Generac Holdings Inc (GNRC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2017 Generac Holdings, Incorporated, Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Vice President of Finance, Mr. Mike Harris.

Mr. Harris, you may begin.

Good morning, and welcome to our Fourth Quarter and Full Year 2017 Earnings Call.

I'd like to thank everyone for joining us this morning.

With me today is Aaron Jagdfeld, President and Chief Executive Officer, and York Ragen, 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 U.S. 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, and thank you for joining us today.

Overall fourth quarter results provided a great end to 2017, as we experienced record quarterly sales through strong core organic growth of approximately 13%.

Overall net sales increased 17% compared to the prior year when including the contribution from the Motortech acquisition and favorable foreign currency impacts.

This sales growth translated into an overall 80 basis point improvement in adjusted EBITDA margin and a 19% increase in EBITDA dollars, along with record quarterly levels of operating and free cash flow of $138 million and $122 million, respectively.

Home standby shipments during the fourth quarter grew strong following the significant outage activity experienced during the second half of the year, as the overall demand environment continued to be favorable.

Shipments of C&I products were also significantly higher during the fourth quarter, driven by the continued recovery in domestic mobile products.

In addition, very strong year-over-year organic sales growth was experienced within the International segment, which was leveraged into a substantial improvement in adjustment EBITDA margins.

Given our strong earnings and cash flow for the year, we reduced our net leverage ratio to 2.5x as compared to 3.6x at the end of 2016, improving further on our financial position as we enter 2018.

Awareness for home standby generators benefited from baseline power outage activity that remained elevated during the fourth quarter as well as the [afterglow of] demand from the significant hurricane activity during the third quarter.

End-user activations for home standby generators remain strong and brought-based with activations in Florida, Texas and Puerto Rico particularly elevated.

Also, the Northeast region continued to rebound and experienced double-digit growth for the first time in several years, benefiting from the increased outage activity during the quarter.

With a favorable demand backdrop, our residential dealer base expanded to an all-time high of approximately 5,700 dealers at the end of the year.

And we expect this number to continue to grow over the next year.

We were able to ramp production for home standby quickly following the active storm season, allowing us to achieve near-record levels of shipments for the category in the quarter.

Shipments of portable generators were higher than expected due to strong replenishment activity following the hurricane activity during the third quarter, additional demand from Puerto Rico and the favorable baseline outage environment experienced during the quarter.

An area of our business that continues to experience a strong recovery is our domestic mobile products, primarily serving the rental markets.

After a fairly severe downturn in 2015 and 2016, demand continues to rebound quickly as we saw significant year-over-year growth in shipments during the fourth quarter.

Additionally, new orders for domestic mobile products were robust once again during the quarter, resulting in significant backlog and improved visibility as we start 2018.

Overall stronger end-market fundamentals due to optimism around a continued fleet refresh cycle and oil and gas market rebound and tax reform impacts all appear to be contributing to the increased demand.

We continue to believe the current fleet replacement cycle is primarily being driven by the overall age of existing rental equipment with oil- and gas-related capital spending just now beginning to accelerate as we enter 2018.

With oil prices improving significantly in recent months and trending in the low to mid-$60 range, we believe a meaningful recovery in the purchase of mobile equipment for use in oil- and gas-related applications is starting to gain traction.

Also, utilization rates for several of the product categories hit hardest during the oil and gas downturn continue to improve, which gives us confidence that further growth is ahead in the mobile products category.

We are currently in the process of further ramping up our supply chain and manufacturing capacity for the anticipated further increase in demand, as we are bullish on this area of our business returning to sustainable long-term growth.

Now let me provide some brief comments regarding the trends for our International segment which had a fantastic fourth quarter with very strong organic sales growth.

We were encouraged by the near doubling of margins during the quarter relative to prior year for this segment which benefited from a variety of factors, most notably, the improved leverage of fixed manufacturing and operating expenses on the considerably higher sales volumes.

Within the International segment, Pramac continues to perform very well, with strong sales growth during the fourth quarter and a solid expansion in margins as compared to the prior year.

In addition to strength in shipments for both residential and C&I products across several European countries, the quarter also saw the benefit of favorable sales mix, including some large project activity with attractive margins.

Our Ottomotores business which serves the Latin American market also experienced solid margin expansion during the fourth quarter through a variety of factors, including favorable sales mix and cost reduction initiatives.

I would now like to share with you a few of our accomplishments from 2017.

For the full year, net sales increased 16% to approximately $1.7 billion as compared to $1.4 billion in 2016, which included $70 million of sales from the Pramac and Motortech acquisitions.

Organic sales growth during 2017 was strong at 11% which benefited from improving end market fundamentals in several areas of our business, most notably, the growth in domestic residential products from the heightened power outage activity, the significant recovery in demand for our domestic mobile products and the strong organic sales growth experienced in the International segment.

This organic sales growth was leveraged into strong year-over-year increase in adjusted EBITDA dollars and adjusted EPS, and we once again generated a robust level of free cash flow of $228 million.

The growth in profitability in free cash flow during 2017 allowed us to again deploy cash in a variety of beneficial ways for our shareholders.

And our net leverage ratio declined by a full turn and now stands at the midpoint of our targeted long-term range of 2x to 3x.

In addition to our team's incredible efforts in responding to one of the most active storm seasons in recent history, we had several other notable accomplishments during the year that were important to executing on our powering ahead strategy.

We once again grew the residential standby market with new products and programs, along with expanding our dealer base and retail shelf placement, all with the longer term goal in mind of increasing the awareness, availability and affordability of home standby generators.

We made further headway on gaining market share within domestic C&I products by focusing on our lean gas initiatives and expanding our natural gas product offering to take advantage of the accelerating shift from diesel to natural gas generators.

We also successfully ramped production for our domestic mobile products in response to a dramatic market rebound, with a further ramp expected during the first half of 2018.

And lastly, we consolidated the Country Home Products assembly and distribution operations in Winooski, Vermont, into our Jefferson, Wisconsin, facility, allowing CHP to further focus on its core D2C marketing and sales capabilities at its headquarters in Vermont while providing better leverage of our existing manufacturing footprint.

We made important progress during 2017 with the businesses that make up our International segment as our global expansion continued during the year with a record percentage of our sales coming from outside the North American markets.

We made encouraging progress in including strong synergies with the integration of Pramac, our largest acquisition to date, which closed in early 2016.

Pramac had an excellent 2017, with very strong sales growth and margin expansion as it made important headway on strategic integration activities, including combining commercial activities with Tower Light and the consolidation of the Generac and Pramac locations in both the United Kingdom and Brazil.

In addition, they achieved an important milestone of establishing and ramping up activities related to our newest sales branch in Australia, with the goal of developing a home standby market and introducing natural gas generators into the region.

In our nearly 2 years of ownership, Pramac has performed beyond our expectations and continues to demonstrate the quality of the team and the business that we acquired.

We are looking forward to further growing this business both in terms of sales as well as margins.

Another important component of our lean gas strategic initiative was our acquisition of the German company Motortech early in 2017.

We believe the significant technical and market knowledge around gaseous engine controls possessed by this company will play an important role in our future success with gas power generation.

In Latin America, Ottomotores had a very solid year with attractive sales growth alongside improving margins.

In particular, we see this region as an important area of future growth for Generac.

And in support of further expanding our addressable market in Latin America, this morning we issued a separate press release announcing the signing of a purchase agreement to acquire Selmec.

Founded in 1941 and headquartered in Mexico City, Selmec is a designer and manufacturer of diesel and gaseous fueled industrial generators ranging from 10 kilowatts to 2.75 megawatts.

The company which employs approximately 300 people and has over 100,000 square feet of production capacity offers a market-leading service platform and specialized engineering capabilities together with well-developed integration, project management and remote monitoring services that provide for higher margins.

Selmec's deep expertise in standby energy solutions specifically for telecom, data center and other mission-critical applications makes for a great fit with Generac's Latin American strategy.

Acquiring Selmec will also allow us to dynamically scale our existing Ottomotores business in Mexico, leveraging both the distribution and operational footprints of the combined businesses to offer the Latin American market a broader portfolio of products and solutions.

As the transaction is expected to close sometime in the next 3 to 6 months, pending regulatory approval, we have not yet included the impact of the acquisition within our 2018 guidance.

I'd now like to turn the call over to York to provide further details on the fourth quarter results.

York?

Thanks, Aaron.

Net sales for the quarter increased 16.9% to $488 million as compared to $417.4 million in the fourth quarter of 2016, including $9.6 million of contribution from the Motortech acquisition which closed on January 1, 2017.

This resulted in very attractive core growth rate of approximately 13%.

Looking at our consolidated net sales by product class, residential product sales during the fourth quarter increased 11.2% to $265.5 million as compared to $238.9 million in the prior year quarter, with all this growth being organic.

As Aaron mentioned, the quarter saw near-record shipments of home standby generators driven by the high power outage environment experienced in the second half of 2017.

Shipments of portable generators were better than expected and down only slightly versus prior year, despite a tough comparison with Hurricane Matthew, which occurred in October of 2016.

During the current year fourth quarter, we continue to see strong portable replenishment demand from our retail partners on the back of the active hurricane season and higher baseline outage activity.

In addition, we also saw broad-based growth of portable generators internationally at Pramac due to market share gains, new product introductions and overall market growth.

Looking at our Commercial and Industrial products, net sales for the fourth quarter of 2017 increased 27.1% to $188.3 million as compared to $148.1 million in the prior year quarter, with core organic growth being approximately 17%.

Excluding the Motortech acquisition and favorable foreign currency impacts from a stronger euro versus dollar, the robust core organic increase was primarily due to the very strong growth in domestic mobile products driven by the continuation of a fleet replacement cycle with our rental customers.

In addition, our International segment benefited from larger product activity across a number of Pramac's global sales branches.

Net sales for the Other products category, primarily made up of service parts, increased 12.3% to $34.2 million as compared to $30.4 million in the fourth quarter of 2016.

The strong growth was primarily due to increased demand for replacement parts as a result of the elevated level of power outage activity experienced in the second half of 2017.

Gross profit margin was largely flat at 36.8% compared to 36.9% in the prior year fourth quarter.

A more favorable pricing environment and improved leverage of fixed manufacturing costs and the higher organic sales volumes compared to prior year were offset by unfavorable sales mix and higher commodities relative to prior year levels.

Operating expenses increased $8.7 million or 11.4% as compared to the prior year, but declined 60 basis points as a percentage of sales when excluding intangible amortization.

The increase in operating expense dollars over the prior year was primarily driven by the addition of Motortech, increased variable cost on the stronger sales volumes and an increase in employment costs, including higher incentive compensation recorded during the current year quarter.

These increases were partially offset by lower promotional costs benefiting from the higher power outage activity.

Adjusted EBITDA attributable to the company as defined in our earnings release was $108.6 million in the fourth quarter of 2017 as compared to $91 million in the same period last year.

Adjusted EBITDA margin before deducting for noncontrolling interests was 22.8% in the quarter as compared to 22.0% in the prior year.

The 80 basis point increase compared to the prior year was mostly due to the previously mentioned improved leverage of fixed operating expenses on the stronger organic increase in sales.

For the full year 2017, adjusted EBITDA came in at $311.7 million, resulting in an 11% margin before deducting for noncontrolling interests and a 13.5% increase over prior year.

I will now briefly discuss financial results for our 2 reporting segments.

Domestic segment sales increased 11.2% to $377.9 million as compared to $339.7 million in the prior year quarter.

The current year fourth quarter experienced strong growth in shipments of home standby generators driven by increased outage activity along with the continuation of significant growth for mobile products.

Also contributing to the year-over-year sales growth were increased in service parts shipments.

Adjusted EBITDA for the segment was $100.6 million or 26.6% of net sales as compared to $87.9 million in the prior year or 25.9% of net sales.

Adjusted EBITDA margin in the current year benefited from a favorable pricing environment, including lower discounting and promotional costs and improved overall operating leverage on the higher organic sales volumes.

These impacts were partially offset by higher commodity levels and an increase in employment costs including higher incentive compensation recorded during the current year quarter.

International segment sales increased 41.8% to $110.2 million as compared to $77.7 million in the prior year quarter, including $9.6 million of contribution from the Motortech acquisition.

Core organic growth when backing out Motortech and the favorable impact from foreign currency was approximately 20%.

This significant core organic growth was driven by increased shipments of both C&I and residential products, primarily within Pramac, which included the benefit of large project activity across certain of their global sales branch offices.

Adjusted EBITDA for the segment before deducting for noncontrolling interests improved to $10.5 million or 9.6% of net sales as compared to $3.9 million or 5% of net sales in the prior year.

The earnings power of our International segment was on display during the quarter as we were able to generate attractive incremental margins from improved operating leverage on the significant organic sales growth.

In addition, the improvement in margin was also due to favorable sales mix from the benefit of higher margin larger project activity.

These favorable impacts were partially offset by higher commodity prices seen in recent quarters and increased operating expenses associated with the expansion of certain branch operations, in particularly in Australia.

Now switching back to our financial performance for the fourth quarter of 2017 on a consolidated basis.

GAAP net income for the company in the quarter was $81.2 million as compared to $41.5 million for the fourth quarter of 2016.

The current year net income includes the impact of a $28.4 million noncash gain largely from the revaluation of the company's net deferred tax liabilities associated with the enactment of the Tax Cuts and Jobs Act of 2017, or the Tax Reform Act.

As a result, GAAP income taxes during the fourth quarter of 2017 were only $607,000.

When excluding the aforementioned $28.4 million gain from the Tax Reform Act, GAAP income taxes would have been $29 million for an effective tax rate of 34.9% on an adjusted basis.

This compares to $24.4 million or a 37% effective tax rate for the prior year.

Adjusted net income for the company as defined in our earnings release was $85.9 million in the current year quarter versus $71.4 million in the prior year.

The significant sales growth and improved operating margins drove this increase and were partially offset by higher cash income taxes during the quarter.

With regards to cash income taxes, the fourth quarter of 2017 includes the impact of a cash income tax expense of $6 million as compared to $3.7 million in the prior year quarter.

The current year cash taxes reflect a cash income tax rate of 12.5% for the full year 2017, while the prior year fourth quarter was based on a cash tax rate of 5.9% for the full year 2016.

The current year cash taxes benefited from certain incremental tax deductions that were accelerated in response to the Tax Reform Act.

In addition, the fourth quarter cash taxes also benefited from higher-than-expected share-based compensation deductions.

The combination of these incremental tax deductions resulted in cash tax savings of approximately $10 million in the current year fourth quarter.

Diluted net income per share for the company on a GAAP basis was $1.30 in the fourth quarter of 2017, compared to $0.64 in the prior year, with the current year earnings impacted by the aforementioned $28.4 million noncash gain related to the Tax Reform Act, or $0.45 per share.

Adjusted diluted net income per share for the company as reconciled in our earnings release, was $1.37 per share for the current year quarter compared to $1.12 in the prior year.

As just mentioned, the current year benefited from $0.15 of incremental accelerated tax deductions which lowered cash income tax expense for the quarter.

Cash flow from operations was a quarterly record of $138.4 million as compared to $123.9 million in the prior year fourth quarter.

Free cash from as defined in our earnings release, was also a quarterly record of $121.8 million as compared to $114.3 million in the same quarter last year.

The year-over-year improvements in cash flow were driven by a variety of factors including the increase in operating earnings and a larger benefit from working capital reduction during the current year partially offset by higher cash income taxes and capital expenditures.

The fourth quarter is typically the strongest cash flow quarter of the year from a seasonality standpoint.

Free cash flow for the full year 2017 was $228 million as compared to $223 million for 2016.

This resulted in a 105% conversion of adjusted net income into free cash flow, and once again demonstrates the strong cash flow capabilities of the company.

During the fourth quarter, we amended our term loan credit facility which, among other items, favorably modified the pricing by reducing the applicable margin rate to a fixed rate of 2%, resulting in a 25 basis point reduction in overall interest rate from the level previously in effect or approximately $2.3 million of annualized interest savings.

In addition, certain terms were amended to eliminate the annual excess cash flow payment requirement if our consolidated net leverage ratio is maintained below 3.75x.

Also during the quarter, we made a total of approximately $110 million of debt repayments, including $100 million in payments on our ABL revolving credit facility, paying off the entire outstanding balance as of December 31, 2017, with cash on hand.

As of December 31, 2017, we had a total of $928.7 million of outstanding debt net of unamortized original issue discount and deferred financing costs and $138.5 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $790.3 million.

Our consolidated net debt to LTM-adjusted EBITDA leverage ratio at the end of the fourth quarter was 2.5x on an as-reported basis, a healthy decline from the 3.6x at the end of 2016.

Given our strong earnings and cash flow generation, we have demonstrated the rapid deleveraging capabilities of the company.

Additionally, at the end of the year, there was approximately $250 million available on our ABL revolving credit facility.

This availability on our ABL and the elimination of the term loan annual excess cash flow sweep gives us tremendous flexibility when evaluating our prior uses of cash.

Uses of cash during 2017 included $33 million for capital expenditures, $127 million for the repayment of debt and approximately $30 million for stock repurchases.

With that, I'd now like to turn the call back over to Aaron to provide comments on our outlook for 2018.

Thanks, York.

Today we are initiating guidance for full year 2018 as we expect net sales to increase between 3% to 5% when compared to the prior year, which includes a favorable currency impact of between 1% to 2%.

This guidance excludes major outage events for the year.

When excluding the benefit of elevated portable generator shipments during 2017 related to the active hurricane season, net sales in 2018 are expected to increase between 7% to 9% as compared to the prior year, which we believe to be a relevant comparison when evaluating year-over-year growth rates.

In addition, our top line outlook assumes no material changes in the current macroeconomic environment and also assumes a baseline power outage severity level similar to the longer term average, which excludes major events.

As a reminder, should the baseline power outage environment in 2018 be higher or if there's a major outage event during the year, it is likely we could exceed these expectations.

Per historical perspective, an average major outage event could result in $50 million or more of additional sales depending on a number of variables.

Lastly, as previously mentioned, this guidance does not include any impact from the Selmec acquisition announced today as the timing of the closing is undetermined pending required regulatory approvals.

Adjusted EBITDA margins for the full year before adjusting for noncontrolling interests are expected to be between 19% to 19.5% as compared to 19% for 2017, which includes favorable impacts from pricing and anticipated cost savings from our company-wide profitability enhancement program, or PEP, initiatives.

Consistent with historical seasonality, we expect sales and EBITDA margins in the second half of the year to be higher relative to the first half, with the first quarter representing the low point as net sales for the quarter as a percentage of full year 2018 sales are expected to approximate the long-term first quarter average.

With some excess residential backlog entering the first quarter of 2018 and no major outage events assumed in our outlook, the improvement in second half sales and margins are not expected to be as pronounced when compared to the first half, as has been the case in recent years.

Lastly, I want to briefly comment on the Tax Reform Act as we believe the recent passage of this legislation could have a favorable impact on future demand within many of the end markets we serve.

The stimulus provided by lower cash tax obligations could further improve business sentiment and may lead to incremental investments in equipment, facilities and infrastructure in the U.S.

In addition to the potential benefit to our top line which we are still evaluating, we expect corporate tax reform will also have a favorable impact to our net earnings and cash flows.

I'll now turn the call back over to York to talk more about the estimated impact of tax reform and also walk through some other guidance details to help model out the company's cash flows and earnings per share for 2018.

York?

Thanks, Aaron.

While we continue to assess the full impact of the Tax Reform Act, our preliminary analysis suggests a meaningful benefit from the legislation.

Specifically for 2018, our GAAP effective tax rate is expected to decline to between 25% to 26% as compared to the 35% adjusted full year rate for 2017, when excluding the $28.4 million noncash gain recorded in the fourth quarter of 2017.

Based on our guidance provided for 2018, our cash income tax expense for the year is expected to be approximately $28 million to $30 million which translates into an anticipated full year 2018 cash income tax rate of between 12% to 13%.

Before considering the impacts of the Tax Reform Act, the anticipated cash tax rate for 2018 would have been approximately 17%.

The reduction in the cash tax rate for 2018 as a result of tax reform is expected to result in a benefit to free cash flow of between $10 million to $12 million based on the outlook being provided.

As a reminder, we still have a favorable tax shield as a result of the significant intangible amortization deduction in our corporate tax return that results in our cash income tax rate being lower than our GAAP income tax rate.

With the passage of the Tax Reform Act, the tax affected annual value of this tax shield is now expected to be approximately $30 million per year due to decline in the federal tax rate from 35% to 21%.

Lastly, I'll provide some brief comments to help model cash flows and earnings per share for 2018.

In 2018, we expect interest expense to be approximately $43 million, assuming the pricing in our newly amended term loan credit facility, our interest rate swap agreements that we currently have in place and a rising interest rate environment in 2018.

Depreciation expense is forecast to be approximately $26 million.

GAAP intangible amortization expense in 2018 is expected to be approximately $21 million, which is a reduction from the $28.9 million in 2017.

The year-over-year decline in expense is primarily a result of certain definite live intangibles becoming fully amortized during 2017.

Stock compensation expense is expected to increase to approximately $12 million to $12.5 million.

Our capital expenditures for 2018 are forecasted to be between 2.0% and 2.5% of our forecasted net sales for the year.

For full year 2018, operating and free cash flow generation is once again expected to be strong and follow historical seasonality, benefiting from the solid conversion of adjusted net income to free cash flow expected to be over 90% in 2018.

This concludes our prepared remarks.

At this time, I'd like to open up the call for questions.

(Operator Instructions) And our first question comes from Jeffrey Hammond with KeyBanc Capital Markets.

This is Brad Vanino filling in for Jeff.

So if you could just size up the storm contribution impact in 2017.

It looks like the guidance implies, call it, $65 million in incremental portable demand.

But could you break out the residential standby piece of that?

No, we don't -- well, I think we've always said the residential product class that we have, the vast majority of our sales are home standby generators.

I think what we did quantify, because, as you know, portables, when you have a major event, that's a much more reactionary product category that volumes spikes and then comes back down to previous levels, which is why we thought it relevant to at least try to quantify what the storm impact in portables was.

Home standby is much different.

It elevates and then holds a new and higher baseline.

So we don't think it makes sense to back that out.

But from a portable standpoint, we quantified what we believe to be the 2017 impact from the major events as roughly that $65 million to $70 million.

Okay.

That's helpful.

Then I guess just trying to get a better feel for where in the post-storm cycle we are, could you provide any color on demand trends and backlog heading into 2018?

Ex, just kind of point towards we are in that cycle compared to kind of what we saw with Sandy a few years ago.

Yes, sure.

So I mean we did have some backlog coming into the year from Q4's order rates.

Again, we had called this out on the third quarter call.

It's not nearly to the level that we experienced with Sandy for a number of reasons, the biggest of which, of course, is just the fact that these storms happened a lot earlier in the season than Sandy.

So a lot of the benefit of that event is really captured in Q4.

So with Sandy, it was a late event and it took us a little bit longer to ramp.

We didn't have quite the expertise we have today in our ability to ramp up.

And as a result, a lot of that benefit flowed into the first quarter, first and second quarter really, of 2013.

So kind of a different situation, really primarily related to timing.

There's a couple of other reasons too.

I mean, obviously, these events weren't the size of Sandy either, which I think is another important factor in that.

But in terms of where we're at today in the cycle, you still see some very good demand.

Usually what we say is you'll see 2 to 4 quarters of elevated demand following an event like this and really kind of pronounced at the 1 year anniversary of that event.

So we would expect the same thing to happen.

What we see, as we saw in Q4, continuing to see activations pacing ahead of prior year here as we go into Q1.

We're continuing to work down that backlog.

Our order rates or our lead times for orders have come in nicely from where they were in Q4.

But strong demand there.

And then in our C&I business, as we called out in particular in our mobile business, we continue to see that market rebound sharply here.

As we saw at the beginning of last year, it's continued again here in the beginning of 2018.

And our next question comes from Ross Gilardi with Bank of America Merrill Lynch.

I just wanted to ask you on the guide for 2018, it looks like you're implying about $335 million of EBITDA at the midpoint versus $312 million in 2017, so an increase of $23 million, $24 million.

I mean, you've got a very easy comp in the first quarter, presumably, that I would think gets you somewhere close to sort of that positive $25 million.

Not asking for guidance on Q1.

But it feels like you're assuming basically very, very limited year-on-year growth after the first quarter.

And I would think your Q2 comp is also, relatively speaking compared to last few years, also on the easier side, given the strength you've been seeing in both resi and standby – sorry, resi and C&I.

So am I thinking about that correctly?

Is that fair?

Yes, I think that's probably a fair assessment, Ross.

I mean, I think the big challenge here, of course, is the second half of the year.

Because we don't include any kind of major events in our guide, it's going to be a challenge to, at least on a guidance, as we issue guidance this morning, it's difficult to comp that back half of the year.

So that's really where I think you probably are -- you're looking at it right I think in terms of first half, second half.

But York, I don't know…

Yes.

I think, I mean if you look, we talk about that $65 million to $70 million portable impact from the storms.

A lot of that happened in Q3.

Based on the fact that we're not assuming any major outages in 2018, that won't repeat, and that's why we called that out.

And then Q4, with our ability to ramp up here, we're at near record levels on home standby in Q4.

And again, without major events, you won't, probably, you won't be at that level.

But you will be at a new and higher baseline, which I think is the key for home standby showing growth year-over-year there, for the full year at least.

Got you.

And then could you just talk about the Florida market?

Have you seen things calm down since the summer?

And field inventory levels in kind of the storm-impacted areas, what are those looking like?

Yes.

So Florida specifically, Ross, obviously it's not at the fever pitch it was during the events and near-term right after.

But it remains very robust.

We saw great activations in Q4 in Florida, and Texas and Puerto Rico for that matter, other impacted regions.

But Florida specifically, what's interesting about Florida, and this is maybe another comparison to if you want to look back to Sandy, we don't have the concentration of dealers in that market that we had in the Northeast.

So that's another kind of headwind to really trying to do that comp directly apples-to-apples with Sandy.

So right now we're focused on expanding distribution.

It had been almost 11 years since there was a major event down there.

So you get a normal amount of attrition.

Contractors just, frankly, turn over, and that's our dealer base.

So it's an effort to increase distribution, which we've done in Q4 and we're continuing to do here in Q1.

IHCs, the in-home consultations remain very strong down in Florida, and activations as well.

I mean, it is a market where you can install product year-round.

I think that's one difference from when you get events in some other regions of the country.

But by and large, in relation to field inventories, field inventories feel very kind of, especially in the storm-affected areas, kind of tight.

It's a different pricing environment right now, and so you won't see the normal promotional cadence you may have seen from us over the last several years.

We'll run our national promotions and things like that.

But some of the one-off promotions that we've run in the past are going to be more limited just as a result of a firmer pricing environment.

And so that clearly I think puts a lid on where field inventories go.

So we feel very good coming into this year, especially when you look at where we were versus a year ago regarding field inventories.

Got you.

Just one quick follow-up to that point.

So just your thoughts on price cost and what you're baking into the 2018 margin outlook.

Obviously steel and copper are up quite a bit.

I didn't get the sense from any of your comments you're overly concerned about that.

Have you done anything to remove any of the metal content or anything like that from -- or to limit the metal content from your generators?

Ross, this is York.

I mean, in terms of the metal content, a generator's a generator from that perspective.

But I think from a price cut, the way we think about price cost, price, on the price side, it will be, I think Aaron just alluded to it, it should be a relative to prior year, a more favorable pricing environment.

So you'll definitely see some positive impacts on the price side.

On the cost side, we are seeing headwinds with commodities and currencies.

But we've talked about publicly, I think when we had our Investor Day and internally here we focus very hard on what we're calling our profitability enhancement program.

And there's a lot of initiatives here that we're working on to help offset what may be headwinds relative to commodities and currencies.

So from an overall net price cost standpoint, we think that should be a net favorable.

And then given where we're seeing growth from '17 to '18, probably relative to mobile and international and whatnot, probably a little bit of mix headwind.

But net net, we do expect to grow margins off of 2017, EBITDA margins.

And our next question comes from Brian Drab with William Blair.

On Selmec, is there anything that you could tell us regarding purchase price roughly or revenue, margins, to help us model that one?

No, we're not disclosing the details other than what we've said.

These are bolt-on-type acquisitions, Brian.

We've done a bunch of these in the past.

And so it's similar in size to many of those acquisitions, about 300 employees.

But we're not giving the specifics on the transaction at this point.

Okay.

Understood.

And then just to clarify in the guidance and better understand what you're modeling in terms of weather activity.

You said it includes an assumption longer-term level of weather activity.

Where have we been relative to that longer-term average over the last, say 12 months?

I just want to gauge whether the guide incorporates a step up, step down or flat assumption with regard to that base level.

Actually, if you look at the last few quarters, let's just strip out even the major landed hurricanes, baseline outage activity actually has been elevated actually above the longer term average the last few quarters, last 12 months.

So this guide actually assumes a reversion down back to the longer term average of baseline outages excluding major.

So not necessarily trying to run rate the higher level that we saw here in 2017.

Okay.

Great.

And then just 2 more.

C&I in Europe, it sounds like you're gaining traction there.

Are there any more specifics you could provide regarding some of those new products that we saw that were in the works that we saw at the Analyst Day and how much traction they're gaining?

Yes, Brian.

I mean, you hit the nail on the head.

I mean our European operations have done well.

Obviously, the European economy's expanding.

But we're getting traction with many of those new products.

In particular, when you look on the mobile product side, the lighting towers that are more focused on LED lighting, fuel savings being the primary driver of that kind of purchase in Europe with fuel costs being higher than you would find here in the U.S., driving the product line more that direction.

Hybridization of some of the products as well, again fuel savings being the primary driver.

But I think in general, the other thing that we're very pleased with there is Pramac, in particular, has been focusing on some larger projects.

We saw some projects in Russia and some other parts of the globe and in China that were kind of larger in scale from what they've historically done.

And so we believe that there's some real, great upside there of their ability to participate in those projects as a result of time part of a stronger company in terms of just the financial position of the company versus being a smaller kind of independent company as they were before.

So there's a trust factor with the client base, the customers that are buying those types of products that want to make sure that they're backstopped by a strong company and, in particular, a company with global operations.

Many of the companies we're selling to have operations around the world and they want to have a consistent supplier around the world.

So we're starting to see that take hold.

It was part of our thesis in building this out to become a Tier 1 C&I player.

And we're really seeing that grow.

And I think what we're going to do in Latin America and what we've done already with Ottomotores and now with Selmec, you're going to see us continue on this path.

Okay.

Great.

And then the last one.

Just trying to gauge how much visibility you feel you have to the follow-on impact of Irma and the recent hurricanes.

I'm getting the sense that you're communicating that the pop in demand has happened and we're going to see some after effect continuing in home standby.

But do you feel like you really have that pinned down in terms of what the follow-on demand is going to be as we move through 2018?

Or is there a lot of variability around your estimate of that impact?

Well, again, maybe it's a good opportunity to talk through this.

It's a step function-type business.

So we saw the pop last year to grow to a new level and now we're holding that level.

As we do with guidance -- this is the problem with guiding for this company, because of the episodic nature of our residential business, when we guide without events, it's maybe underwhelming when you hear it.

But the reality of it is, it provides a tremendous amount of upside potential with the company should those events happen.

We've gotten used to not providing our guidance inclusive of the events because we think it's the more conservative position to take.

I don't know if that hurts the stock in the short run or helps us in the long run; I don't know that at all.

But the fact of the matter is that we think that we continue to see, as my comments said, we continue to see really good activity down in those markets that were impacted by the storm.

That's what helps us hold that new and higher baseline.

We're looking at expanding distribution in those markets.

And we think that that normal kind of 2 to 4 quarter pacing with home standby is going to continue this time around as we've seen in the past.

And our next question comes from Stanley Elliott with Stifel.

Couple quick questions.

Did you guys have any delay in terms of the installed on the home standby because of weather, either in Q4 or even into January?

No, not really, Stanley.

I mean, again, I think this time around, because much of the storm activity was in warmer weather climates, really provided an opportunity to install products on a pretty consistent basis.

Florida installs are notoriously long because the permitting process can be longer, generally, there's an LP tank involved if you don't have a natural gas line available.

So there's a little bit more in terms of logistics which can stretch out installs.

But we're not seeing anything that would be dramatic, not like if you had an event in the Northeast or the Midwest where you'd have the frozen ground.

We see seasonality with installs there, normal seasonality there.

That's fair.

And as far as the margin improvement that you guys had on the International business, which was great, is there a way to parse out kind of what you've done structurally in terms of the cost out there or versus how much of that is mix from some of the larger projects you guys shipped?

It's more the mix and the leverage than anything, Stanley.

I mean, that's really how I would characterize that.

We've done some cost-outs as well, especially when you look in Latin America in particular.

And then lastly for me.

With kind of getting rid of the cash sweep and the improved free cash flow, does it change your appetite in terms of M&A from bolt-on deals to larger size deals, especially with your leverage being kind of right in the middle of your targeted range?

Yes.

I mean, we've talked about this in the past.

Our acquisition strategy to date has been anything that helps us advance our powering ahead strategy faster.

So I think bolt-ons have been a great way for us to do that.

It's not that we don't look at larger deals.

And I think even with our financial position even a year ago we would have been able to do a larger deal if we wanted to.

Does being in a better financial position today give us an even better position to do that?

It could.

I mean, I won't say that our funnel doesn't include larger things; it does.

But I would say our primary focus is on bolt-ons.

And our next question comes from Chip Moore with Canaccord.

I guess with dealers at 5,700 and growing this year, are most of those new dealer additions on PowerPlay?

Maybe you can talk about close rates for those guys, whether you're churning out some not using the sales tools.

Yes.

I mean, what I can say about that, Chip, is that we endeavor to put all dealers on PowerPlay.

We have a lot of them on PowerPlay.

In fact, if you want to kind of strip apart the distribution, the better dealers are on PowerPlay.

And you see that not only in their size but also their close rates.

So dealers that use PowerPlay have higher close rates.

Again, we don't get into quoting specifics and what they are.

But they're materially higher than you would see in dealers that don't use the tool.

And again, for us, the biggest thing that it gives us is great visibility for those deals that don't close.

And that's been I think an area of intense focus here on how we work that file, as we refer to it internally.

We call it a file.

And that file of unclosed IHCs and proposals that is there is a really rich marketing opportunity for us.

And as that file grows and as outages happen, we track outages, as we've said before, as we look to do promotions, whether they be nationally or regionally, we can tap that file in ways that just wasn't available to us 5 years ago prior to having it.

So it's a really important tool for us.

It also gives us great visibility on kind of how install costs are trending, how they trend from one dealer to the next, one region to the next.

It's just an incredible amount of data for us.

And it's been something that's been a huge part of how we've focused on growing that market, in spite of not having any major events.

I think it really paid off for us.

As we said during the third quarter call, we saw IHC rates that we had never seen before because we hadn't pressure tested the tool.

So it's been great to watch that.

The upside to that is all in the data that we get.

Yes, that's helpful.

And maybe a follow-on.

Rolling out remote monitoring capabilities, initial reception, how that's trending.

Yes.

So the product line is going to launch here in April/May timeframe with standard remote connectivity.

We think that this is again another major initiative, major differentiator between ourselves and competitors.

But probably even more than that, because I think what's really important is this connectivity layer that we're putting in and we're developing in all in-house, we've been working on it for the last couple years and it'll be across the product line, there'll be different levels of service, of course.

There's a pay level of service, there's a freemium level of service.

But I think what's really important is, longer term, when you think about that, it's not only that we can give the homeowner and the dealer better information about their product, and it's all about the uptime of an emergency product, but we see a market in the future that could develop where these assets, these generators, as opposed to being singularly used and as an emergency backup only, could be deployed in a different fashion.

They can be deployed as part of a business's energy strategy or a homeowner's energy strategy to help reduce their energy cost.

And the connectively layer makes that all possible.

We haven't talked a lot about this as part of our lead gas initiatives and strategy.

And you're going to hear more about that going forward.

But the term distributive generation, demand response, these are terms that, in particular, have always kind of centered on the commercial and industrial part of the market and they've kind of come in and out of favor based on where gas prices are and utility prices are.

But we see this as a major market opportunity for us in the future across our entire business line.

And we think residential's going to play a role in that.

It's going to be pretty cool to watch this develop over the next few years.

But that connectivity layer is central to it.

Great.

And maybe if I could just --

(technical difficulty)

And our next question comes from Charlie Brady with SunTrust Robinson Humphrey.

Just on the mobile product side, that's an area that's been pretty strong for almost a year.

As we go through, I guess it started in Q1 of last year towards sort of like tail end.

Do you have a sense -- it sounds like it's still kind of going pretty strong into '18 here.

Do you have the sense as to length of time until it gets, I don't want to say it's a restock saturation, but you've kind of soaked up this demand because of a lack of buying during the energy patch downturn when they were rotating product outside of energy into other areas?

I guess I'm trying to get an idea of the length of how long we might see this kind of rapid growth in mobile.

It sounds pretty good.

Yes.

So Charlie, we have the information we get from our customers.

And we're talking to all the major and independent rental companies out there.

There's a couple of factors.

First of all, actually, the oil and gas piece of that is only in the early innings.

With oil prices only really recently getting into a range where oil and gas exploration and production have begun to ramp, the products that serve those markets, the lighting towers, the gens, the heaters, pumps and things that we manufacture, are really starting to only now improve in terms of our order rates.

I think up until this point it's really been about general re-fleeting.

The fleets went through kind of an extra year or 2 of the rental companies kind of holding onto those assets before -- the secondary markets were depressed.

So in terms of getting the returns that they're looking for and the utilization rates were depressed, they held on to the equipment as opposed to turning it.

And so that refresh cycle has been ongoing.

And actually, that's still – no, we're probably more middle innings on that.

When we talk to our customer base there, it feels like the majority of 2018 could be a pretty solid year that we're planning for it as such.

In terms of our production capacities and our supply chain readiness, we're attacking that pretty vigorously.

We think that there's going to be a window here to race for, kind of share of that market and make sure that we not only maintain our share but maybe even grow our share opportunistically by taking some bigger bets on whether it's inventory safety stock or some other, could be finished good safety stock there, as the fleets, as the rental companies deploy CapEx throughout the year.

Just looking at the public comments that many of the rental companies have made, clearly, CapEx spending's going to be up this year versus prior years.

And then I think a lot of those comments were made really prior to the Tax Reform Act, which could have an added bonus there, both literally and figuratively, in bonus depreciation.

So the ability to accelerate depreciation on purchases of capital equipment here over the next several years could lead to maybe an exacerbated fleet refresh cycle as a result of that.

So we have to wait to see.

We're still evaluating that.

But that's how we view it.

Okay.

Just as a follow-up, I just want to go back to your comments.

I guess in prepared remarks you talked about the seasonality this year.

And you talked about first quarter representing the low point for net sales for the quarter as a percentage of total year.

And I'm just trying to square that up because you've got obviously a second half pretty tough comp, as you mentioned, in resi, and you've still got some flow-through, at least a little bit of backlog coming out of Q4 from the hurricanes.

Is it a function of the mix between the resi and the C&I that drives that?

So you've got some offsetting there?

I'm just trying to --

(technical difficulty)

Yes.

I mean, I think the way we've laid it out, Charlie, I mean, given the seasonality of the residential business even with some backlog coming into '18, that Q1 is always the low point of the year.

And I think in looking at how we're laying things out, we think it's going to be more indicative of sort of the longer term average.

So if you look at first quarter as a percentage of the total year, the last couple years it's been low relative to the longer-term average.

We think Q1 with the benefit of some of that excess resi backlog [coming into the year], it'll be more normalized.

And then it'll build from there.

That's just sort of the way the resi side of the business works.

And then on the C&I side, I guess we just expect some building throughout the year as well, so --

I think the important thing there is, without the assumption of any major events, resi's more level loaded for the year.

And Q1 still being…

More so than normal, yes.

More so than normal.

Much more so than normal.

And again, I think we said that in the prepared remarks.

But it's really the assumption of not having outages, major outages in the guidance.

Yes.

And our next question comes from Christopher Glynn with Oppenheimer.

On the overall pricing and cost inflation curve, just wondering if you're in kind of a steady state of balance there or if there's some call out on the gross margin impact in the first half verse the second half?

Just because the mix of lead times to price realization for a lot of companies is sort of all over the map.

So just trying to figure out where you guys fit there.

Yes.

I mean, we look at both commodities and currencies and look at our lags.

And many, I think to your point, it varies depending on the supplier.

But on average, there may be 3 to 4 months of passing on a particular commodity movement or currency movement with the supply chain.

And then it might be another 2 to 3 months to get through inventory.

So I mean, there can be some pretty long lags relative to when we see a commodity move or a currency move to when it shows up in our financial statements.

And that really gives us time, actually, in terms of executing cost reductions as well.

So I think we've seen with the weakening of the dollar, there are some things that we're looking at there and we're watching it closely.

But commodities have moderated a bit here, but we're watching it close and have forecasted them accordingly with the appropriate lags.

Okay.

So it sounds like you feel you're pretty well balanced currently with the good price inputs?

Yes.

I mean, that's the key is we believe that the pricing environment will be more favorable to help offset that.

Okay.

And then in the outlook for 2% to 3% organic for the year, sorry if I missed it, but could you kind of give some qualitative comments on resi verse C&I in that?

Yes.

I think as far as resi goes, I think we quantified that, I guess call it the headwind from portables that if you don't assume a major.

So I think the portables year-over-year will be down, but we believe home standby will see some nice growth, obviously heavier in the first half versus the second half from a growth perspective.

But we think that home standby growth will help to offset that portable headwind.

And on C&I there's a number of pieces there.

But that mobile business Aaron just alluded to, we believe we're going to see some very strong continued growth in the mobile side.

And that International segment, we're going to continue to see some very nice growth there as well.

So again, expect some strong growth out of the C&I side.

And our next question comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could just expand on the comments around the operational plan to ramp up production for the mobile business.

Can you just maybe share lead times with us, where they stand today?

How you assess the bottlenecks for particularly that part of the business?

And on the flip side, Aaron, you spoke about ramping up faster on the standby genset side in this post-storm period.

Can you talk about where lead times stand today compared to 3 months ago and what's the operational plan to scale that down from an employee standpoint, et cetera?

Sure, Jerry.

So on the mobile products side, it's really about adding shifts, manpower to achieve some of those higher levels.

In terms of kind of lead times on those products today, it depends on the product.

But if you looked at a typical lighting tower, I mean, the lead times are getting extended there depending on the configuration.

I mean, in fact, for us, we've seen most of our production get booked up here in Q1, and we're kind of booking slots now into Q2.

So now that can change if we can continue to ramp.

Where we're starting to see some potential constraints there is in some of the supply chain.

Some of the major engine suppliers in those product ranges are beginning to also feel tightness and are pushing out lead times.

So that's actually impacting us more.

Frankly, if we could get some of the engines, we could build more product here.

But it's starting to tighten up.

So now, we have other engine partners and so we're bringing those online as well.

But it's the normal stuff you run through when you grow as quickly as that business has rebounded.

On the standby side, my comments were about the residential standby.

We were really able to ramp a lot quicker in response to the active storm season this past fall in that business than maybe the last comparable in 2012 with Sandy, for a couple of reasons.

One, we had more safety stock of components.

Two, we had gotten our supply chain into a position this time around to be able to supply more product more quickly.

And three, through a continued investment in automation and other improvements in our efficiencies on the actual assembly of the products, we're just able to get there quicker.

And as far as the ramp down on the other side of that, there's a normal attrition rate that takes place in any manufacturing environment that we would see, I think we'll be able to achieve that.

We do want to make sure we've got appropriate levels of inventory both in our stocks as well as in the field going into the next season.

So that ramp down won't be a cliff.

It's kind of a you kind of gradually decline down, you let attrition kind of take over there.

And then you get into a position where you're ready for the next storm season.

So we feel really good about where we're at in that cycle today.

And I think the benefit of having pressure tested that whole kind of ramp up/ramp down I think only goes to benefit the company in the long run when we see this kind of episodic events happen.

And Aaron, on the lead times for the standby product, can you just give us an update or maybe comment in a different way?

Where are incoming order rates versus production for this quarter?

Yes.

So what I can say about that, Jerry, is our lead times for products really in the kind of Q3 to Q4 range were out 2 to 3 weeks depending on the products, on average, and today they're much nearer inside of 1 week.

So we've been able to, as we said in our prepared remarks, there was a little bit of backlog coming into the beginning of the year, nice little backlog there, excess backlog as we would say, that we worked down here into January and February.

And today we feel it's a pretty good balance of what we're seeing.

And I am not showing any further questions at this time.

I would now like to turn the call back over to Aaron Jagdfeld, President and CEO, for any further remarks.

We want to thank everyone for joining us this morning.

We look forward to reporting our first quarter 2018 earnings results, which we anticipate will be at some point in early May.

With that, we'll bid you a good day.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program and you may all disconnect.

Everyone have a wonderful day.