Generac Holdings Inc (GNRC) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Generac Holdings, Inc., Earnings Conference Call.

My name is Fab, and I'll be your operator for today.

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

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

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

Please proceed.

Thank you.

Good morning and welcome to our second quarter 2012 earnings call.

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

With me today is Aaron Jagdfeld, our President and CEO.

Good morning and welcome to our fourth-quarter 2011 earnings call.

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

With me today is Aaron Jagdfeld, our President and Chief Executive Officer,

We will begin our call today by commenting on forward-looking statements.

Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see our earnings release or our SEC filings for a list of words or expressions that identify such statements and the associated risk factors.

In addition, we will make reference to certain non-GAAP measures during today's call.

Additional information regarding these measures, including reconciliation to comparable US GAAP measures is available in our earnings release and SEC filings.

I will now turn the call over to Aaron.

Thanks, York.

Good morning, everyone, and thank you for joining us today.

We are pleased to report our second quarter 2012 results this morning, which we believe reflect the powerful macro growth drivers for our business and the continued progress we are making in executing our Powering Ahead strategic plan.

Our second quarter net sales increased 48% to $239.1 million, and on a pro forma basis, our net sales for the last 12 months, as of the end of the second quarter, were approximately $1.1 billion.

Growth in shipments of home standby generators were again stronger in the quarter as the market for this product category continues to further develop with more homeowners becoming aware of the importance of having a backup power system for their home.

Major outage events like the ones recently experienced in the Midwest and Mid-Atlantic regions in late June and early July are further examples of the powerful macro drivers for our business as the prolonged under-investment in the aging electrical grid is leading to more frequent and longer power disruptions for homeowners and businesses.

With only 2.5% of US households owning a home standby generator, we believe the latest series of outages both during the second half of 2011 and again at the end of the second quarter of 2012 have helped to create significant 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 baseline level of demand over the longer term.

As part of our Powering Ahead strategic plan, we have a number of sales and marketing initiatives designed to extend the positive impact that outage events have on home standby generator demand.

In addition to increased home standby sales, we also experienced solid double-digit growth in portable generator shipments as we further expanded placement for these products during the quarter.

Our ongoing success in portable generators after reentering this category four years ago has further solidified our leading position in providing a full range of backup power products for the residential market.

Additionally, while we are still in the early stages of both programs, we continue to be encouraged by the quarterly sales trends related to our recent residential product introductions of power washers and Honeywell licensed generators.

Magnum products has also contributed to our year-over-year sales growth, as demand for mobile equipment has benefited from a secular shift towards renting versus buying and as equipment rental companies replace their aging fleets.

As we have mentioned previously, with little to no overlap with Generac's products, distribution channels and end markets, the Magnum acquisition brings additional diversification to our business while also providing cross-selling opportunities for our sales teams.

We are also making good progress with integrating Magnum's operations and are on track to achieve our cost synergy targets laid out at the time of the acquisition.

After three quarters of ownership, we continue to see Magnum as a complementary and strategic fit with Generac.

Another important driver for our business, going forward, is the increased market interest in cleaner burning more cost effective natural gas fuel backup power solutions.

While still a much smaller portion of the overall C&I market, demand for these products is increasing at a faster rate than traditional diesel fuel generators given their low capital and operating costs.

As a leader in the North American market for natural fuel generators for over 30 years, we believe we are well positioned to capitalize on the secular shift towards these products.

During the second quarter, we continue to see increased year-over-year shipments of natural gas generators providing attractive organic growth for our C&I business.

In addition to capitalizing on the powerful macro growth drivers for our business, we are making important progress in executing our Powering Ahead strategic plan.

This strategy, implemented less than two years ago, has served as a template for our investments in the Company that we expect will drive our longer-term baseline growth.

These initiatives are linked to each of our four strategic objectives of growing a residential standby market, gaining share in the commercial industrial market, diversifying our business through the introduction of new products and services, and expanding our geographic reach.

Commenting specifically on geographic reach, international expansion continues to remain a focus as we look to increase our distribution footprint and support functions globally.

Earlier this week, we announced the signing of a distribution agreement with all power industries of Victoria, Australia, to sell and service Generac branded home standby generators, portable generators, and power washers through their well-established network of over 400 dealers in Australia and 150 dealers in New Zealand.

Even though total single-family households are projected to grow to 9.5 million by 2017, the market for home standby generators in Australia and New Zealand is currently under-developed with no manufacturer having any meaningful level of market penetration.

As such, we see this agreement with all power as an attractive entry point into this market.

Going forward, we will continue to make international expansion a priority, given the significant global market opportunity that exists for backup power generation.

Finally, during the quarter, we paid to our shareholders a previously announced special cash dividend of $6.00 per share.

Our ability to return significant capital to shareholders through a special cash dividend is directly attributable to our strong free cash flow and demonstrated track record of paying down debt.

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

York?

Thanks, Aaron.

As previously mentioned, net sales for the second quarter 2012 were $239.1 million, a 48.2% increase as compared to $161.4 million in the second quarter of 2011.

Looking at net sales by product class, residential product sales increased 33.8% to $123.4 million in the second quarter of 2012 from net sales of $92.2 million in the second quarter of 2011.

During the second quarter, Generac continued to experience a strong double-digit increase in shipments for home standby generators in comparison to the prior year.

The major outage events that have occurred over the past year, combined with the Company's initiative to increase the awareness and availability of home standby generators has helped to drive baseline growth for this product category.

As demand for home standby generators has significantly increased over the last several quarters, we have been able to execute by rapidly increasing our production levels to meet this demand.

With regard to portable generators, we continue to see strength for these products during the second quarter 2012, with solid, double-digit growth versus prior year.

Our broad relationships at retail have provided us with an increase in portable generator shelf space and corresponding market share compared to prior year, further enhancing our leading position in the market for residential backup power in the US.

Also contributing modestly to the revenue growth for residential products during the second quarter 2012 was increased revenue from our power washer product line, which first began shipping in the second quarter of 2011.

Looking at our commercial industrial products, net sales increased 76.4% to $101.1 million in the second quarter 2012 from $57.3 million in the second quarter of 2011.

The increase in net sales was primarily driven by the Magnum Products acquisition and, to a lesser extent, increased shipments of natural gas-fueled backup generators.

Partially offsetting these gains was a decline in shipments to national account customers during the current year's second quarter.

As a reminder, there can be some variability in our C&I product shipments primarily due to the timing of capital spending by our national account customers.

With regards to Magnum, our progress to date with the integration of this business continues to be favorable as we work towards our goal of achieving roughly $2 million in cost synergies on a run rate basis.

Much of the savings 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 and the consolidation of certain administrative-related expenses.

We will continue to realize these cost synergies throughout 2012 and remain on track to achieve a full realization on an annualized basis by the end of the year.

Looking forward, we expect to take advantage of future cross-selling opportunities as we have had early successes with Generac's industrial national account customers and industrial dealers purchasing Magnum mobile generators, and we continue to track the number of leads across sales teams both domestically and internationally.

Our Other product sales category improved to $14.6 million in the second quarter of 2012, an increase of 23.7% in the prior year second quarter sales of $11.8 million.

As a reminder, this product category is mostly comprised of sales of after-market service parts as well as loose engines to equipment OEMs.

The increase in the Other product category primarily relates to the contribution of parts revenue from the Magnum acquisition, increased service to part sales as a result of several initiatives aimed at improving our focus on after-market sales opportunities as well as increased demand for service parts generated by the major outage events.

Gross margin as a percent of sales for the second quarter of 2012 was 36.6% compared to 37.4% in the prior-year second quarter.

The 80 basis point decrease in gross margin percent over the prior year was primarily due to the mix impact from the addition of Magnum product sales.

Partially offsetting this decline was a higher sales mix of home standby generators and the positive impact from certain price increases implemented in the prior year as well as improvements in our overhead absorption and the moderation of certain commodity costs.

Operating expenses for the second quarter of 2012 increased by $11.7 million, or 30.4% as compared to the second quarter of 2011.

These additional expenses were driven primarily by operating expenses associated with Magnum, increased sales engineering and administrative infrastructure to support the strategic growth initiatives, and higher baseline sales all over the Company, increased incentive compensation expenses as a result of the Company's financial performance during the quarter, and, lastly, increased variable operating expenses resulting from the strong double-digit increase in organic sales.

Adjusted EBITDA increased 45.1% to $54.6 million in the second quarter of 2012 as compared to $37.6 million in the same period last year.

Pro forma for the Magnum acquisition -- the last 12 months adjusted EBITDA as of June 30, 2012, was $258.3 million or 23.9% of pro forma net sales during that period, and a $56.4 million increase since December 31, 2011.

GAAP net income for the second quarter of 2012 was $9.3 million as compared to $15.3 million for the second quarter of 2011.

Current year net income includes a pretax charge for refinancing [laying] costs of $11 million, and a normalized income tax provision of $6.4 million.

As previously announced, on May 30, 2012, the Company completed a refinancing of its senior secured credit facilities pursuant to which it has incurred $900 million of senior secured term loans to replace the $575 million in term loan facilities.

Additionally, the Company obtained a $150 million asset-backed revolving credit facility to replace its existing $150 million unfunded revolving credit facility.

The new term loans will mature in 2018 with interest accruing at LIBOR plus 5% with a LIBOR floor of 1.25.

The new revolving credit facility will terminate in 2017 and interest will accrue on drawn proceeds using availability-based pricing grid initially starting at LIBOR plus 2%.

Following the refinancing, the Company used the remaining proceeds from the new term loans, along with cash on hand, to fund a special cash dividend to stockholders of $6.00 per share into pay-related financing fees and expenses.

The special dividend, which was paid on June 29, 2012, constituted a declared amount of approximately $408 million in aggregate of which $404 million was paid in the quarter.

As a result of the refinancing transaction, a nonrecurring charge of approximately $11 million was recorded during the second quarter of 2012 related to financing costs and other related expenses.

Due to higher debt levels and cost of debt from the refinancing, interest expense in the second quarter of 2012 increased to $9.9 million as compared to $5.9 million in the same period last year.

With regard to income taxes, the second quarter of 2012 includes the impact of a normalized effective income tax rate of 40.5% as compared to a tax rate of 0.6% in the prior-year second quarter.

As we have discussed during the last two earnings calls, until the fourth quarter of 2011, a full valuation allowance was recorded on the Company's net deferred tax assets resulting in substantially no tax provision.

In the fourth quarter 2011, it was determined that a full valuation allowance was no longer required on the Company's net deferred tax assets.

Therefore, starting in the first quarter of 2012, a normalized income tax provision has been recorded.

Looking forward, we continue to expect a full-year normalized tax rate in the 38% to 40% range during 2012.

More importantly, though, this expected tax provision rate is virtually all noncash in nature as we will continue to realize significant cash tax savings primarily from the step-up in asset basis and NOL carryforwards relating to the 2006 change in control transaction and, to a lesser extent, the recent Magnum acquisition.

As a result, we believe we will not be paying federal income taxes for the foreseeable future, which is why we only reflect cash taxes in our adjusted net income calculation.

Adjusted net income as defined in our earnings release increased to $39.9 million versus $27.7 million in the prior year second quarter.

The strong increase in adjusted net income is attributable to improved operating earnings during the second quarter resulting from the 48.2% increase in revenue including the incremental results from the Magnum acquisition partially offset by higher interest expense due to the refinancing of the Company's credit facilities.

Diluted net income per share for the second quarter was $0.14 compared to $0.23 per share in the second quarter of 2011.

Diluted earnings per share for the second quarter of 2012 includes a net $0.25 impact from the aforementioned items relating to the nonrecurring refinancing costs and normalized effective income tax rate.

Adjusted diluted net income per share as reconciled in our earnings release was $0.58 for the current year quarter compared to $0.41 per share in the prior-year quarter.

Free cash flow defined as net cash provided by operating activities less CapEx was $17.8 million in the second quarter of 2012 as compared to $13.5 million in the same period last year.

Strong operating earnings were partially offset by increased working capital investment driven by seasonal finished goods inventory replenishment and additional raw material safety stock for rapid demand response.

Free cash flow over the past 12 months was $187.3 million, representing a conversion of 90% of the adjusted net income reported during that period.

As of June 30, 2012, we had $895.3 million of bank debt outstanding net of unamortized original issue discount, and $10.3 million of consolidated cash and cash equivalents on hand resulting in consolidated net debt of $885 million.

Our consolidated net debt to [LTM] adjusted EBITDA leverage ratio at the end of the second quarter was 3.4 times on a pro forma basis as compared to 4.5 times net debt leverage ratio at the time of our IPO in February 2010, and a 2.0 times net debt leverage ratio at the end of the previous quarter on March 31, 2012.

We are confident our new capital structure will allow us to further invest in our future organic growth initiatives and will provide the flexibility for potential acquisitions.

With that, I'd now like to turn the call back over to Aaron for some additional comments on our updated outlook for 2012.

Thanks, York.

As a result of solid execution in the second quarter of 2012, and an increased outlook for residential sales for the third quarter, we are revising upward our sales guidance for full year 2012.

Full year total net sales are now expected to increase in the low 20% range over the prior year, which represents an increase from the high teens growth rate previously expected.

The higher revenue outlook is primarily attributable to an expected increase in portable and home standby generator shipments as a result of the recent power outage events that occurred in the Midwest and Mid-Atlantic regions in late June and early July.

As was the case with our previous guidance, our revised guidance assumes no material change in the macroeconomic environment and no additional major power outage events during the remainder of the year.

Despite the fact that there have been a number of recent data points that suggest a clearly more cautious tone for commercial and industrial markets for the remainder of 2012, our sales outlook for our C&I products for the full year remains largely unchanged, and we continue to expect a low single-digit organic growth rate for the year on a pro forma basis assuming Magnum was included in our results for all of 2011.

On an as-reported basis, we expect our C&I products to be up in the high 40% range for the full year 2012.

Specifically for residential products, we expect shipments for full year 2012 to increase approximately 10% over the strong comparison in 2011.

Consistent with our previously issued guidance, gross margins are expected to be approximately flat for full year 2012 when compared to the prior year.

The unfavorable mix impact of adding Magnum products is still expected to be offset by a higher sales mix shift towards home standby generators and a lower mix of portable generators.

Additionally, the realization of price increases, improved manufacturing overhead absorption, and commodity cost moderation should also impact gross margins favorably for the full year 2012 in comparison to the prior year.

Also in line with our previous guidance, as reported, consolidated operating exists 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 our improved sales outlook, we have also raised our guidance for adjusted EBITDA for the full year as we now expect an increase in the high teens range over the prior year, representing an increase in from the mid-teens growth rate from our previous guidance.

As previously announced, with the refinancing of our credit facility during the second quarter, we are also reiterating our guidance for interest expense for full year 2012.

We expect interest expense to be in the range of $49 million to $50 million, which includes approximately $45 million of debt service costs at current LIBOR rates plus approximately $4.5 million for deferred financing costs and original issue discount amortization for the new credit facility.

Interest expense during the third quarter of 2012 specifically, which is the first full quarter under the new capital structure, is expected to be $17.1 million to $17.3 million, which includes approximately $1.5 million of deferred financing costs and original issue discount amortization.

In closing, we believe our second quarter results clearly provide further validation of the powerful growth drivers for our business.

Execution on our Powering Ahead strategy is leading to revenue growth and overall diversification in our business.

We have continued to grow the Company's top line through product innovation, expanded distribution, and increased awareness for our products.

When considering all of these factors, combined with our competitive advantages and our intense focus, we believe Generac is well positioned to capitalize on the expected increase and demand for backup power.

This concludes our prepared remarks.

Thank you again for joining us today.

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

Operator?

Thank you.

(Operator Instructions) Mike Halloran, Robert W. Baird.

On the guidance side, a lot of color there; appreciate it.

Could you give us a sense, qualitatively, for how much of that increase on the revenue side fell into 2Q and how much you expect to come into 3Q?

I think the bulk of it is something we're looking at in 3Q.

There's a little bit of a beat in Q2 from our prior guidance, so the bulk --

A lot of that, Mike, is the result of the events that occurred -- I think it happened the night of June 29th.

Our quarter ends on June 30th, so there's not a heck of a lot of that event in Q2.

It's mostly in Q3.

And it sounds like, but for that, the back half of the year guidance is unchanged, right?

That would be --

On the top line side.

On the top line side, I think that's the way to think of that, right.

All right.

And then on the international side, really good to see you start seeing some wins on that side after the increased investments you guys have made.

Maybe you could talk a little bit about what other opportunities like this you see in other regions.

Is it a pretty rich pipeline, or is this kind of a one-off type thing?

Basically, what we've done, and this is our approach.

I don't know if it's exactly the right approach, but it's our approach, and I think it fits what we're trying to accomplish here.

But we're taking the globe, and we're looking at regions of the globe that fit our products where believe we can be most competitive and, certainly, where outages are more prevalent.

And we've distilled that down into kind of a roadmap, if you will, for ourselves to follow.

And we started out with Latin America last year, as we've, I think, previously described to everybody on the calls.

We believe Australia and New Zealand market is really kind of a fairly logical step.

Frankly, a fairly easy step for us.

Those markets, you can think of Australia -- Australia is a big island.

A lot of the housing is toward the coastal regions.

They do get some severity of weather similar to the US.

The outages aren't quite the same frequency level as what we experience here in the US, but home values -- single-family home values -- actually eclipse that of the US on average.

So we believe that it's a market that's got some potential.

Certainly, other parts of the world where natural gas -- Australia being an area of the world where nat gas is very prevalent.

Other areas of the world where nat gas is prevalent, you think of Russia, the Ukraine.

There are parts of Latin America where natural gas is becoming a bigger force in terms of a fuel source.

Those would be areas on our roadmap that we're concentrating on.

Good color there.

And then last for me -- could you just talk a little bit about how C&I, the legacy business and as well as, separately, the Magnum business -- how those have tracked through the year and specifically through the second quarter.

If you've seen signs of slowing on the organic side of either of those platforms or has it been a little bit more stable?

Yes, it's a great question.

I mean, obviously, we're peppered with news from other companies and macroeconomic news on the C&I side that should give us pause and, frankly, it does.

We might take the position that we were a bit conservative early on in our guidance on C&I for the full year.

I think we may have suffered a bit for that relative to other companies coming out a little bit stronger out of the gate than we did, but I think the year is playing a bit into our hand relative to -- our business is a late cycle business when we talk about stationary products, in particular.

And so we look for some of those things that are early on that are kind of leading indicators for us.

We saw a few of those things earlier this year.

We started showing that guidance that kind of gave us pause.

The other thing I would tell you, the second half of the year traditionally, in particular, with national accounts for us tends to be a lighter -- the first half is stronger than second half, generally, because budgets dry up.

It's not always the case but, in general, it's kind of a rule of thumb.

So as far as what we're seeing, I think it's playing out along those trends.

I do think there are some areas of concern relative to -- when we look at Magnum's business, in particular; we look at the large national rental houses, just their plans for CapEx spending in 2H versus 1H.

That obviously gives us a little bit more pause.

We think that's appropriately reflected in our guidance here as we've come back out for the second half.

On the legacy business, I think what we're seeing there is -- we still, again, as we mentioned, we like the nat gas space.

That's been, I think, a nice area of growth; continues to be more aligned what we refer to as the optional standby market, so it's geared toward smaller businesses.

Those companies, for which standby power generation is really a business decision, and with nat gas being priced appropriately relative to the capital cost of that equipment as well as the operating costs associated with gas, nat gas has really come on strong as I think a very solid way for businesses to protect revenue streams, inventories, some spoilage and whatnot, in particular in light of some of the outage events that occurred last year.

On the diesel side and, in particular, larger projects appear for us, anyway, in looking at our quote book, and our quoting activity appear to be moving out further in terms of the quote-to-order conversion.

It seems to be taking longer on bigger projects.

So -- I think that's fairly consistent with what we've heard across the markets.

I don't think we're seeing anything that's specific to Generac as much as it is more of some uncertainty forming around the market.

Jerry Revich, Goldman Sachs.

Can you gentlemen just say a bit more about the opportunity in Australia and how meaningful you see that part of the business over the next three to five years?

Maybe frame for us the level of investment you're considering and help us understand that pace of introduction path?

Yes, it's a great question, Jerry, and one that we're trying to obviously get our arms around as well in terms of -- the market opportunity in Australia, again, is what -- as I said just a minute ago, we see it as a very logical step for us.

It's a country rich in nat gas.

It's a country with single-family home values that rival that of the US, which is -- frankly, it's difficult to find markets like the US in housing anywhere in the world.

Australia probably approximates the US closer than any other market from a valuation standpoint.

And then the fact that they are coastally located, most of the housing, that is, in populace areas.

And they do have the severity of weather from strong winter weather to, obviously, typhoons and things that impact them in their summer months.

So 9.5 million homes is the projection for single-family homes by 2017.

I do think -- if you wind the clock back and you look at what went on in North America here, it's taken us some 20, 25 years to get to the point where we at a 2.5% penetration.

So I don't think that we're going to overstate the impact that this could have to the Company, but I think it's a very logical step for us to -- as kind of an entry point to get it this far.

We're doing it through a very well-known distributor who has a lot of locations relative to distribution -- 400 dealers in Australia, another 150 in New Zealand.

We think that we've picked a good partner here.

We do have to figure this market out, though.

There's no question it's going to take some time to break that down, figure out the best way to sell into this market.

It may not form out the same way as the US market in terms of just the sales process.

We have to figure that out.

How to engage the electrical contractors who are going to be needed to install the products and things like that, but we're excited about it.

It really represents, for all intents and purposes, our first major foray outside of the US.

We are going to staff it appropriately.

We're going to have some dedicated resources internally here that will shepherd that market probably aiming up in the Australian market directly working for us.

But, right now, we're going to have in the startup phase, the distributor is going to provide, really, all of the support and the requirements that we're going to need to launch the products there.

And in terms of the residential standby business in the US, can you just frame for us where at lead times now stand today and just, if you could, give us an update on how the Honeywell branded generator program is going?

Sure.

So lead times, as we said at the end of Q1, we're coming back into kind of the normal range of anywhere between zero and two weeks, depending on the model.

I think they really came into full -- back to that level in the beginning of Q2, and by the end of Q2, we've remained there.

In fact, here in the beginning of Q3 we've remained there even with the outage event.

We don't see lead times any longer than what they normally are at this point.

As for the Honeywell product line, that continues, as we said in our prepared remarks, we like the trajectory of that product launch.

It's been about a year now since we launched it about three and a half quarters here.

And it's doing exactly what we wanted to do, which was to give us access with this product category to the HVAC market more directly.

Our 4,600 dealers are, roughly -- there's a high concentration of the dealers, if not all of them, that are somehow involved with the electrical trade business as opposed to the HVAC trade business.

We see the HVAC distribution channel is a very viable distribution channel for these products, and the Honeywell brand is a great way to go after that channel, we believe, with a brand that's not specific to any one HVAC OEM, which is the former program that we had in place, which was a good program but, frankly, only gave us access to that percentage of the market for which that OEM had share in.

So Honeywell, we believe, is more agnostic as a brand going into the HVAC space and therefore should give us a broader opportunity set over the long haul.

But we like where it's headed.

Christopher Glynn, Oppenheimer.

Maybe the lead times answer is there, but I was just wondering what your thoughts are on channel inventory and sellthrough given the dynamics over the past year and a half; maybe some eager-beaver channel partners out there.

Yes, the channel inventory, as it stands today, is, we believe, probably, frankly, a little light going into what should be the busiest time of year for us as it relates to standby generators, which, as we said on previous comments -- previous remarks, Chris -- standby is not a category of products that's heavily inventoried to begin with.

But in places where it is, such as the wholesale channel, some of our larger dealers, some of our e-commerce partners, those inventories are, we believe, probably at a lower level than they would normally be more as a result of this latest series of events.

Portable generators are probably -- the latest channel checks that we had are roughly in line with where we need to be for that.

We are probably a little bit lighter than we'd like to be there, coming into season.

So we're bringing a little bit more stock in just to make sure that we're set for the upcoming season should an outage event occur of the kind of magnitude that we saw last year.

We want to be ready to handle that.

But I think for right now, I would tell you that inventory levels are -- if they're not at normal, they're maybe just slightly under where we'd want to see them at this point.

Sounds good.

And I just wanted to try to frame the recent outage events.

If I look at the two events last year and the total impact on your business, maybe I'd put Snowtober at a third and Irene at two-thirds, and looking at the duration was comparable to Snowtober.

So I just wanted to bounce that off you.

Yes, I think you'd look at the duratio as -- we're viewing it as somewhat smaller than Snowtober.

I think the thing that Snowtober benefited from -- to use your term and others who have used it and coined it -- that event, because of the fall -- it was only eight weeks apart from the Irene event and, roughly, in the same geographical location.

Because of the closeness of those two events, I think it exacerbated somewhat the echo effect that Snowtober had, and therefore may have made it a bigger event strictly from the impact that it has on our business, right?

I won't speak to your one-third/two-thirds relative to the impact, but I would say that if you had the right order of the events, Irene was the bigger event, Snowtober was in the middle, and then I would put the duratio is somewhere kind of underneath that Snowtober event.

York, if you see it the same way, but --

First, I think if you look at our [replies] guidance in terms of total sales where we say previously we're talking high teens growth year-over-year and now talking low 20s, and that's predominantly, as we talked about, is the result of some of these major outages we saw at the end of June, early July, may back a little bit off for some of the Q2 beat, but the majority of that upwardly revised guidance is, in fact, from those outages.

So you could sort of zero in from that standpoint.

Jeff Hammond, Keybanc Capital Markets.

Just to follow on the storms -- can you just maybe frame how you're thinking sequentially about the progression just given the storm activity and what you're seeing around channel inventories and just to kind of frame how the rest of the year shapes up?

Again, and I think, Jeff, you can kind of look at our revised guidance, which we said is mainly the result of this event.

So if you wanted to kind of bracket that guidance change in terms of the impact of that and, again, I think a lot of that's focused more on the third quarter as a result of that.

So it's a modest step down from 2Q -- 3Q is a modest step down from 2Q, and then you stepped down further into 4Q?

Is that the way to -- ?

No, that's not the way to --

You might get a little pop on the end because of -- you need from Q2 to Q3, I think.

Sequentially, Q2 to Q3, we would say that would actually improve on the residential side.

A lot of portable generators were sold during an event like that and see immediate reaction.

We do expect an afterglow effect as well in those areas with home standby to come over the next six to 12 months.

Okay, and then that would back you into a week -- considerably a week to 4Q, I guess.

Well, again --

(inaudible)

Yes, I mean, if we don't get the kind of comparable outage events we had last year -- those were big events, right?

Compare that -- compare that -- (inaudible) a new and higher baseline, Jeff.

Right, right, nicely above 2010 but certainly a step down from the 4Q strength last year.

Can you give us the Magnum revenues in the quarter?

We can't say -- the C&I was up 76% -- organically, we still saw some modest growth organically.

So the majority of the C&I growth was Magnum.

But we still saw modest organic growth on the C&I side.

So I think that's (inaudible) that zero in from that standpoint.

Okay, and then can you maybe bifurcate within the 34% growth was portable or home standby an outlier?

Was one kind of notably better or were they both kind of in that range?

They're both strong double-digit growth.

There wasn't, like, one was way up and one was way down.

They both were strong, solid (inaudible).

But there wasn't one that plus 45 and one that was plus 15 either?

No.

And, frankly, Jeff, the residential business -- we really didn't have any outage events but for that duratio --

On the last day of the quarter.

On the last day of the quarter.

I mean, we track outages, and in tracking those outages, and we've tracked them now for three or four years.

We saw some of the lowest ratings prior to that event for Q1 and Q2 than we've seen in a long time.

So it was a very mild winter, so there really wasn't a lot of winter events.

Obviously, here in Q3, the summer months have been -- in particular, July has been more active relative to just the kinds of outages, but, certainly, I think that we're pretty pleased with our performance in res given the fact that we really had no outages for the first six months of the year.

Okay, great.

And then just -- you mentioned kind of the rationale for Australia.

Are there any other obvious markets like Australia and what are -- I mean, is it management capacity, is finding the right partner?

Yes.

From an [obviousness] standpoint, there are some other markets around the world that we would say -- kind of approximate what we're zeroing in on, where there's rich availability in nat gas, where power quality is an issue, and where home values are elevated.

But they're more scattered.

I mean, you get beyond Australia, those -- there are pockets of them everywhere around the world, frankly.

I mean, we're finding them in the Ukraine, we're finding them in parts of Latin America, the Caribbean.

There are some very obvious areas like that that you would expect that a backup power system, a home standby generator would be something that would be -- we would want to obtain.

From a management resource standpoint, clearly, that's always going to be a constraint when you're expanding.

It's been a constraint on the Company.

We've added a lot of people over the last 12 months here, part of what you see in our operating expense line in terms of maybe not getting the kind of leverage that some people might expect off of that.

We believe those are very wise investments to make for our future.

We need to make those.

Some of it's missionary work like what we're doing here in Australia and going out and doing in other parts of the world.

But we also have, from a product standpoint, you have to develop certain products for local markets, right?

We have a very North American-centric product offering.

It's highly regulated, the North American market.

Therefore, the product has additional costs in it that, frankly, may not be needed in other parts of the world.

So in terms of getting the right product offering, in terms of getting the right distribution partner, which you alluded to, is also critical.

So, again, we put a roadmap together.

We think that we're going to be executing on that roadmap very aggressively here over the next several years.

Australia was a good step.

We've been hammering away at Latin America over the last 12 months, seen some good movement there in terms of adding new distribution.

It's taking a while to get that distribution onboard, which it does, again, because of -- you're spreading yourself thinner into other languages and other cultures and product mixes and things for those local markets.

But we're figuring it out, and it's going to get -- we've said all along that the upside with going global, it's a big upside, but it's going to take a while to get there.

We're going to do it as we can in certain countries organically, like what we're doing in Australia and in other countries.

Frankly, it may make more sense for us to look at M&A as a better way to -- or partnerships or JVs or some other way to get into other markets more quickly.

So we're evaluating all of that, and stay tuned, you're going to see more of that from us.

Zack Larkin, Stephens.

Hi, good morning, guys.

This is Chris Godby in for Zack Larkin, thanks for taking my call.

So first of all, thinking about the margin profile a little bit, given the mix impact of Magnum, do gross margin levels, going forward, feel sort of similar to what you saw in this quarter?

You're talking the outlook?

Exactly.

Kind of looking forward at your gross margin, would you expect levels similar to this quarter given the mix impact of Magnum as this quarter was a little bit lower than what we've seen historically?

Or would you expect a return to more normal levels?

Well, I think what we've experienced has been the normal levels ever since purchasing Magnum.

So I think, to answer your question, I think it would be more consistent, you know, maybe some upticks here as mix may change a bit but -- and some moderation.

Realization modernization of commodities but I wouldn't expect it to be dramatically different from current levels.

Okay, great.

And then, also, though, give significant outage events in 2011 and what you've seen, so far, this year, do you have an estimate as to how penetrated your end markets may become by year-end?

Well, right now we've been consistent and say it's about 2.5% of US households and, frankly, there's so many US households that every 1% of penetration in the market as we define it relative to our opportunity set is really about 50 million US households, and that's -- so 1% would be 500,000 homes.

So that's a lot of generators.

I don't think it's -- and we're talking in total market as well, so if we moved to 2.6, 2.7 by the -- that would be -- that would probably be somewhere in that range.

But it's going to take -- it takes a lot to move that needle.

We see those outage events as great opportunities for us to increase awareness around the category.

More and more people are talking about home standby generators, which is great for the category, and it's something that we continue to work on in terms of education, in terms of how we pursue that market with being a lot more direct in our marketing activities, getting a lot smarter on how to sell this product, getting a lot smarter in helping our dealers get a lot smarter in terms of developing those dealers and turning them into the kinds of sales instruments that we need out on the street selling those products.

But it's a slog.

I mean, it takes a while to grow a market.

Brian Drab, William Blair.

I just wanted to ask a couple more questions on Australia, actually, first.

And you mentioned that the penetration rate there is low today.

Can you talk a little bit about who the competition is in that market, why the penetration rate is low, and I'm assuming it's a lack of effort more than a lack of opportunity.

And what sort of distribution networks the competitors have?

Yes, it's a great question.

We see the penetration rate at nearly zero.

I mean, it's -- frankly, there's just not a lot going on there.

The competitors who are there are the same guys that are here in the US, and the way they appear to be going to market, and I can't speak for them directly, but the way they appear to be going to market is roughly the same way they go to market here.

Although maybe a little more heavy reliance on outdoor power equipment dealers as opposed to electrical contractors.

Again, I think we have a lot to learn about this market.

We think that because of our broad product offering, because of our competitiveness in pricing, because of the support that we give our distribution partners from a marketing standpoint, a sales standpoint, we think that we can approach that market similarly in the way we approach it here in the US.

But we haven't quite figured it out yet but right now it looks like a fairly greenfield site relative to just not -- you know, it's just a lot of white space.

There's really nobody else doing anything there.

It's probably a lack of focus, lack of effort and, you know, frankly, the same reason they get low percentages here in the US is probably the same reason they're getting low percentages there.

Okay, thanks.

And one other thing, and we were talking to Mike Harris about this recently, but I wanted to get your take on it, too.

How do you think about the impact of a particular outage event with respect to whether there was an outage event in that geography the year before?

For example, we had these outages recently in the Midwest and in the Mid-Atlantic states.

Last year we had Irene, and flooding hit those same regions.

Would your business be more impacted if there was a similar-sized event in a different geography or in the same geography the next year?

Really, the time delta between events in a particular market has an impact, has a significant impact.

Really, it's a compounding effect.

What happens is, when you get an event in a region where there hasn't been any significant events in a long time -- and I'm talking about years and years.

What happens is -- and because this category is still so new, we oftentimes don't have the kind of distribution channel that has been built to handle an increase in baseline demand.

So -- the first step, generally, whenever that happens is building out distribution, frankly.

And so it really takes a second event within a couple of years after that even at some point, whether it's eight weeks like was the case with the event -- the snow event after Irene, or as is the case here, eight months after that snow event with this duratio, that compounding effect gets magnified because you've got additional distribution partners in the market that you didn't have during the first go around.

So I think that does have a significant impact, and so I guess to answer your question more bluntly, if you get an area -- and I won't use an area like Florida because Florida has had a lot of events.

Distribution is pretty well built out up there.

If you get an event in Florida, a hurricane or something, that could have a nice impact for the Company -- not a nice impact, obviously, for the homeowners there, but it certainly has an impact on us more positively than it would, say, an event in someplace that hasn't had a major event in a long time, like, if it happened in Kentucky or some -- you know, pick a state but a state where events are not frequent.

So that does have an impact, and we think that distribution, the buildout of distribution plays a big role in that.

(Operator Instructions) Stanley Elliott, Stifel Nicolaus.

A question on expectations for power washer.

You talked about picking up some new distribution on the residential side.

Is there a way to -- I don't know, prepackage or package, if that's the right way to think about it, but with the leading share that you guys have on the portable generator side, maybe talk about some expectations for power washer kind of ramping up as well.

Yes, so on the power washer product where we reentered that, Stanley, about a year ago now.

That was a market that we were very prevalent in back in the 1990s.

Arguably, we built the market, frankly.

There were others in it at the time, but we took it to a different level relative to mass merchants and the DIY retailers.

We had a very capable team at that time that did an awesome job with that product category.

We learned a lot.

We still have some of those individuals here at the Company, and when we decided to reenter that category, certainly leveraging our position after reentering portable generators was definitely in our [map].

The channel partners are, roughly, the same.

Portable generators are, by and large, a retail channel game -- power washers the same.

A lot of times the buyers -- not in all cases -- but the buyers for these products at mass merchants is generally the same individual.

So we're able to build on some of our relationships there.

And I think probably, more importantly, what surprised us a little bit is the strength of the brand -- the recognition of our brand in that marketplace.

It's been refreshing to see how people have received it, and I think our success in portable generators have given us some credibility in going out and getting back in this market.

We're feeling pretty good about where we're going with innovating in this category.

You know, it's line review season right now, so we don't have any direct feedback that we can give you about 2013, but we're certainly planning as if we could end up with some additional market share there for 2013.

Just how much is going to be, really, the result of where these line reviews end up, and line reviews are tough, and our competitors are tough.

They're very good.

They've been in this market a long time and they understand the market, and they certainly want to hold onto their share.

So I don't think we're going to delude ourselves into thinking that we're just going to come in and take it all.

But we are -- I think we're cautiously optimistic that we are going to be a large player in this marketplace in the next several years.

Very good.

Then, kind of, shifting gears talking about acquisition potential down the road.

What sort of product categories as you guys are looking to kind of diversify and build out what you already have going on.

I mean, if there's anything to talk about, generally speaking, just more from a pure knowledge standpoint.

Yes, we don't comment specifically on the M&A pipeline, but I think what we can say is what would interest us most would be companies a lot like Magnum.

When you look at engine-driven products that have -- where we have the capability to take things that we do well here at the Company from manufacturing and operations to global supply, and leverage that -- or areas where we can leverage our distribution with other products.

If we can find other product categories that fit well into our existing distribution, we've built a very robust distribution pipeline for our products here so one of the products could go into that.

I think, generally, we have to think in terms of engine and power products because that's where a bit of where our expertise lies.

I would tell you, the other area that, from an M&A standpoint, that we continue to look at as I said in my previous comments, would it make more sense geographically to get into some markets through an acquisition.

We're looking at that.

That's something, I think, is a little bit of a -- it's a bit of a harder step than would be buying a domestic company here to expand into other engine-powered products, but yet I think maybe an important step in our development to go global.

And that's something that we're actively pursuing opportunities as they come, and we think that the next several years there are some things that could be actionable.

It depends on where the global economy goes, it depends on how our business goes, but I think you can look at the Magnum acquisition as really kind of a first foray.

We've actually completed now three acquisitions in, really, the last -- it will be the last 18 months.

Two of them very small, one of them, Magnum, much larger.

But we are ramping up a pipeline here, and we believe that there is an opportunity to do more of that with the strength of our balance sheet and some of the areas where we want to grow with our strategy.

Yes.

And then from a cash flow perspective, what are expectations for inventories as we finish up the year?

I think as Aaron mentioned, coming into the season here at the end of June, we seasonally ramp up our inventory levels for the season, and then the expectation is we will work that inventory down throughout the second half of the year.

So should get a positive contribution of cash flow from working capital through the second half of the year as a result.

And there are no further questions in the queue.

I would now like to turn the call back over to Mr. Aaron Jagdfeld for closing remarks.

I want to thank everybody for your time this morning, and we look forward to speaking with you on our third quarter earnings call.

Thank you.

Thank you all for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.