially. We have got great distribution from a retail footprint standpoint in that area of the country. That's an area that hasn't atrophied as we mentioned in our prepared remarks kind of all time highs in terms of our retail placement and we really saw that play out with the ability to deliver a lot of portable generators in that region of the country and that's -- a key underpinning and why we raised our guidance for Q4. Along side of that as we said we do think these tools that we have got are going to lead to an increase in the home standby activity and as evidenced some of the leading indicators that we watch would be things like our in home consultation and we have seen in home consultations in particular of that region have -- have really picked up nicely, as we would expect, and so we expect as we get in and start training and we have got a team that we have deployed from the factory here that will actually hit the ground next week in the Carolinas and in Florida to actually expand on the use of these tools.

We expect that in home consultations should increase even more. One last thing I'll add to that Jeff and I know it's a long winded answer, but I think there's a lot of things going on here. Our targeted marketing efforts we have got some pretty good views on what's going on market to market, on where these outages happened and so we're now in the final stages of completing our media plan to go after those markets in a very large way to target those regions to really fill the top of the funnel with leads. So a lot of activity going on as you would expect we want to make sure we can -- we can capitalize on -- on the increased awareness around the product categories and we expect that will play out here over the next several quarters.

And then just a quick -- that's helpful. Just a quick follow-on. So you took your revenue guidance up, you left the margins unchanged. Can you just speak to -- I thought there maybe would be a little bit more leverage there. Maybe speak to what -- what might be holding that back.

Yes. Jeff, this is York. So longwinded answer for this one as well. So as you would imagine so we raised our -- our residential guidance, brought down our -- our mobile products guidance down a little bit. Overall, though, that would generally imply a more favorable overall sales mix with that higher residential sales. You would also get favorable overall SG&A leverage on those higher residential sales, but partly dampening that is just the fact that bringing our mobile guidance down a bit we're--not only the topline but also the margins. We're just seeing a relative to previous expectation that those mobile product margins down overall. We did -- we did talk about promotional activities and whatbnot here in the third quarter. So that when you factor that into the full year guide that is something that's sort of offsetting some of those favorable impacts and then just the fourth quarter with the -- with the updated guidance you're going to have some additional employee incentive comp accruals. So when you put that all together that -- that allows us to hold the 19.5% EBITDA guidance for the year.

Okay thanks, guys.

Our next question is from Mike Halloran with Baird. Your line is open.

Hey. Morning, guys.

Morning, Mike.

Hey Mike.

So just on the C&I piece any signs of stability at the bottom there for some of those affected markets?

Yes. I think domestically, Mike, the -- we're starting to obviously, we'll get around the horn here in terms of getting into easier comps in that business, but that would be probably , the only sign of stability is just the fact that the numbers get quite a bit smaller in terms of comparatives going forwards. From a demand--just a pure market demand standpoint we saw some normal seasonality manifest itself in Q3 in terms of lighting towers which is typically when we would see that. The heating season , we've seen better interest in heat this year versus last year, of course, but we're coming off of a warm winter and to be very frank that -- that business has been -- that product line has been disappointing since we acquired it. Just the timing of our acquisition was -- was challenging. And that's really what the difficult comp in Q3 was all the about this time around was heat. We delivered a significant amount of heat last year in the third quarter and that didn't repeat this year.

So as we get into the fourth quarter we still have, some headwinds that the way our guidance plays out that we'll have to fight through, but as we get into 2017 we think that that will abate certainly, but I think the -- the key measure -- measurements and the key KPIs that we keep watching there are around rental rates, fleet utilization and then secondary market equipment pricing. All of those metrics are moving I think in a favorable direction, but without a meaningful recovery at least in energy prices it's kind of a wait and see game and you got to wait for these fleets to age and until they age the fleet refresh cycle that replacement cycle is just going to be differed and we're seeing, I think at one point we were hopeful that might happen more likely in the back half of 2017. Frankly, that may play out to be more of a 2018 story depending on where energy prices go here but we just don't see anything in the short-term that gives us a tremendous amount of confidence in-- in any major change there.

Yes. Okay. That's -- that's fair. And then back on -- back on the activities you have seen over the last couple months here could you try to frame that a little bit from a historical perspective. Obviously with the new tools you're implementing that's going to be skewed more favorably for you, but what kind of bolster do you typically get from this kind of outage activity what kind of tail is it and -- and at what point do you have a little better sense for how much bolster you start get on the standby side.

So what we have said in the past and what we have experienced in the past and again the category is only about 15 years old, the standby. So there's -- there's been a couple of notable points of over indexed activity and under indexed activity, so I will speak to those but I think our typical response has been that we see two to three four quarters of follow-on demand in general on an average basis in home standby category following an elevated period of outages. That was, of course, exacerbated after Sandy that was really pushed to something more like, six quarters to eight quarters. I mean it really was a very strong follow-on. I think a lot much that, Mike, is the fact that when you kind of peel back the onion on an event like Sandy it really -- that region had been impacted serially by a number of events in a short period of time.

Yes.

So there was a strange kind of you had hurricane Irene and then you had a snowtober event which was the snow on the leaves that caused trees to drop and takeout power and then you had Sandy and you got kind of those three things happens in rapid success over the period in about a year and a half and this -- this event Matthew in the Southeast is kind of a one time deal in ten years time. So I think it would probably fall more along the lines of our two to four-quarter statement. We also just putting it in context when you compare it to those other events that I just mentioned, in terms of our kind of the way we look at power outages we have talked about this proprietary severity index which is really a -- it's really a mathematical formula of not only the number of people impacted by an outage but the -- the -- amount of time the duration of their outage, which think is an important driver of demand.

And so when you look at that kind of amalgamation that severity index this event would not rise to any of the last three events that I just mentioned. So it's -- it's still below that. That's why in our estimation it's really not a major event. It will drive increased awareness and it's certainly helpful in an area of the country where we haven't seen a lot of outages for a longer period of time and there -- there were millions of people that were without power. So that is certainly going to help us and as we mentioned I think the first -- the first wave here was portable generators that we have called out, but I think two to four quarters probably a safe bet and we'll get that better visibility on that as the fourth quarter plays out here in terms of some of our efforts shorter-term and kind of how the distribution is kind of accepting of those -- accepting of the product category as the fourth quarter plays out.

Thank you. Our next question is from Stanley Elliott with Stifel. Your line is open.

Hey, guys. Good morning. Thanks for taking my call. Quick question for you. On the number of dealers kind of in the impacted area didn't sounds like many of them had been using a PowerPlay tool. Is that correct? How quickly would it be to get them ramped up to take advantage of the store.

Yes. Stanley. That's exactly what my comments were about. We have a good dealer base there, but it's not as what we would refer to as engaged as maybe some other parts of the country. That engagement level has measured by usage ever those tools like PowerPlay. So it is a small percentage that are on the PowerPlay system in that region and so in response to your question how quickly can we get them to engage and get them signed up on estimate a very easy process. I mean it's basically it's as easy as them getting an iPad and buying a license for the software and that's something that can be done in very short order and that actually is the number one priority of the team. We are deploying a field team as I mentioned that team will hit the ground next week in fairly large numbers to engage those 400 dealers in getting them signed up for PowerPlay. Remember that what's really important for those dealers the messaging there is all of the activity we do in terms of marketing so the info commercial and all the other lead generation activities that we do all drive consumers, homeowners, to our lead team internally here and that lead team qualifies those leads and then schedules those leads by pushing them out to dealers that are on PowerPlay. So if you're not on PowerPlay as dealer you're not going to get those leads. So it's a very -- the alignment that is required there is really important for those dealers to get those leads.

So the messaging is a pretty simple one. If you want to see the leads, and we're going to spend a lot of money in that area to -- to work on awareness and of the category and through our marketing efforts and if you want to get the leads in your hands you have got to be on PowerPlay. So it's a pretty simple message. What we'll do is what we refer to as ride along so we're going out with dealers and actually do a lot of hand holding to do those first initial, couple of (inaudible) with the system so that they get a feel for it and a then we'll turn it over to them and we'll be on to the next dealer. So we think its a--over the next 60 days we're going to be able to get a much higher adoption level of PowerPlay in that region of the country.

Perfect. And thankfully the election is going to be over here a couple weeks but does that --

Thankfully.

Does that impact your ability to get favorable ,advertising rates in some of these markets which are going to be contested states and how do we think about that? Does it delay the ability to get down to get the message out, right on the heels of the storm or -- or does it have to have a little bit of a lull period? How do we think about all of that?

Yes. I mean certainly it's I mean advertising rates are a little bit more elevated at this time of year in an election cycle than you would see without that, of course but I think the timing of this maybe it pushes it a week or so. I mean really the event just happened a couple weeks ago. You have to wait for the power to come back on. You let-- we have got to get the dealers engaged and then we have got to get our media plan put together. We have actually started playing some media in that region already but we will double down on that effort after the election passes we also don't want to get caught up in the noise not only just elevated pricing for the media cost today but we don't want to get caught up in the noise. People are -- I mean I know in our household any time there's an election add that comes on we're turning the channel so I don't know at some point people are going to get the hint. It's one of things that it's just -- we will have deal with it. It may push this out a week or so but I don't think its going to have a material impact on the cadence that we would normally have around post outage.

Our next question is from Brian Drab with William Blair. Your line is open.

Hey. Good morning. I was wondering if you could go through some of the organic revenue growth figures for the quarter. I don't know if you would be able to give us for resi, up 4% in total and C&I up 1%. If you give us organic numbers there and maybe even organic on Domestic and International.

Brian, it's York. So on the residential side that -- organically that's only down slightly. I mean it's a modest decline organically on the residential side. So they did get some contribution from one month of CHP that didn't get annualized and then Pramac if you recall does sell portable generators which would classify a certain amount not a lot, but a certain amount goes to that residential buckets. So organically residential is down call it modestly organically and then on C&I given that oil and gas decline they're down about 20% -- mid 20% range. So that's still weighing on -- on the year-over-year growth rates and I think Aaron mentioned it earlier in a commentary, we sold a lot of heat in -- in the prior year and that -- that didn't necessarily repeat given the -- the under utilization of that equipment out in the field.

Okay. And then I guess on Domestic versus International.

Yes. I mean I think the key there is -- Domestic is where all the residential is and International is -- is all C&I and most of that growth year-over-year there, Brian, for international is in fact the Pramac acquisition growth. There's -- there's a certain amount-- small amount that is -- that mobile products year-over-year declines in the European area. European region. So there is some decline there, but it's -- the vast majority of that increase in International is going to be acquisition growth.

Okay. Can you just remind me how much of the Domestic segment actually is C&I?

I guess we haven't broken that out. We've got --you have got the slice by Domestic and International and you got the slice by product class. We haven't necessarily provided the metrics on that.

Okay. And then I was wondering if you could-- given the renewal of the share repurchase authorization-- just a quick update on capital allocation plan it's been about a year and a half since the Analyst Day and is there any change to the amounts that you are expecting for a share repurchase versus acquisitions and debt pay down, et cetera?

Yes. Brian, it's York again. So I guess the discussion of uses of cash and priority capital allocations is really a very -- that discussion hasn't changed really since we have been public and we have got our stated priorities in terms of how we want to allocate capital and debt pay down is something that -- that we look at. We -- we have a targeted leverage range of 2 to 3 times where -- where we're elevated now at 3.9 times, but we know given where EBITDA has -- has troughed here we believe that that can return pretty quickly here as end-markets recover. So not -- not concerned about that leverage being that elevated. We are cognizant of that leverage and we don't want that to get too much higher, but we believe that -- that leverage ratio will moderate here as end-markets return and get back to that 2 to 3 times. So then you have got an M&A pipeline. We have demonstrated that we can execute on that M&A pipeline. We still are integrating Pramac here so we want to be measured there but so then after that pipeline is -- is return of capital to shareholders and as we have demonstrated that share buy backs at these levels are -- are an attractive use of that cash and I think that would be -- we will be opportunistic when we execute on that and.

Brian, just it gives us the opportunity to be-- gives us added flexibility to evaluate a wider range of options than when -- when we do have access capital as York said, after stepping through the priorities here and as you mentioned EBITDA this would be our trough quarter. EBITDA given our guidance here so we -- we should -- we're optimistic we will be able to de-lever that through if nothing more than through improvements in the EBITDA run-rate on an LTM basis. So that -- that doesn't worry us where we're at from a leverage standpoint but again the buy back -- the buy back is really just another tool for us.

Yes. And we do have excess cash flow sweeps that are built into our term loans so we have to be cognizant of that in our uses of cash as well.

Our next question is from Jerry Revich from Goldman Sachs. Your line is open

Hi, good morning.

Good morning.

Good morning

Aaron are you willing to share the numbers with us on how much the home consultations are up through October--just to help us understand the cadence of how the next couple of quarters might look--and just what the storm impact in context versus the company as a whole.

Yeah, we won't give specific percentages, Jerry, but what I can tell you is just from a data standpoint--we track this obviously its an important leading indicator and we have been tracking it over the last three years and typically what you'll see there is a seasonality to this in years where we haven't had major events in the fall we actually still do see a nice improvement--- or have seen in the last few years where we have PowerPlay in place we have seen a nice improvement in IHC. In the back half of the third quarter as we enter the fourth quarter and that's -- the result has been, you've seen improvement in our own standby run rates in Q4, really and that has been the result of the Northeast being--still kind of coming off of that-- those serial events that happened. As we've called out the Northeast has actually been pretty soft this year in terms of activation so we were not necessarily seeing that same seasonality play out with IHCs.

It was lower as you would expect because activations were lower there as well. What we have see is that has now turned around. We've seen the IHCs pick up materially again it's just later than we would have seen it in maybe the last couple of years and that really is the result of, based on regionally where we are looking at the IHCs it's really the result of these outage events and he increased awareness. Oddly enough, we actually have seen the Northeast respond as well, so we often times see is there is a spillover of fact when you get a major event in whatever part of the country you get the last area that was affected previously, in this case the Northeast, there is an increase in interest. It becomes topical for people and so we're going to make sure that we try and capitalize on that as well, the increased awareness there by shifting some of the media spend into that market where otherwise we may have otherwise started to curtail that we're actually shovel some dollars into that region because we have seen pick up in IHCs in that area. So, again, not giving you like discreet numbers but just the timing of when we see IHCs ramp and the nice increase we have seen is very encouraging for us as a leading indicator to support the fourth quarter guidance that we have given and we are in the middle of the budgetary process for 2017 and we will evaluate its impact, overall as we work through that process.

Ok, thank you for the context. For Pramac you spoke about the impact of the weak pound on Tower Light has that had any impact on Pramac as a whole and do you expect to recover the loss pricing as a result of the currency move in your businesses or is there a local competition in the UK that would make that challenging?

The first part of the question Pramac doesn't have much of a UK presence the little bit--it's actually smaller than Tower Light's UK business so in terms of the currency impact there not as material--it's material to Tower Light's business as a business but its not really incredibly material to our results overall I guess would be a way to put it. And certainly with Pramac it is even smaller because they don't have as big a footprint there. Unfortunately we don't believe there is going to be a great opportunity to recover the pricing. These are large national rental customers some of those prices are contracted, there is some wiggle room to move pricing-- thankfully there are not a large number of local manufacturers in the UK but that not withstanding it is still a competitive environment and we have to respond to that as such. So, unfortunately we don't think-- we certainly aren't going to recover all of that in pricing, there may be a little bit of that where we are going to get the opportunity to try and work on improving margins in the UK is through consolidation of operations. We have an operation in the UK for Pramac and we have an operation in the UK for Tower Light, we are currently in the investigative state of consolidation of those operating footprints so that we can try and reduce our overall cost structure in the UK. But-- our bigger issue, our bigger challenge is really on the pricing side and that is not something we see resolving itself very easily.

And it is reflected in our guidance.

Yes, it is reflected in our guidance appropriately in that fashion.

And our next question is from Ross Gilardi from Bank of America Merrill Lynch

Good morning. Thanks guys.

Good morning Ross.

Good morning Ross.

Hey I just want to ask you about telecom, how that is trending-- up or down year-on-year I don't think you mention it in your formal remarks and how do you think this AT&T, Time Warner thing impacts that business. I know in the last couple of years when the DirecTV acquisition was pending it seemed like you felt that had a softening impact on the market and I am wondering if--if that, obviously this is going to be a long drawn out process but if that weighs on capital spending in that market?

It's a great question Ross and one that--I mean we watch that market very closely its been an important market overall for us as a vertical in C&I and we have been a longstanding supplier in that market. We had more encouraging conversations earlier in the year, but those conversations-- I think is M&A activity for many of our major partners, channel partners there has--has increased with Verizon its YAHOO! with AT&T its been DirecTV and now the Time Warner deal. Just historically for us anytime we see those channel partners use their capital for M&A it tends to come at least in our markets, it tends to manifest itself in muted demand for telecom, and that is really what we reflected in our guidance here, we really haven't reflected any material uptick in it. We were already seeing that and I think the AT&T announcement with Time Warner only kind of doubles down on that. I think that what is a little more interesting to me is just maybe the signal all of those deals are sending in terms of just the network infrastructures spend by any of the wireless companies. I just find it interesting that since the net neutrality rules have come into play here, that is there-- I guess is there a broader macro theme here of de-emphasizing

.

the investment in the networks and the investment in the hard asset-- in reality you are basically building a highway for someone else to drive a car on and is that really what--does that give their shareholders the best return. I thought it was interesting Google Fiber made their announcement yesterday--or this morning, kind of pulling back and I think they found it a lot more costly to go into the markets-- to do what they wanted to do but is that also somewhat tied to net neutrality, they didn't call it that but you just wonder where is the investment in hard assets for--the pipe for all of these things whether it be wireless or whether it be fiber. Where is that going longer term in terms of investment so we will continue to watch it. I think the good new is there are a lot of sites out there that still don't have backup power so the opportunity set for us is pretty large and power quality continues to degrade that is something that we will keep an eye on the market but you do see some kind of signs on the horizon here with the M&A activity and some of the other macro themes here. It makes one pause in terms of what that may mean for capital spending by these types of customers today and into the near term.

Got it. Thank you Aaron and then lastly I just wanted to ask you about the big box retailers, you mentioned that your product placements--I think it will add all time highs with the retailers, just wondering how sell-through has been-- retail sell-through aside from the increased power outage activity. It just seems like some of the vendors to the big box retailers are reporting softer numbers over the last couple of days, in different categories than yours, but have you seen that at all, generally outside of the weather impacted areas or is it just been pretty steady staid.

To be honest we haven't really talked too much about sell-through, we see sell-through activity from our channel partners and I can tell you that nothing I've seen in the last several weeks, and I haven't looked at it in the last couple of days, which I think was your reference point. The last several weeks the sell-through activity is as we would expect in the regions that were impacted by the outages that was elevated, certainly by the outages and immediately thereafter we haven't seen anything there that would lead us to a different conclusion about either our feelings about the impact-- and remember as important of a channel as retail is and it is an important channel. Great partners and we have had long standing relationships there. Our Dealer channel is really the channel that for home standby anyway, because this is a home improvement project its an installed product, its a considered sale--highly considered sale, highly researched sale, big ticket item. The Dealer channel is the larger channel there and has grown over the last decade has grown faster than retailers. The retailers still serve a really important part though, of awareness around these product categories, a lot of times people will see the product for the first time on a retail shelf and they may start to get interested in the category through that interaction so our point of purchase displays are really important and obviously the training and other things we do with those retailers is really critical. But, to be frank the dealer channel most people want a turn key solution and some of our retailers are already paired up with our dealer channel, we have retail install programs that have been very successful and those programs we've seen nice improvement on those numbers in the last several weeks, as you would expect in the regions that were impacted but we can't speak to anything in the last few days to be honest Ross, but we'll continue to keep an eye on sell-through and understand how that might impact the business going forward.

Our next question is from Christopher Glynn with Oppenheimer & Co. Your line is open please go ahead.

Thanks. Good morning.

Good morning Chris

Good morning Chris

Hey, so on the comments about the modest increase in outages, obviously the hurricane was in October but is that a dynamic where there is no individual call out, it is more of just a little bit of a wave through the various geographies.

Yeah. That is part of it we have run some campaigns some pretty effective promotional campaigns coupled with the outage events have really been, in our estimation have been very successful and that is one of the reasons why the out performance in Q3 certainly, as we got to the back half of September even before Matthew. We see an event like Matthew being an overall awareness event. We've also seen some localized outages up in the Northwest coming off of some of the storms that have been hitting the Northwest territory here over the last couple of weeks. All of those things are driving to improve the overall IHC environment, the in home consultation environment as we've called out a lot of our leading indicators are pointing what we believe in a very good direction

I would also say inventory levels have played a part we talked about field inventory. As we entered the third quarter field inventory was a little bit elevated so there was a bit of de-stocking that occurred during the third quarter and in spite of that we outperformed our expectations. A lot of that again, the promotions coupled with the elevated outage event. But as we enter the 4th quarter we look as inventory levels today in the field being very much in line year-over-year and I think that is an important point to make because we don't anticipate and our guidance doesn't contemplate any kind of re-stocking or de-stocking events that need to take place in any measurable way, certainly in the 4th quarter. I think that that is an important part of the guide as we go from Q3 to Q4.

Ok and then--regarding the fourth quarter revenue lift and sort of allocating that obviously we could take the segment guide and triangulate but I just wanted to take a little different angle. The mid point of your full year guidance puts roughly a $40 million higher fourth quarter than the third quarter. Just wanted to ask about the components of that. Is that pretty much all standby or is there some little bit of seasonality and C&I contributing to that?

Going from Q3 to Q4 is the question, Chris? That is your question?

Yeah and the midpoint has it call it $40 million higher than the third quarter.

Yeah it is predominantly that resi volume and I think that the outage activity, the concept that Aaron just talked about in terms of not having this field inventory, being more balanced coming into the Q4. So most of that $40 million that you are talking about is going to be on the resi side.

Thank you. Our next question is from John Quealy with Canaccord Genuity. Your line is open.

Hey good morning guys thanks for squeezing me in. So big picture, I know I talked about this awhile ago, Aaron your thoughts on battery storage, Tesla, no really doing much as it seems with Power Wall, LG Cam announced some stuff in the Gulf Coast. Talk about that, cost is still an issue. Would you guys think about it if it got commercial traction and the economics were there? Thanks guys.

Thanks John. I think what is really important battery storage and you've seen the Tesla Power Wall, I think they pulled the product down that they had put out there as a backup solution. It is really not-- I mean, I think it is an interesting storage device for people who have alternative power sources at the home or business, solar being the primary there. Having an intermittent storage device to work on the radar (inaudible) during the middle of the day or peak times during the day is important. As a back up, as a purely backup solution you don't know how long an outage is going to occur and that is really what-- our product is fundamentally different, we serve a different market there and I think a couple of things would have to happen. Certainly the economics of batteries would have to improve dramatically. The amount of storage that you would need--again, hurricane Matthew is a great example, there are people down in hurricane Matthew in the impacted zones that were out of power for four days.

There is no battery today on the market--you would have to have a lot of batteries to get you past four days. To spend that kind of money on a solution just doesn't make sense. So let's fast forward for a second and assume the economics become workable at some point in the future. If they did I think what is really important and I try and stress this with not only external constituents but internally here at the company, what we do with a home standby generator I would love to tell you that there is a ton of proprietary technology. I think what we do on a scale basis is unique and I think what we do in certain elements of the product is unique. To be honest the product itself, the technology itself, a reciprocating engine driving a set of copper windings has been around for a long, long time--it is kind of physics 101 its been around 80 years.

I think we have done some unique things with it but I think what is really important is the system that we have built to create awareness and the system we built to sell it and promote it and market it and install it and service it, that entire investment over the last 15 years. The network that we built, that 5400 dealers we called out and we're back at our high point for distribution post Sandy. Which is amazing to me just sitting here that we have that many engaged partners that are interested in the category in spite of being--in kind of a down power outage environment. So what is inside the box, whether its an internal combustion engine or whether it is a set of batteries. We can commercially go out and buy batteries on the open market and if batteries tomorrow--technology shifts and the economics make sense that is what we would do, again there is nothing proprietary there. All the things we do around it, that is what is really valuable to us and I think that is what is really hard to replicate when it comes to just the amount of time and the amount of money that we have put into that.

Thank you. I am not showing any further questions so I will now turn the call back over to Aaron Jagdfeld, President and CEO for closing remarks.

Great. We want to thank everybody for joining us this morning and we look forward to our fourth quarter and full year 2016 earnings release which we anticipate will be sometime in mid February of 2017. With that we will bid you a good day. Thank you.

Ladies and gentlemen this does conclude the program and you may now disconnect. Everyone have a great day.