Generac Holdings Inc (GNRC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Genarac Holdings, Inc. earnings call. My name is Janeida and I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. York Regan, CFO. Please proceed.

Good morning everyone, and welcome to our first quarter 2012 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, our President and Chief Executive Officer.

We will begin our call by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Genarac or its employees may contain forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or our SEC filings for a list of words or expressions that identify such statements and the associated risk factors.

In addition, we'll 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'll now turn the call over to Aaron.

Thanks, York. Good morning everyone, and thank you for joining us today. We're pleased to report our first quarter 2012 results this morning which we believe demonstrates our strong execution and the significant earnings power of Genarac as we recorded $294.6 million in net sales and $75.8 million of adjusted EBITDA for the quarter.

Demand for our products increased to record levels following the multiple outage events that impacted the US during the second half of 2011 and was a large driver of our 138% year over year sales growth. Our ability to rapidly respond to this substantial increase in demand is a direct result of the efforts of our dedicated work force and our flexible operations. With the significant increase in production during the quarter we were able to improve lead times for our products allowing us to quickly fulfill the increased demand that occurred in the second half of 2011 and into the first quarter of 2012.

With only 2.5% of US households owing a standby generator, we believe last year's outage events have created significance awareness for this growing product category. As we have experienced in the past, we expect this increased awareness will accelerate the adoption of these products leading to a new and higher base line for home standby generator demand over the longer term.

In addition to increased home standby sales, we also saw considerable strength in portable generator shipments as we continue to gain share in this market. Our success in portable generators after reentering this product category less than four years ago further solidifies our leading position in providing a full set of back up power solutions for the residential market. Also, while we are still in the early stages of both programs we were encouraged by the first quarter results related to our recent residential product introductions of power washers and Honeywell licensed generators.

In addition to executing on the significant increase in residential product demand, the Magnum Products acquisition also contributed to our year over year sales growth as end market demand for portable power equipment remains strong. With little to no overlap with Genarac's products, distribution channels and end markets. the Magnum acquisitions brings further diversification to our business, while also providing cross-selling opportunities for our sales team.

As we further integrate Magnum's operations we are on track to achieve our cost synergy targets. We commented last quarter on our view that the Magnum acquisition will prove to be an attractive use of shareholder capital, and after two quarters under Generac's ownership, we continue to see Magnum as a complimentary and strategic investment.

Our significant organic revenue growth and the Magnum Products acquisition combined to drive a substantial increase in net income, earnings per share and free cash flow for the quarter. We have generated over $180 million of free cash flow over the last twelve months ended March 31, 2012. The free cash flow generation capabilities of Genarac are what set us apart from many of our peers. Our attractive margins, efficient use of capital and favorable tax attributes have allowed us to significantly reduce our outstanding debt as we have paid down approximately $156 million over the last six quarters.

As a result of our strong free cash flows, we are also announcing a special cash dividend this morning of up to $10 per share. Our ability to return a significant amount of capital to shareholders is attributable to our strong conversion of EBITDA to free cash flow which has led us to achieve our stated leverage target of two times consolidated net debt to EBITDA.

As part of this proposed special cash dividend, we plan to execute a recapitalization in which we intend to incur, subject to market and other conditions, approximately $650 million of additional debt to fund the special cash dividend. This special dividend will highlight for our shareholders the value of the cash flows from our business, and we are confident that our business model will allow us to accommodate this additional leverage.

We believe the current financing markets afford us a cost effective and flexible source of capital to execute this transaction. And we believe our new capital structure will provide us with the flexibility to further invest in future organic growth initiatives as well as pursue additional bolt on acquisitions that fit our strategy. I would now like to turn the call back over to York to discuss first quarter results in more detail. York.

Thanks, Aaron. As previously mentioned, net sales for the first quarter 2012 were $294.6 million. A 137.6% increase as compared to $124 million in the first quarter of 2011. On a pro forma basis when including the results of Magnum Products for the entire period, last 12 month net sales as of March 31, 2012 were $1.038 billion.

Looking at net sales by product class, residential product sales increased 153.1%, to $175.1 million in the first quarter of 2012, from net sales of $69.2 millionin the first quarter of 2011. Genarac once again experienced robust shipment levels of home standby generators as a result of the increased awareness of these products caused by the multiple major outage events that occurred during the second half of 2011.

As we have previously stated, the majority of our residential product sales relates to home standby generators. In the first quarter of 2012 we experienced significant year over year growth in shipments of these products through a combination of increased production rates along with continued strength in order rates in comparison to the prior year. As Aaron mentioned, as a result of our significant increase in production rates for home standby products during the first quarter, we were able to improve the lead times for these products helping to fulfill the surge in demand which followed the 2011 major outages.

With regards to portable generators we continue to see strength for these products during the first quarter of 2012 with strong double digit growth verses prior year. We once again expanded our shelf space at retail with our portable generator product line, and as a result, we believe we expanded our market share and now hold a leading position for these products in the US market.

Also contributing modestly to the revenue growth for residential products in the first quarter of 2012, was increased revenue from our power washer product line, and our Honeywell licensed generators which were first introduced in the first and second quarters of 2011. We continue to roll out distribution for these products and we are encouraged by our progress to date.

Looking at our commercial industrial products, net sales increased 137% to $105 million in the first quarter of 2012 from $44.3 million in the first quarter of 2011. The increase in net sales was primarily driven by the Magnum Products acquisition, strong shipments of natural gas gen sets into the industrial dealer channel and increase shipments to industrial national account customers.

In addition, net sales during the first quarter also benefited from the resolution of certain previously delayed shipments caused by a short-term shortage in the supply of certain components sourced overseas. As a reminder, there can be some variability in our C&I product shipments from quarter to quarter, primarily due to the timing of capital spending by our national account customers.

With regards to Magnum, results during the first quarter 2012 came in above our expectations as strong demand from energy and construction and markets continued. Key drivers of growth for Magnum include the replacement of aging fleets by rental equipment companies, the overall expansion of rental fleets due to an ongoing secular shift toward equipment rentals and continued market share gains with Magnum's mobile generator, and mobile pump product lines. Looking forward, we expect to take advantage of future cross-selling opportunities as we have had some early successes with Genarac's industrial national account customers purchasing Magnums mobile generators and we continue to attract a number of cross-selling leads across sales teams.

Our progress to date with the integration has been very favorable as we work towards our goal of achieving roughly $2 million in cost synergies. Much of the saving we are projecting will come primarily as a result of improved purchasing scale, with certain components and commodities as well as from improved utilization and efficiencies in Magnum's operations. We will continue to realize these cost synergies throughout 2012 and remain on track to achieve the full realization on an annualized basis by the end of the year.

Our other product sales category improved to $14.5 million in the first quarter of 2012, an increase of 38% from prior year first quarter sales of $10.5 million. As a reminder, this product category is mostly comprised of the sales of after market service parts as well as loose engines to lawn and garden OEMs. The increase in the other product category primarily relates to the contribution of parts revenue from the Magnum acquisition, elevated service part sales as a result of focused initiatives to drive increased parts sales to our distribution partners and increased parts demand that was generated by the major outage events that took place in recent quarters.

Gross margin for the first quarter 2012 was 37.7%. compared to 36.8% in the fourth quarter of 2011 and 38.1% in the prior year first quarter. The mix impact from the addition of Magnum Products sales reduced total Company gross margins by almost 200 basis points during the first quarter of 2012 as compared to the first quarter period last year. Mostly offsetting this decline, gross margin during the first quarter was impacted favorably by a higher mix of home standby generators and a lower mix of portable generators. In addition, the positive impact from price increases implemented throughout 2011 and improved overhead absorption during the current year quarter was largely offset by higher commodity costs relative to the prior year.

Operating expenses for the first quarter 2012 increased by $15.5 million or 43% as compared to the first quarter of 2011. These additional expenses were driven primarily by increased variable operating expenses on the substantial increase on organic sales, operating expenses associated with Magnum; increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher base line sales levels of the Company and increased incentive compensation expenses as a result of the Company's financial performance during the quarter.

Adjusted EBITDA increased to $75.8 million in the first quarter of 2012 as compared to $27.5 million in the same period last year. Pro forma for the Magnum acquisition when including the results for Magnum for the entire period last 12 months adjusted EBITDA at March 31, 2012 was $245.9 million.

GAAP net income for the first quarter of 2012 increased to $30.1 million compared to $4.8 million for the first quarter of 2011. It is important to note the first quarter 2012 includes a more normalized GAAP tax rate of 38.8% as compared to a tax rate of 1.9% in the prior year first quarter.

As previously discussed, prior to the fourth quarter of 2011 a full valuation launch was recorded with regards to the Company's net deferred tax assets resulting in a nominal effective tax rate. As was first the case in the fourth quarter of 2011, a full valuation allowance is no longer required with regards to the Company's net deferred tax assets and therefore a full tax provision was recorded in the first quarter of 2012. We expect to have a normalized tax rate in the 38% to 40% range going forward, given there is no longer a valuation allowance to offset.

More importantly, we will continue experiencing significant cash tax savings from our favorable tax attributes which include a step up in asset bases and NOL carry forwards relating to the 2006 change in control transaction, and to a lesser extent the recent Magnum acquisition, which are expected to generate significant cash tax savings into the future. As a result, we believe we will not be paying federal income taxes for the foreseeable future, which is the reason we are only reflecting cash taxes in our adjusted net income calculation.

Adjusted net income as defined in our earnings release, increased to $66.1 millionversus $17.1 million in the prior year first quarter. The substantial improved is attributable to improved operating earnings during the quarter, resulting from the 137.6% increase in revenue, including the incremental results from the Magnum acquisition.

Interest expense in the first quarter 2012 declined to $5.7 million compared to $6 million in the same period last year. The slight decline in interest expense was a result of approximately $82 million in debt prepayments over the last 12 months, mostly offset by a modest increase in the weighted average cost of capital -- cost of debt.

Diluted net income per share for the first quarter was $0.44 compared to $0.07 per share in the first quarter of 2011. Adjusted diluted net income per share as reconciled in our earnings release, was $0.96 for the current year quarter compared to $0.25 per share in the prior year quarter.

Free cash flow, defined as net cash provided by operating activities less capital expenditures was $36.4 million in the first quarter of 2012 which was up significantly from $11.1 million in the same period last year. Strong operating earnings were partially offset by increased working capital investment driven by the replenishment of inventory levels to support higher product rates and seasonal build requirements. Inventory was purchased during the first quarter to support the significant increase in production for home standby generators.

In addition, as we prepare for the upcoming summer storm season, we are replenishing finished good inventory levels that were depleted in the second half of 2011. Free cash flow over the past 12 months was $183 million representing 93% of the adjusted net income reported during that time period.

As we announced today, the Company's pursuing a recapitalization to fund a special cash dividend to shareholders. Before discussing further details about the transaction, we want to review our current capital structure and recent trend in leverage ratios. Looking at our capital structure as of March 31, 2012, we had $573.7 million of term loan debt outstanding net of unamortized original issue discount and $91.7 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $482 million and a consolidated net debt to [LTM] adjusted EBITDA leverage ratio of 2.0 times. This compares to a 3.7 times net debt leverage ratio at March 31, 2011.

Historically, we have demonstrated the ability to pay down debt through our strong free cash flow generation. Specifically, total debt has been reduced by $156 million during the past six quarters using cash on the balance sheet, resulting in a significantly improved leverage ratio. The Company's net debt to adjusted EBITDA leverage ratio has declined from 4.1 times at the end of the first quarter of 2010, to 2.0 times by the end of the first quarter 2012.

I would now like to provide some additional details regarding our announcement of our proposed special cash dividend to shareholders. We are currently pursuing a recapitalization in which we intend to incur, subject to market and other conditions, approximately $650 million of additional debt to fund in large part the special cash dividend of up to $10 per share on our outstanding common stock.

As part of this transaction, we expect to enter into new debt financing in the aggregate amount of approximately $1.2 billion which is expected to be comprised of $800 million of senior secured debt, and the remaining in senior unsecured financing. The proceeds from the new debt financing will be used to pay the special cash dividend and to refinance our exiting credit facilities.

In addition, we anticipate our current $150 million unfunded revolver will be replaced with a similar size asset backed revolver. The declaration of the special cash dividend is conditioned upon obtaining new debt financing under acceptable terms.

We currently expect our Board of Directors will declare an authorized payment of the special cash dividend before the end of the second quarter of 2012. Given our strong free cash flow conversion, which includes minimal cash taxes from our significant deferred tax assets, we're very comfortable in our ability to continue funding our growth initiatives while also servicing our debt. With that, I'd now like to turn the call back over to Aaron to provide some additional comments with regards to our 2012 outlook.

Thanks, York. Primarily as a result of our increased full year outlook for residential sales, we are revising upward our guidance for full year 2012. Previously, we were forecasting net sales to increase at a mid to high teens rate as compared to 2011. We now expect the total net sales will increase at the high end of this range growing at a projected high teens rate as compared to the prior year.

Our revised guidance continues to assume no material improvement in the macro economic environment, and no comparable major outage events during the balance of this year. Specifically, for the second quarter of 2012, total net sales on an as reported basis are forecasted to increase between 35% and 40% in comparison to the second quarter of 2011.

As we commented during our last call, lead times for home standby generators at the end of the fourth quarter 2011, extended out as far as eight to ten weeks for our most popular models. The accelerated ramp in our productions rates for home standby generators since the beginning of the year, coupled with a mild winter which enabled the installation of these products to continue throughout the season, has helped to bring lead times at the end of the first quarter down to approximately three to four weeks.

Looking forward, we expect demand for home standby generators to remain strong over the next several quarters relative to the most recent comparable periods with no major outage events. This expectation is due to the after glow the Company historically experiences after major power outages as homeowners look to protect themselves future outages.

As the initial surge and demand levels off, we believe that the awareness and additional distribution points added will create a new and higher base line level of demand from home standby generators as we move towards the second half of 2012. Increased awareness of home standby generators combined with a more targeted approach to finding prospective buyers for these products as well as greater distribution, are all contributing factors for the base line growth of this product category.

As a result, total Company net sales for the second half of 2012 are expected to increase at a high teens rate, in comparisons to the previous base line level experienced in the second half of 2010, which again, is the most recent comparable period with no major outage events. For reference, total Company pro forma net sales for the second half of 2010 were $374 million.

Consistent with our previously issued guidance, gross margins are expected to be approximately flat during 2012 compared to the prior year. The unfavorable mix impact of adding Magnum products is expected to be offset by a higher sales mix shift towards home standby generator shipments and a lower mix of portable generators. Additionally the realization of price increases, improved manufacturing overhead absorption, commodity cost moderation, and cost reduction projects should also impact gross margins favorably throughout the balance of 2012.

In line with our previous guidance, as reported consolidated operating expenses as a percentage of net sales, excluding amortization of intangibles, are expected to be slightly higher as compared to 2011 as we continue to invest in our infrastructure to support our strategic growth initiatives and our overall higher level of sales. As a result of this revised outlook, adjusted EBITDA for the full year 2012 is now expected to increase in the mid teens range compared to 2011, while second quarter 2012 adjusted EBITDA is expected to increase in the mid 20's percentage range over the comparable period prior year.

In closing, we believe our first quarter results clearly provide a tangible example of the significant earnings power of Generac business model. We have continued to grow revenues through product innovation, expanded distribution and increased awareness of home standby generators. Our power ahead strategy which we implemented less than two years ago has served as a template for our investments in the Company.

In addition to the accomplishments over the last several quarters, we continue to make important progress on a number of our powering ahead related initiatives that we expect will drive our longer term growth. These initiatives are linked to each of our four strategic objectives of growing the residential market, gaining share in the commercial and industrial market, diversification through new products and services and expanding our geographic reach.

In addition to our powering ahead initiatives, we believe we are well positioned to capitalize on the powerful macro growth drivers for our business. In particular, prolonged under investment in the aging electrical grid in the United States is leading to more frequent and longer power disruptions for homeowners and business owners. With the broadest product offering in the industry, we believe Genarac is well positioned for the longer term opportunities that will result from the continuing increase in demand for back up power.

Our leadership position in natural gas generators in particular, is allowing us to capitalize on the secular trend away from diesel fueled units and towards cleaner burning more cost effective natural gas fueled solutions. Add to these macro drivers a potential future recovery in residential investment and nonresidential construction, we believe our prospects for growth are very compelling.

This concludes our prepared remarks this morning. Thank you, again, for joining us. At this time we'd like to open the call up for questions. Operator.

(Operator Instructions). Your first question comes from Zach Larkin with Stephens. Please proceed.

Good morning, guys. This is Chris Godby in for Zach Larkin at Stephens. Congratulations on the quarter.

Thanks, Chris.

Thanks, Chris.

So first of all, the $370.4 million number that was for the second half of 2010 proforma including Magnum, correct?

Correct.

Okay, great. And then looking ahead for the remaining three quarters this year, how should we maybe think about seasonality this year? Would you expect it to follow typical patterns that you have seen in the past?

I think, Chris, that's how we are viewing it. In years without a storm -- or excuse me -- in years after a year of storms like we had last year, we typically see seasonality take a little bit different track with the first half of the year being more robust than the second half. And that, of course, is assuming that there are no major comparable events in the second half of this year.

Okay. Makes sense.

Yes, I think our guidance for second quarter, talking about second quarter being up 35% to 40% compared to second quarter of 2011, that gives you some guide as to how that is playing out. And then I think the second half statements in terms of that newer and higher base line compared to similar turns with out outages, again, those forecasts are assuming no major outages for the balance of 2012. Our guidance would indicate how that would play out.

Great, that make as lot of sense. And then can you talk a little bit more about how the mild winter effected you in the quarter? It seems like maybe we had a little bit of a pull forward effect in terms installations? Could you maybe talk about that a little bit more.

I think there's probably two ways to look at the mild winter. Certainly from an installation standpoint, our distribution was able to get out in areas of the country like the Northeast and the Midwest, where typically in January or February it would be awfully difficult to install these products. So we traditionally see installs slow down at that time of the year. But with the winter playing out the way that it did, distribution was able to continue to install and therefore we believe work down their own backlog internally, if you want to think of it that way, if they had orders they had taken and they were waiting to install product.

At the same time we had ramped up our production very aggressively. And so the combination of our ramping up our production very aggressively in Q1 and the combination of the installers and distribution being able to be continue to put those products into the field, we are able to work down the lead times very quickly, again, from that eight to ten week range at the end of the year to something in the three to four week range. That's the one side of the answer, Chris. The other side of it is obviously with a mild winter, although we were able to increase our portable generator sales at a good clip year over year in terms of the first quarter numbers, a lot of that was due to pick up in shelf space we had and some pipeline fill coming off the strong second half of last year.

But right now inventory is at a pretty good level, I would say, going into the season is. Normally at this point retailers may be looking at restocking more aggressively ahead of the season, because if normal winter weather plays out they generally have regions of the country where they are depleted as a result of winter weather, but that of course didn't happen this year.

Okay, great. And then one final question for you. Can you maybe discuss the competitive environment you are seeing right now? In particular, can you give us a update on what you believe your market share is in your end markets currently?

Sure. As we have stated on the residential standby side, we believe our market share remains in the 70 percentile range. It's a market that there's not a lot of tracking information out there. So those are management estimates of course, but pieced together we think to the best of our ability.

On the portable generator side as we've stated in our prepared remarks today, we do believe over the last several quarters we have re-established ourselves as the number one market share player in the US market for portable generators. We believe the market share depending on what you reports you look at is anywhere between 20% and 25% in terms of share. It's a little bit different from units to dollars, but it's roughly in the same range in that 20 to 25 percentile range.

On the C&I side of our business. If we just look at total C&I ex-Magnum here for a second, we believe that in a stationary products market our market share is somewhere in that 12% to 15% range, and then Magnum holds a leading share position in North America in light towers. Again, we publicly stated that that's somewhere in the 30%-plus range, and they are an up and coming player in the mobile generator and mobile pump space.

Okay, great. Thank you very much for taking my call.

Your welcome.

Thanks, Chris.

Your next question comes from the line Jerry Revich with Goldman Sachs. Please proceed.

Good morning.

Good morning, Jerry. How are you?

Good morning.

Good. I'm wondering, gentlemen, if you can give us a update on your product development plan on the industrial and natural gas generator product line? Any size, range or extensions that you're considering. And also I'm wondering if you can give us some more context on the rising interest level you are citing in natural gas over diesel generator for these applications? Perhaps quantify that with order rates and inquiries so far this year.

Yes. It's a good question, Jerry. The natural gas obviously has come to the forefront here most recently. We have been very focused on that niche end of the market for the last 20 years, so I guess we're finally in vogue when it comes to nat gas.

We have developed a lot of technologies and capabilities around natural gas; not only in the residential side, clearly, where we dominate that space, but also in the light commercial and industrial space where we have continued to see, as you mentioned it and as we mentioned in our prepared remarks this morning, a long term secular shift that is starting to accelerate somewhat here toward natural gas. A lot of that shift is occurring as a result of diesel products becoming frankly higher priced.

Diesel engines have become much more complex due to the regulatory environment over the last seven to eight years. And it's not that natural gas gen sets are any less clean or less complex, it's just frankly the fuel source as it starts out is cleaner than diesel is. And as it is cleaner it needs less pre-treatment and less after treatment in terms of what we need to do with the emissions of the equipment.

So what we're seeing in our own product line in terms product development we have got the largest natural gas product line in the industry. We continue to add positions to that both on the top side of that product line in terms of going larger into C&I, as well as down in the light commercial space where we have made a number of changes to our product relative to the engines that power those products around certain engine ranges where we are now the manufacturer of certain of those engines. So that's changed for us here recently in the last couple of years, and we believe gives us an improved position as it relates to supply and also cost position in many of those products.

I think as far as trends that we're seeing here, again, we've been seeing a long term shift, but that is beginning to accelerate. And as we have said, the long-term growth rates for gas sets we believe -- or spark igniters as it is referred to in our industry -- we believe are going to continue to grow at a rate that out strips that of diesel.

Natural gas you don't have the storage issues that you have with diesel. You have got first piece costs that in a certain range of products you get under 200-kilowatts and smaller products that you would use in light commercial applications like small footprint retail stores, restaurants, C-stores, bank branches, health clinics, things of that nature. The first piece cost advantage of natural gas over diesel is sometimes as much as 25% or 30% of the cost of the machine. So that clearly from a return on investment standpoint for a business makes the natural gas power generator a pretty attractive investment.

And, Aaron, on the second part of the question, can you just quantify the year to date order growth for nat gas powered industrial gen sets versus diesel for your business?

We haven't traditionally broken that out, Jerry, but that's something that again -- we point to the longer term trends are greater for gas than for diesel. That would apply in the short-term as well.

Yes that would translates to our results.

You are seeing that in our results, exactly.

And York, what were your Magnum construction equipment sales in the quarter? And what does your sales guidance imply for the Magnum business for the year?

I guess what I can say is about -- if you look at our growth for the total Company 137.6%, maybe a quarter of that was related to Magnum. So you can get some idea in terms of organic versus Magnum growth. And we're not necessarily breaking out specifically our outlook between Magnum and Genarac, but I think from a C&I standpoint, I think we said last quarter that both Genarac and Magnum's C&I product sales would grow at a similar pace in 2012 from an outlook standpoint.

And, York, I guess since then we have seen some much more positive CapEx announcements out of your rental customers. I'm wondering if you've revised your guidance to reflect that?

I don't think specifically, Jerry. We talked to those guys quite a bit, so our forecast -- our numbers earlier in the year, certainly contemplated that the rental companies were going to be fairly aggressive in CapEx. Obviously with the United Rentals purchase of RSC that's given us pause to re-evaluate. RSC was not a strong customer of Magnum, so there may be additional upside for us there. We are sorting through that and trying to understand how the procurement landscape is going to fall out once the consolidation and integration is completed in that acquisition.

Thank you.

You're welcome.

Thanks, Jerry.

Your next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed.

Thanks, good morning.

Good morning, Chris.

Good morning, Chris.

There's a question on C&I underlying trends and run rates. It seems like the guide has some deceleration at least approaching analogous to residential. I was just wondering how much you think backlog resolution contributed in the quarter? And also what do you think the awareness impact was on the C&I set? We haven't really talked about that.

Yes, so let me touch that first, Chris. The awareness in the C&I generally is a long -- there's much longer tail on that. Homeowners tend to react quicker than businesses do.

For businesses the purchase of a generator tends to be a little more involved, a little more thought out. And there are obviously budgetary cycles and things that you have to work through with businesses that you don't necessarily have as tough a constraints with homeowners on. If a homeowner wants a generator for their home after an outage, they will go out and figure out how to get one. But businesses it is a little bit longer tail to that.

So the after glow for businesses, our history and perspective on that is that that will tend to trail a little bit longer than will the homeowner piece. The homeowner piece will be a little more immediate, and the C&I side will experience that in the Northeast in particular here. Probably over the back half of this year and into 2013, and maybe even a little bit longer.

What it really does is highlight for certain of our national account customer where they have weaknesses in their operations in certain regions of the country. So some of our telecommunications customers in particular, they have focused on building out their networks in the Northeast because there are obviously large population concentrations there. So where they saw power outage interruptions from the events last year, they may decide to elevate their CapEx spending more geared towards projects in those regions around back up power. I don't think we're probably not really reflecting too much of that yet, because again, it is a little bit slower tail.

I would also remind you when you look back at the second quarter last year for C&I, as we have said here, our results can be a bit lumpy as it relates to C&I, because of our national account customers purchasing habits. What we saw last year in CapEx spending for those national account customers in the second quarter was there was some projects that rolled out that we don't necessarily think will repeat this year. So that may be part of the deceleration you are seeing relative to the residential results we are talking about.

As far as the first part of your question the impact of the resolution of the backlog issue related to the component supply chain. We had a Japanese supplier that had issues after the tsunami last year, really about maybe $5 million to $6 million of the C&I sales would be related to resolution of that issue.

Okay. And then on the production levels you hit in the quarter, pretty impressive. Did you happen to engage in any contract manufacturing or anything like that?

On the home standby generator side we did not. We have a very flexible operation here. We pride ourselves on that. And every once in a while when you get events like this, you get to test out how flexible you are.

I was incredibly impressed with our operations team, in particular our supply chain team. We have a very deep supply chain group here in terms of competencies and what we do.

It's not just us going out and hiring people to ramp up our operations here in Wisconsin. That effort has to get repeated throughout our supply chain. And some of that supply chain extends overseas as well as domestically here.

And it is a lot of coordinated effort, and it really outstripped our expectations to be frank. That combined with the ability of distribution to continue installing products throughout the first quarter we think had a pretty material impact on the results. You see that in the lead times really compressing down probably further than we were expecting them to compress, really due to our outstanding execution as it relates to Q1 production ramp.

Thanks, congratulations.

Thank you.

Thanks, Chris.

Your next question comes from the line Jeff Hammond with Keybanc Capital. Please proceed.

Hey guys good morning.

Hey, Jeff.

Good morning, Jeff.

Just on the special dividend. Can you talk about the rational for the magnitude, and how you are thinking about leverage profile going forward? And then if you can give us any sense of what you are thinking in terms of financing costs?

Yes, absolutely. I'll take the first part of the question, and I will let York take the financing cost question, but obviously all tied together. The magnitude of the special dividend, Jeff, we analyzed a number of different scenarios and looked at really what is -- I'll step back a second -- we have said from a priorization of the uses of our cash in the past we have said we wanted to focus on prioritizing cash towards paying down debt, and we had a stated leverage target to be in that 2.0 times. Really we said 2.0 times to 3.0 times range on a consolidated net debt basis to EBITDA. And frankly, we hit that.

We achieved it very quickly here in the last couple years. And we got to that point this past quarter and it just made sense to re-evaluate our uses of cash. In terms of the magnitude of the dividend, we thought that one of the things we thought we needed to do was find a better way to highlight the free cash flow of this business for our shareholders and really bring that discussion to the forefront.

We have some really unique attributes in this business. They extend from obviously the margin profile of the products that we sell to the capitol efficiency -- or the efficiency with which we deploy capitol at the Company. And even more important is the tax attributes that we've got that were generated back in the transaction back in 2006. I think that in order to really evidence the impact and the power of the free cash flows of this business, we felt that some amount of special dividend would help us do that.

The right amount -- you can pick a range, but we settled on $10 because we felt that from a leverage profile standpoint, and it's 5.0 times leverage, but I think when you look at 5.0 times, I think you have to put that in perspective as it relates to analyzing that against a peer group of industrial technology companies. I don't think it's fair to say that 5.0 times leverage for Genarac is necessarily translated into the same leverage ratio for other similar businesses because of the tax attribute. I would say that's probably the primary thing that I don't know exists in other companies.

So I think when you look at that and our ability to convert our EBITDA to free cash flow, 93% here in the last 12 months, I think that strong free cash flow conversion is, again, you put all that together and we're very comfortable with that 5.0 times leverage. We are going to work that back down again and we think our forecast here, we are going to continue to prioritize towards paying down debt.

We also wanted to leave ourselves in the new capital structure the flexibility to do a lot of the aggressive things we are doing right now. We're growing very aggressively organically, and from bolt-on M&A as well. With deals like Magnum, we wanted to continue to be able to do things going forward. I guess, York, if you want to tackle the --

Yes. I think from across the desk standpoint, today's financing environment is very attractive. And in terms of the rationale you asked bout for this transaction, that plays into the rationale as well.

From a cost to debt standpoint, we believe we can get this transaction done for approximately 7% overall cost to debt. Which again is an attractive rate in this environment.

Okay, great. So essentially you go back to 5.0 times and then you focus on deleveraging again, and assess it in the future?

Right.

I think the way we were thinking about it is we are just resetting our priorities. We achieved our priorities and now we're resetting them if you will.

Okay, great. Can you give us the Magnum revenue contribution in the quarter?

Yes. I think I referred to -- of 137.6% growth year over year, about 25% of that came from Magnum.

20 --

25% of the 137.6%.

Okay, okay. That's overall.

Overall.

Overall total Company.

As reported.

So if we look at 2Q, I'm just trying to understand what was pulled forward. You don't have a particularly tough comp until 3Q, 4Q, and if we back out Magnum coming in, it seems like the core growth is what 10% to 15% into 2Q?That seems pretty modest giving the trends you have been seeing.

Yes, I think Aaron alluded to exceeding our expectations in terms of the production levels and bringing lead times that we referred to. Aaron also talked about how some of our sales from our industrial national account customers can vary from quarter to quarter. So on the C&I side you have got that coming in the second quarter.

Yes. There's a little bit tougher comp coming in the second quarter because of that last year that some of those projects are probably not going to repeat to the same level that they did last year.

Okay.

I think resident growth is still showing strong. Oh, yes. In the second quarter.

If you think about it, Jeff, in terms of quarters, Q1 again as we said, we were really able to ramp up production very quickly, and bring our lead times down. Probably beyond our expectations initially in Q1, just given the flow through of the product at the end market through distribution and then also our ability to ramp up and execute.

Okay. I mean do you have a sense of how much the weather and restock pulled forward in the residential business? Similar to the quantification you called out on the commercial side.

As it relates to home standby generators, not much. There's not much of a restocking effort because there is not much stocking that goes on in that category. There is some, but it isn't dramatic.

I would say again, our comments on portable generators before would probably be -- there's obviously a piece of what happened in Q1 that went to restocking. We also had some new customers that we added in the first quarter for portables that rolled out. There's a piece of that is offsetting probably what would be more of a underlying weakness related to not having had much in the way of outage events in Q1 that would impact our portable demand.

Okay, but on home standby, you've got some help from mild weather in the installations.

In installations, correct.

How would you characterize lead time -- is there still catch up on home standby,or have you caught that up because of the milder weather?

Our lead times are pulling in a little bit further now. We are back down to our normal lead times of inside of two weeks. So we were three to four weeks at the end of the quarter, there's a little bit more pull in that has occurred as we have caught it. Really back through our stated lead times of inside of two weeks.

Okay. Thanks, guys.

Thanks, Jeff.

Thanks, Jeff.

Your next question comes from the line of Tim Mulrooney with William Blair. Please proceed.

Morning, guys. Congratulations on a great quarter.

Thanks, Tim.

Thanks, Tim.

I am calling for Brian Drab. Most of our questions have been answered. One thing I was looking at is the gross margin. I know you guided to flat gross margin in 2012. But as you work to improve the operations at Magnum, do you think that you can get back to the levels that you saw in 2009 and 2010,or is this more of the structural gross margins which we should be looking at going forward?

I think we talked about Magnum, when you layer Magnum on top of Genarac. Initially in the offset it was around 250 basis point impact, and as we execute on the $2 million of cost synergies that should compress that a bit. But I wouldn't expect to make up that entire amount. So I think maybe to answer your question, that would be where we're at today would be more indicative of the line going. More from a mix standpoint.

Okay. That's helpful. Thank you. And just one last thing, I noticed your G&A was down quite a bit on a sequential basis. Is that because of the fourth quarter? Had a few one time things going on, or is this first quarter G&A representative of what we should expect for the rest of the year?

Well, sequentially I guess it's up a little bit. But I think there's incentive comp in there as well as we've been adding infrastructure to support our growth initiatives, so I think those are a large part of the drivers,as well as the variable costs and what not.

Okay, thank you guys.

And Magnum rolling in the fourth quarter had a piece of it too.

Okay, thank you.

Thanks, Tim.

(Operator Instructions). Your next question is a follow up from the line of Jerry Revich with Goldman Sachs. Please proceed.

Hi, thanks. Just a couple of follow-ups. I'm wondering if you can say more about the power washer contribution in the quarter and what type of sales run rate do you expect for that business as we exit the year?

Yes, that business, Jerry, this would be our first season. We launched those products last year. We introduce them in roughly the end of the first quarter the beginning of the second quarter last year. And began to shop them around the customers and did have some customers take those products.

It was a pretty modest contribution, but we like the trajectory of that business. But remember there is some seasonality there. It really is a Q1, Q2 game in terms of power washers.

There could be some more, a little bit maybe around certain events like Labor Day and as you get into the holidays, but primarily it is a spring season type of product. If you can think of more of a lawn and garden type of pattern seasonality wise.

We are very pleased with our placement there so far. The products have been incredibly well received by the end market. A lot of retailers, a lot of big retailers already had their season set this year, and set without us.

And where we've been nibbling on the edges we have gotten some placement in certain parts of the country, with certain of those large retailers, but we are still working through one off promos to test the products and see how they perform with those retailers. We are in the middle of line reviews right now for next year, and we're pretty excited about the prospects for that business going forward.

It is a tough market, it is a competitive market. But we think we've got some innovation there that we are bringing to that market that we believe for the longer term we think we are going to be a player there.

And so based on the line reviews that are completed so far, what's your market position heading into next year, and what's the range of upside if the reviews go as you plan and hit your targets?

Yes, I guess I haven't sat and scribbled out a range of reviews. We aren't going to give guidance from 2013 on the call. But I do think we are in the very low single digit market share right now and we are growing.

There are a couple of manufactures out there that dominate the space. And we have our work cut out for us to be a worthy competitor. They are not going to roll over there and give us the market.

We do think we are going to have to prove our worth for the end consumer, in terms of bringing innovation and feature sets to the marketplace that consumers feel are worth paying for and worth putting the Genarac brand in their garage. As we work through the year, I think we will be able to provide more clarity to that. But right now, there really aren't many of the line reviews that are complete, I think it would be premature for us to comment on that.

And for the residential standby business, can you give us an update on the distribution? You have had a number of training programs over the past couple quarters in the Northeast. I'm wondering if you can give us a distribution count update? And also have you been able to make progress on the Honeywell branded generators, or has it been too tough because of the focus on the core business during the install season here?

Absolutely. So the first part of the question, Jerry, the residential distribution we have done obviously when you get events like we had out East, the other thing that happens in addition to the demand increase for the product, is also we get quite a few interested parties in being dealers for the Company. And so we have expanded our distribution very nicely in the first quarter of this year. Probably from an inflection point beyond what we would normally know in terms of a trend, beyond what we would normally see this time of year.

So right now our distribution is approaching 4,500 dealers at the end of the quarter. We were at over 4,200 at the end of the year. So on a net basis, has been that add. So that has been a nice area for us.

We believe there's going to be -- again, part of our comments about this new and higher base line that gets developed is around adding points of light, points of distribution for the product category, because it is so under penetrated. So we think that's a key component of and so we are really excited about that.

A lot of the training programs that we have done, we have had to accelerate even further because we've added distribution so quickly. We have been scrambling, and again to add the infrastructure here at the Company to support more dealers through more dealer development effort, through more training.

We've got some really cool programs for our dealers that we rolled out recently at the beginning of the year at our dealer forums. We're really excited about where that will take our dealer base going forward in terms of making that more successful at selling the product, and really identifying where opportunities are for sales.

On the Honeywell side, that program also we mentioned in our prepares remarks, but that program has done quite well for us. We found that the HVAC space, which is what we are really targeting with that Honeywell brand, is an area that's ripe for opportunity relative to the sheer number of dealers and distributors in that space that could use a product category, in addition to their heating and cooling products. And so it's been very popularly received, obviously in parts of the country like the Northeast that have experienced outages where demand is higher. We are seeing a nice uplift with those products.

Thank you very much.

Thanks, Jerry.

At this time we have no further questions. I would now like to turn the call back over to Aaron Jagdfeld for any closing remarks.

Again, we appreciate everybody's time this morning and we look forward to speaking to you on our second quarter call.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.