Generac Holdings Inc. (GNRC) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Generac Holdings Inc. Earnings Call. My name is Kathryn, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. York Ragen, Chief Financial Officer. Please proceed, sir.

Thank you very much. Good morning, and welcome to our first quarter 2014 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’ll 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 reconciliations to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, York. Good morning, everyone, and thank you for joining us today. We’re pleased with our overall first quarter results as they met our internal expectations, with revenue at a level consistent with historical seasonality as our lead times to residential products returned to more normalized levels entering 2014 as compared to the elevated levels, they were at entering the prior year first quarter. Our results further demonstrate the ongoing diversification of our business as continued growth in commercial and industrial products helped to offset the impact of harsh winter weather and home standby generator installations. First quarter net sales were $342 million as compared to $400 million in the first quarter of 2013. C&I product sales increased 24% during the quarter due to a combination of acquisitions and continued organic growth. As expected, residential products faced a strong prior year comparison as sales were $164 million compared to $255 million in the prior year quarter, which benefited from elevated demand due to the Superstorm Sandy. In addition, residential product sales during the first quarter were impacted by extreme cold temperatures and significant snow cover, which delayed the installation and slowed demand for home standby generators. As mentioned in the earnings release this morning, we are reaffirming our guidance for full year 2014 in terms of revenue growth, EBITDA margins, and free cash flow with solid year-over-year revenue growth to resume for the remaining quarters of the year. Looking beyond the first quarter, we’re seeing increased installation activity and demand for home standby generators in April. Going forward, we remain particularly focused on additional opportunities to increase the awareness of home standby generators using our innovative sales and marketing tools, including our A.M.P. targeted marketing process and infomercial advertising campaigns. The sales leads generated from these methods will be directed to our Generac lead team for qualification and in-home consultations will be scheduled homeowners through our PowerPlay in-home selling solution. The sales and marketing tools first became fully operational early last year and form an innovative and cost-effective approach to identifying and qualifying sales leads. In 2014, we will be focused on improving sales closure rates for home standby generators by further optimizing use of these tools. With only approximately 3% of U.S. households owning a stationary backup generator, there is a substantial opportunity to grow the category over the long-term. Our new product pipeline will continue to be an area of focus for us during 2014. Innovation has always been a part of Generac’s culture and is a core competency of our company. We have used the growth in our business over the past several years to accelerate our product development efforts by dramatically expanding our research and development capabilities. As a result, 2014 is expected to be another year of heavy product introductions particularly for residential products. New technologies rolling out in 2014 include the Guardian Synergy series. The industry’s first variable speed residential standby generator. Most generators operate at a constant speed to produce electricity, regardless of how much demand there is for the power. The patented variable speed technology we have developed in the Synergy Series allows the generator’s engine to run only as fast as necessary to meet the electrical load demand. The end result is a best-in-class, much quieter, more fuel efficient generator with exceptionally clean power output. In 2014, we also plan to launch our Power Pack series, a step up from our previous entry level core power product, which will combine all the benefits of automatic operation with many of the features found in our market leading Guardian series. With the 7 kilowatt unit starting at an affordable $1,899 at retail. Power Pack is a compact footprint of galvanneal steel enclosure for durability and is designed to streamline the installation process, thereby reducing the total cost of ownership and resetting the bar lower on the opening price point in the industry. In addition, we plan to launch our new Power Dial technology into the portable generator market this spring. This innovative feature dramatically simplifies the starting an operation of these products by incorporating the fuel valve, choke circuit and ignition all together in one single consumer touch point, making Power Dial generators the easiest to start and easiest to use portable generators on the market. These products will be available later this quarter at Lowe’s and other retailers. It’s new product introduction such as these that help to maintain our leading market share for residential products and are a big part of our ability to continue our track record of above average growth and premium earnings. Shifting over to C&I, sales of commercial and industrial products increased at a strong rate during the first quarter, driven by the Tower Light and Baldor Generators acquisitions, as well as solid organic growth. The strong momentum that we experienced during 2013 from our telecom national account customers continued during the first quarter of this year, as wireless providers in particular look to further safeguard their networks from future outages. We also saw some notable strength in the quarter from rental equipment customers in the U.S. as a result of improving trends in the oil and gas markets. A quick update here with regards to Baldor Generators and the integration of this recent acquisition, which remains a key corporate focus throughout 2014. Recall the Baldor offers a broad line of standby and prime rated products up to 2.5 megawatts and the addition of these products significantly expands our industrial product offering and manufacturing footprint, and essentially doubles the addressable domestic market that Generac and its distribution partners can serve. Although still early in the process, we are making good progress in strengthening our distribution as we work to combine the Generac and Baldor industrial networks. In addition, we have identified some meaningful product cost synergies given our increased manufacturing and sourcing scale as we transitioned the acquired products and facility into our portfolio. We are also particularly excited about the increased exposure the Baldor acquisition gives us to the oil and gas market within the U.S. and potential cross-selling opportunities with our Magnum mobile products business. Through these two acquisitions, we now have a broader product line of mobile gaseous fueled generators that are capable of running on well gas generated at the drilling site. Additionally, advances in drilling technologies over the past several years have created access to a significant supply of shale gas, which creates an attractive secular opportunity for mobile power equipment demand, including the need for support equipment, such as light towers, generators and pumps that are essential at these drilling sites. We expect the oil and gas market to be an increasingly important end market vertical for Generac going forward, as we positioned ourselves to participate in this potential long-term up cycle. Our Powering Ahead strategy has serviced the framework for the significant investments we’ve made during the last three years to drive penetration of our products including backup generators using residential, light commercial, and wireless telecommunications applications. While continuing to execute on the compelling secular penetration opportunities within these important end markets we remain focused on strengthening our leadership position in the overall markets we serve as well as providing diversification to our revenue base. As we continue to move the Powering Ahead plan into the future, we’re focused on a number of initiatives that are driven by the same four key objectives to grow the residential home standby by generator market, gain commercial and industrial market share, diversify our end markets and expand into new geographies. Combining this strategy with the long-term growth drivers for our business and the potential for further recovery in key macroeconomic indicators, we believe Generac is well positioned over the longer term to drive future growth and shareholder value. I’d now like to call, turn the call back over to York to discuss first quarter results in more detail.

Thanks, Aaron. Net sales for the first quarter of 2014 were $342 million as compared to $399.6 million in the first quarter of 2013, which benefited from elevated demand from Superstorm Sandy. Looking at net sales by product class, residential product sales were $164 million in the first quarter of 2014, as compared to $255.2 million for the comparable period in 2013. Shipments of residential products during the prior year first quarter of 2013 were positively impacted by approximately $100 million as we ramp production levels to satisfy the extended lead time that resulted from Superstorm Sandy. Lead times were at more normalized levels entering 2014 and as a result this dynamic did not repeat in the first quarter of 2014. Excluding this $100 million of benefit during the prior year quarter, residential product sales during the first quarter of 2014 increased 6% year-over-year, driven mainly by increased shipments for portable generators due to localized ice storms that impacted various regions of the U.S. during the current year quarter. As previously discussed, the harsh winter weather impacted installations and demand for home standby generators during the current year first quarter. Despite this severe winter weather, and excluding the prior year benefit from extended lead times, shipments of home standby generators were flat year-over-year as we were able to hold the new and hire base line level demand for these products. Looking at our commercial and industrial products, net sales increased 23.8% to $157.4 million in the first quarter of 2014 as compared to $127.1 million in the first quarter of 2013. The increase in C&I net sales was driven by the acquisitions of Tower Light, which closed in August 2013 and Baldor Generators, which closed in November 2013 along with solid organic growth for stationary generators and light towers. The strength in organic C&I sales was primarily driven by an increase in shipments to certain national account customers highlighted by the telecom and equipment realm markets as the wireless cell tower and oil and gas secular opportunities continue to play out. Our other product sales category improved to $20.7 million in the first quarter of 2014, an increase of 19.8% from prior year first quarter sales of $17.2 million. This growth is primarily due to an increase in sales of service parts as the installed base of our products continues to grow with the overall growth of the company. Gross margin for the first quarter was 34.9% compared to 38.4% in the prior year first quarter. The decline in gross margin was primarily due to changes in sales mix compared to prior year. Most notably a higher mix of organic C&I product shipments, a lower mix of home standby generator sales and the addition of Baldor Generators acquisition. Operating expenses for the first quarter of 2014 declined $2.7 million or 4.8% as compared to the first quarter of 2013. The expense reduction was driven primarily by a decline in warranty expense as a result of warranty rate improvements in recent quarters. Partially offsetting this reduction, where the operate expenses associated with the acquisition of Tower Light and Baldor Generators. Excluding non-cash intangible amortization expense, operating expenses as a percentage of net sales during the first quarter of 2014 were 14.3%, representing a 160 basis point increase as compared to 12.7% in the prior year quarter. This increase was primarily the result of reduced leverage of operating expenses on lower sales volumes during the current year first quarter as compared to the prior year period was benefited from Superstorm Sandy. Adjusted EBITDA was $77.5 million or 22.7% of net sales in the first quarter of 2014 as compared to $108.8 million or 27.2% of net sales in the same period last year. Adjusted EBITDA margins for the current year quarter came in slightly ahead of our expectation. Compared to prior year, margins were unfavorably impacted due to the overall decline in gross profit margin and reduced leverage of operating expenses and the lower sales volumes in the current year first quarter. Adjusted EBITDA over the last 12 months as of March 31, 2014 was $371.3 million or 26% of net sales. GAAP net income for the first quarter of 2014 was $34.7 million as compared to $50.7 million for the first quarter of 2013. Adjusted net income as defined in our earnings release was $50.7 million in the current year quarter versus $83.9 million in the prior year first quarter. This decline over the prior year as a result of the previously discussed lower operating earnings during the quarter from decline in net sales and lower overall EBITDA margins along with the $5.4 million increase in cash income tax expense. These reductions were partially offset by $4 million in lower interest expense due to a reduction in interest rates from the May 2013 refinancing of our senior secured term loans. Diluted net income per share on a GAAP basis was $0.50 in the first quarter of 2014 compared to $0.73 per share in the first quarter of 2013. Adjusted diluted net income per share as reconciled in our earnings release was $0.72 for the current year quarter compared to $1.21 per share in the prior year quarter. With regards to cash income taxes, the first quarter 2014 includes the impact of the cash income tax expense of $9.9 million as compared to $4.5 million in the prior quarter. As we commented during our last conference call, our cash income taxes for 2014 are expected to increase due to a combination of our NOL carry-forwards and certain tax credit carry-forwards becoming fully utilized during 2013, certain discrete tax deductions that were taken in 2013 that will not repeat in 2014, and to a lesser extent, higher overall pre-tax profitability levels. Cash income taxes for 2014 were previously estimated to be approximately $63 million to $65 million, translating to a full year 2014 cash income tax rate of 21% to 22%. Due to a higher level of benefit than previously expected from certain tax credits and discrete tax deductions during 2014, cash income tax expense is now projected to be approximately $55 million to $57 million, which translates into an anticipated full year 2014 cash income tax rate of 19% to 20%. As a reminder, even though we announced during the pay income taxes, our favorable tax shield through annual intangible asset amortization and our tax return remains intact through 2021, resulting in approximately $49 million of cash tax savings per year for the next eight years. As a result, our cash income tax rate is expected to be significantly lower than our now currently projected 34% to 36% GAAP income tax rate in 2014. As we drive higher profitability over time, cash income taxes can be estimated by applying a projected longer term GAAP income tax rate of approximately 36% on pre-tax profits going forward and then deducting the approximately $49 million of annual cash tax savings from the tax shield each year through 2021. Free cash flow, defined as net cash provided by operating activities less capital expenditures, was $31.4 million in the first quarter of 2014 as compared to $33.9 million in the same period last year. The larger decline in operating earnings was mostly offset by less investment in working capital compared to the prior year, mainly due to a reduction in inventory levels in line with sales volumes during the first quarter of 2014. Free cash flow over the last 12 months was $226.7 million. As of March 31, 2014 we had a total of $1.2 billion of outstanding debt, net of unamortized original issue discount, and $173.7 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $1.02 billion. Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the first quarter was 2.7 times, a level that is within our targeted range of 2 times to 3 times. Given our strong free cash flow profile, we are confident in our ability to continue to invest in the future growth of the business both organically and through M&A, while also evaluating other priority uses of cash. In April 2014, we made a voluntary prepayment of debt of $12 million that will be applied against our excess cash flow payment requirement in our credit facility, as well as against future term loan principle amortizations for the next 12 months. In addition, as a result of our credit agreement leverage ratio stepping below three times, our borrowing costs were declined by 25 basis points to 3.25%, beginning with the second quarter of 2014, which is reflected in our previous guidance. With that, I’d now like to turn the call back over to Aaron, to provide additional comments under our outlook for 2014.

Thanks, York. We are reaffirming our guidance for 2014 in terms of revenue growth, EBITDA margins and free cash flow. For full year 2014, net sales are still expected to increase in the mid single digit range as compared to the prior year. Importantly, this top line outlook continues to assume no material changes in the current macroeconomic environment, no major power outage events for the remainder of 2014, and does not include the potential impact from additional acquisitions. In summarizing our sales growth assumptions for the year, excluding the impact of the previously discussed headwind related to the first half 2013 production ramp to normalize product lead times, we still expect total organic year-over-year growth to remain between 9% and 11%. When including this headwind in prior year, we continue to expect organic growth to be approximately flat year-over-year in 2014. The acquisitions of Tower Light and Baldor Generators are still expected to contribute approximately 5% growth for a total year-over-year net sales increase in the mid-single digit range. We continue to expect the seasonality of quarterly results during the year to return to a more normal historical pattern, assuming no major power outage events during the year. As a result, we still expect the first half of the year to represent approximately 46% of total sales and the second half approximately 54% with the third quarter being the highest revenue quarter of 2014 and the first quarter being the lowest. When taking this into consideration, we continue to expect solid year-over-year revenue growth for the remaining quarters of the year. Consolidated gross margins for 2014 are now expected to decline slightly compared to our prior guidance, primarily as a result of a higher mix of C&I product shipments than previously expected. However, this incremental decline is expected to be fully offset by a slight incremental reduction in operating expenses. As a result, we are reaffirming our adjusted EBITDA margin guidance for 2014 as we continue to expect margins to remain in the mid 20% range which is consistent with the average level seen during the past four years. Adjusted EBITDA margins during 2014 are still expected to experience some variation from quarter-to-quarter as a result of normal seasonality. As previously guided, the second half of the year is expected to be approximately 400 basis points higher than the first half, as a result of more favorable product mix, increasing synergies from acquisitions and additional SG&A leverage on higher sales volumes. We continue to expect to generate significant free cash flow in 2014, given our superior margin profile, capital efficient operating model, low cost of debt and favorable tax attributes. For full year 2014, we expect our conversion of adjusted net income to free cash flow to be approximately 90%. In closing this morning, as we continue to execute on our Powering Ahead strategic plan and capitalize on the long-term secular growth drivers for our business, we expect to continue to generate strong free cash flow for the foreseeable future. With regards to our future allocation of capital, we expect our highest priority use of cash going forward to be focused on investing in the business to grow organically. We expect our second priority would be to pay down debt if our net leverage ratio exceeds approximately three times or if interest rates rise materially in the future. Our next priority use of cash is to seek strategic bolt-on acquisitions that are in line with our Powering Ahead strategic plan. Although our guidance for 2014 does not include any assumptions for additional acquisitions, we are currently working an active M&A pipeline and are well positioned from liquidity perspective to execute on additional opportunities that meet our acquisition criteria should be become actionable. Lastly, once we step through the first three priorities, and as future cash flow and liquidity permits, we will consider a further return of capital shareholders. Over the past three years, we believe we have demonstrated the effective use of our strong free cash flow by progressing through this capital allocation strategy. We’ll continue to follow this approach as we pursue additional shareholder value enhancing activities going forward. This concludes our prepared marks. And at this time, we would like to open up the call for questions. Operator?

Thank you. (Operator Instructions) And please standby for your first question, which is from the line of Jeff Hammond from KeyBanc Capital Markets. Please go ahead? Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.: Hey. Good morning, guys.

Good morning, Jeff. Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.: So just a couple of things, it sounds like your kind of expectation on this $100 million and $40 million is kind of playing out, one, is that fair? And two, can you give us any kind of quantification or impact of kind of the weather delay and a little more clarity on what you’re seeing in 2Q on home standby that would suggest, maybe some kind of demand or normalization?

Hey, Jeff, this is your kind of first part, that the $100 million and the $40 million what you’re referring to is our previous statements, where that the headwind that we talked about that as we came into 2013 as a result of Superstorm Sandy, there was extended lead times, we ramped a production to satisfy those lead times, that’s a quantifiable number. It was, in total, for the first half 2013, it was $140 million, $100 million in the first quarter, $40 million in the second quarter. So that, that is playing out, because it’s a quantifiable number.

And then Jeff, I think on the second part of your question, just the impact of weather, the winter weather on Q1 home standby in particular, it’s a little bit part of the seasonality that we normal seasonality, that we see in our business. In residential, in the winter months it’s more difficult to install these products that are outside, there is generally trenching involved and other things that, when the ground is frozen or there is three feet of snow become more challenging to do. So we typically see, as we say, we typically see Q1 being the lowest quarter. Obviously, the harsh, the harshness of this past winter is not something we’ve experienced since we’ve been in this category. And I think we saw some things that in terms of just physically not being able to put product on the ground in parts of the country that was really a challenging situation I think. But I think when we strip the back and we kind of look by region, one of the things that we do like is that in parts of the U.S., where arguably the harshness of the winter was not as maybe it wasn’t quite as bad, places in South Central, one of the regions we track, and the West, those regions were actually up in Q1 over the prior year. So in terms of installation. So I think what it tells us is a couple of things, I mean it tells us that clearly installations were down because of the weather as we would expect. But we like the underlying trends that are continuing in the home standby category and have continued for the better part of 12 years. So, we don’t see that changing dramatically. And as we go forward into April here, we continue to see as the weather warms up. As we would expect we see installation starting to pickup in those regions like the Northeast and the Midwest in particular, where I think the harshness of the winter probably impacted us the most. We’re starting to see that increase here in April. The cadence of installations, which we track, I think you’ll recall what we refer to as activations, which is every new home standby, they gets turned on, the minute it’s turned on we see it. We see exactly where it is and it gives us a tremendous amount of information. But it gives us a really good feel I think on what’s going on out in the end market relative to installs. Further upstream, when we look at proposals through PowerPlay and some of the other selling solutions that we put together here. Those have also picked up in April. So, we like the trends there, I think there is a lag of course that happens between when you do a proposal to when you sell a product and when it gets installed. So, I think whether there is pent-up demand to get to that, the route of your question I think is still a bit unable for us to comment on at this point. I think we like some of the trends, but we’re not sure if that demand is truly pent demand or if it’s something that we won’t get back. But I think we’ve adjusted our view points here accordingly by changing the mix a bit going forward with C&I being a bit stronger and resi being little bit lower. But to reflect that, frankly, I mean that’s really the outcome and it’s modeled here in our guidance that we’ve updated today. Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.: Okay, great. And then just a couple of quick ones on commercial, one, can you give us the acquisition revenue in the quarter, and two is there a way to maybe size some of these bigger end markets within commercial like telecom, oil and gas, your regular commercial retail?

Jeff it’s York. So C&I grew 23.8%, I think another way to answer your question. Our organic growth was 6%. So, and about 18% then was roughly acquisition driven.

Yeah. I think in terms of sizing the end markets and the opportunity there and kind of framing that Jeff, I think I’ll step through just as you mentioned, because I think there are probably the most, the largest opportunity if you will. In telecom, we’ve said this before, there is roughly 300,000 wireless cell sites in the U.S. and today roughly 30% of those sites have backup power in the form of a generator. And so, when we talk in terms of penetration rate opportunity, we talk in the residential side, we’re only at 3%, and where does that ultimately top out, is it double-digits, kind like portable generators are 15% of household. When we talk about telecom, I think it’s conceivable that you could see a topping out there, something much closer to 100% in my viewpoint, much more, many more critical communications whether be data or voice are shifting to wireless and the proliferation of mobile devices, obviously is pushing that, and if that happens, what we’ve seen is in our telecommunications customers in particular is a move towards hardening their networks. Now, the cadence of that move can shift from quarter-to-quarter. I mean that the way they released capital dollars, deploy them, and the way they arrange the project management for installations can move from quarter-to-quarter, but I think the long-term view on telecom is that both 300,000 sites eventually will need some kind of backup power and even have situations now where you’ve got FEMA is out there promoting the fact that we’re sending text messages to people to give them advance notification and warning about storms that are coming towards them. Tornadoes, bad weather, you got to text at your mobile phones saying take shelter immediately. Well, that’s all well and good as long as the cell network is up. And the problem is, when you get poor weather, that’s generally when the cell network goes down. So for some of these advanced warning systems and these kind of critical communication and warning systems to work and operate flawlessly, we believe and we continue to take a view of that, the hardening of the telecommunications network is a long-term opportunity. In oil and gas, that’s one I’m trying to get my arms around in terms of quantification. It’s relatively new for us. I mean, we had some exposure that we kind of acquired into a few wells through the Magnum acquisition a couple of years ago, but that’s really accelerated with Baldor, one of the nice bright spots of the Baldor acquisition has been. Their penetration into the oil and gas market as it relates to natural gas or propane-powered mobile gensets. That really run-off a wellhead gas. So and there is some regulation changes coming in terms of the ability to flare gas off. So the need to consume that gas or store it, refine it and sell it, is going to become of greater importance to the energy companies that are extracting it. And so we see an opportunity not only in the support equipment, I mean, the mobile equipment like light towers and mobile gens and even to an extent mobile pumps, that really are the support equipment for the production activities on the drilling sites. That’s been great for us as well to our rental accounts, but also, these natural gas-fired gen sets and other products that we have the opportunity to help them consume some of that. Otherwise, kind of flare it off and lost gas and turn it into power at the site instead of trying to use diesel gen set and the logistics around diesel and the cost of operating diesel gen sets, effectively the gas is free in kind of around about way until there is some really good opportunities. And we’re truly trying to quantify it still, so I’m going to shy away from giving you any discrete numbers there. I think, one of the things that we do watch is kind of the number of new drilling sites, the number of new, the rig count that’s kind of become an indicator that we’re watching with greater importance and greater interest, it seems to correlate to some of the needs of the support equipment that goes on those sites, so that’s something we’ve watched little closer. And then the last category that’s the kind of regular kind of commercial building backup or what we refer to the optional standby market, this is the market that, depending on your source, it’s in excess of 10 million buildings out there that we’re an optional standby generator. You could help a business protect its revenue stream, protects it perishable inventory and cases, provide security during outages. We have done a lot here in the last 12 months to 18 months, really on the heels of events like Sandy and Irene to take advantage of the increased awareness of the option standby category for these businesses to have backup power. And so I think quantifying that we believe that the penetration rates today in those installations are still in kind of that mid-single digit range. So there’s a lot of upside, it looks a lot like home standby in terms of, not only the upside potential but also the work that we have to do to educate business owners on just how cost-effective it is to have a generator. We demonstrated the payback model for some businesses, in particular we get into restaurants, small restaurants and other things like that where a generator can be paid for and as little as a 24 hour outage. So I think it’s a very strong payback model in certain businesses and certain verticals, and I think it’s something that we look forward to and again its one of the reasons why we’ve invested very heavily in our C&I business overall, all these things that we talked about. So we really like the performance of that business, it continues to perform well. It’s going to continue to perform well throughout 2014 as we look at the year here is shaping up and we’re excited about it. Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.: Very helpful. Thanks, guys.

Thanks, Chip.

Thank you. The next question comes from the line of Ross Gilardi from Bank of America. Please go ahead. Ross P. Gilardi – Bank of America: Hi, good morning guys, thanks very much.

Hey Ross. Ross P. Gilardi – Bank of America: I just wanted to clarify couple of things. So what do you say about a shipments of home standby in the first quarter, did you say they were flat year-on-year?

So, if you take out this extended lead time concept from the first quarter 2013, if you carve that out, which was a piece of that, a large piece of that $100 million that recording, the vast majority of that $100 million that recording in the release related to that extended lead time benefit in the first quarter 2013. You carve that out Ross, and we’re actually please that we were actually flat with home standby year-over-year... Ross P. Gilardi – Bank of America: The harsh winter I mean...

With that harsh winter, yeah. Ross P. Gilardi – Bank of America: Okay. And within Europe your comments about I think you’re expecting organic growth to be positive for the entire company for the remaining three quarters of the year, is that what you were saying?

When you exclude, again when you exclude that headwind that we just talked about, we expect it to relatively – there will be revenue growth overall...

Yeah.

If you exclude that, it’ll be flat when you include that.

Yes, yes. Ross P. Gilardi – Bank of America: But, I was talking for the remaining three quarters of the year.

The remaining...

The remaining three, because that’s a full year, so for the remaining three quarters of the year I guess we have to look at that. Ross P. Gilardi – Bank of America: Okay. I mean what was your...

Yeah, for the remaining three quarters if you add them all up...

Yeah, there’ll be growth.

Yeah.

Yeah, correct. That’s the true statement, Ross. Ross P. Gilardi – Bank of America: Okay. And how about on standby, if you take out the $40 million in Q2 of 2013, would you expect that to be up year on year in Q2?

I guess we didn’t give that level of discreet granularity there with the mid-single digit guidance that we are talking about, flat organic mid-single digit. And we did talk about 46% of our sales would be in the first half, which I think you will be able to, so that’s total company. We didn’t get that level of granularity there Ross, but you’re, so I was thinking that $40 million of that $140 million headwind will be in the second quarter, so you need to carve that out, when you’re looking at comparisons for the second quarter. Ross P. Gilardi – Bank of America: Okay. And the harsh winter, did it help clear out some of the excess inventory in portables in the chain that was there as a result of lack of hurricanes?

Yeah, it did. I mean, I don’t think when we look at those – when we look at what happened in Q1 with weather, there were a couple of ice storms and things, we wouldn’t have classified any of that as major, first of all. I think that’s fairly, I suppose, if you looking through them, they were major, but from our perspective in terms of the raw number of the people and the duration of the outages they wouldn’t qualify as a major outage, but they did to your point, Ross they help clear out some of the excess point, where inventory to the point where retail inventory levels of portable generators feel about right now both for the retailers and for where we are at coming into the season. So I think we wouldn’t expect to see a tremendous amount of, but there’s a couple puts and takes, some of the retailers perform a little bit better with weather, when there is weather, then others, but across the board, across the line portable generator inventories feel about right at this point. So, they don’t feel heavy as a result of some of that clear out. Ross P. Gilardi – Bank of America: Okay. Great. And then you made reference to some operating cost savings that will help offset some of the mix erosion from having higher mix of C&I this year. Could you go into a little bit more detail on the nature of some of these things and help quantify at all?

Yeah. So I think a couple of things there, Ross. I mean some of it just a little bit tighter operating cost management. Again it’s a pretty slight kind of offset, but at the end of the day, some of those costs are, I think, just being a little more prudent on whether it’s advertising or whether it’s some other things that might have been a little bit more exploratory, if you will, or little bit more advance. We just basically dial a couple of things back, but nothing that will impact really for us anyway, any of the programs or any of the initiatives that we have going on in any material way. I mean I think that’s kind of the key. It’s just a little bit better tighter expense management. We’ve grown quite a bit. We’ve integrated subs into our SG&A line. So kind of rationalizing some of the expenses there at the subsidiary levels alongside with what we do and kind of tightening up or structure a little bit. I think there’s a little bit of cost optimization to do there. Ross P. Gilardi – Bank of America: Okay. Great guys. And just my last one. Can you talk a little bit more about the trends you’re seeing internationally given some of the softness outside of North America, particularly with Tower Light and Ottomotores?

Yeah. So we’ve obviously got a little bit better view now into some things outside the U.S. and Canada through those entities. I think I’ll speak to Latin America first. I think Latin America, I think, maybe has underperformed to just broader expectations in terms of the economies down there, based on not only some of the geopolitical things going on, the political environment in some of those countries, but even in Mexico where Ottomotores is the leader in the commercial industrial market there. Mexico in particular went through an administration change last year and continues to be a little bit slow to let loose some of the spending through the new government there. And so, that’s I think delayed a little bit of what we would have expected to this point with Ottomotores. We’re doing a lot of good things in that business to get the foundation ready for growth. The business, as we had mentioned previously, was fairly neglected in terms of investment over the years through the previous owner. And so we had quite a bit of work to do down there and it’s been quite a learning experience for us and we’ve been on a pretty steep learning curve from the last year just culturally as well as just doing a lot of work with that business and that team down there to understand the markets in Mexico and Latin America and how they operate, transact and what we need to do to optimize our arrangement in our operations there. I would say that in Brazil where we also have an operation through the Ottomotores acquisition, I think personally for us, we’ve seen some little bit probably brighter skies there simply because we’ve resourced a little more heavily on sales and marketing and done some things there that I think are going to help us longer term. I don’t know if they’re indicative of the broader Brazilian economy. I think everything there would also indicate continued slowness, but I think we’re outperforming a bit there. Our feeling is, we’re going to outperform there based on what we’ve done to resource that. Now, it’s on a very small base. So don’t get overly excited. And then over in Europe, with Tower Light, I think we saw better economy in the UK and we saw continued weakness in boarder Europe, I think it is how we would place kind of our view points through the rental markets in particular that we serve, that would really be the best viewpoints that we would have. There was a significant amount of – kind of weather-related issues, even though the broader economy in UK feels better, they had a very damp spring, winter spring, very wet, especially in southern UK, southern England. And so in terms of job sites and rentals, little more challenging environment there in southern Europe and southern England then and we anticipate that it will be for the rest of the year. So we like that company though and where its headed, a lot of good things going on, Tower Light as well is a well run company and we’re trying to figure out how we can extend their product platform and extend their importance to their customers in the rental markets through kind of some synergies, product synergies that we can bring to them through here. Ross P. Gilardi – Bank of America: Okay. Thanks very much guys.

Thanks, Ross.

Thanks, Ross.

The next question is from the line of Christopher Glynn from Oppenheimer. Please go ahead. Christopher D. Glynn – Oppenheimer & Co., Inc.: Thanks, good morning.

Hi, Chris. Christopher D. Glynn – Oppenheimer & Co., Inc.: Hey, York. So previously you had been a little more specific on res, I think setup 10% to 12% excluding the 140, just why don’t if you could try to back on that?

Yeah, I think based on some of Aaron’s comments, we did dial that back in based on some of the views here with the harsh winter weather, it was slight though, I mean it was maybe a couple percent off of that, so it wasn’t a big change. Christopher D. Glynn – Oppenheimer & Co., Inc.: Okay. Thanks. And then wanted to just dive in a little bit into your comments on the long-term shift to the rental of mobile power equipment. What behaviors are changing exactly in the secular basis? And are the rental company’s customer service operations improving?

That’s our view on it. I mean there’s a couple of key things, I think that underpin that secular shift to renting versus buying. One is, I think coming out of the economic slowdown here over the last several years, many of the smaller construction firms – they found that during those downturn, they had a significant mismatch of, they owned the equipment, they had a note from the bank against the equipment but they had no revenue to utilize the equipment. So in those instances, rental would have been much more beneficial to them and in a lot of cases either that equipment was repossessed or returned or sold off which created kind of a further dampening effect on those markets several years ago especially like 2009 right before our ownership of that business in the preceding years, which were more difficult. But, so I think the ability to kind of better match expenses with revenues for those smaller construction companies is a big plus on rental. The other thing is access to capital, that’s been more challenging for small businesses, maybe starting to loosen up a bit here over the last 6 month to 12 months, but traditionally I mean those small businesses could go to their local lenders and get a loan and buy the equipment. The ability to do that has been dramatically reduced over the last several years, that coming out of the downturn. So access to capital and then I think matching of revenues to expenses is the primary mover there. But what we’ve seen is the rental companies really capitalize on this shift and in particular, I mean we serve all the major rental accounts through the Magnum business and somewhat through the Baldor business, and they have continued to refine their model. They’re very focused on equipment utilization, but they’re focused on providing customers much more than just an equipment rental. They provide them with the service level for refueling, they provide them often times with in particular, in the case of long-term rentals, they provide them with maintenance agreement so they take care of the equipment. So basically, you can think of it, and we mentioned as if you think about the oil and gas markets in particular, where our light tower, per say, they use light towers in these drill sites where they don’t have primary power available, there is no utility power. So, and so there is no lighting. And so they operate some of these drill sites operate 24/7 or throughout in Canada, where daylight is shorter during the winter months, like towers are very prevalent. And so what you’ll find though is they will go out on long-term rental agreements and essentially what the rental company is renting is just the light. They are not really, the sites says, hey, we need this much light or this much power on a site, the rental company provides the equipment to do that, and then all the services behind it from refueling the maintenance to keep the equipment up. And so that’s really the model, they’ve refined it quite a bit, and I think that it’s again, I think it’s a reason why we see that long-term secular trend taking hold, and why we like the fact that we’re in good position to benefit from that going forward with the Magnum business and the Baldor business. Christopher D. Glynn – Oppenheimer & Co., Inc.: Thanks, guys.

Thanks, Chris.

The next question is from the line of Charlie Brady from BMO Capital Markets. Please go ahead. Charles D. Brady – BMO Capital Markets: Thanks. Good morning, guys.

Hey, Charlie.

Hey, Charlie. Charles D. Brady – BMO Capital Markets: Can you just talk a little bit, you talked about new portable product going into Lowe’s and Home Depot later this year. Is there a sort of a channel fill that helps out one quarter versus another, and was that baked into prior guidance?

That is the case, that’s the way it works. Charlie, in that case, that product that we mentioned is going to Lowe’s, and there will be a loading on that late in Q2, early Q3 ahead of the season. And that’s really reflected in our guidance. We kind of take into consideration the impact of product launches on and the timing of those launches quarter-to-quarter. Typically with standby launches, there is not much of a load-in, but there is when you get into portable generators and power washers. Charles D. Brady – BMO Capital Markets: Okay. Thanks. That’s helpful. And just on the Baldor deal, maybe you mentioned and I missed it. You talked a little bit about synergies that you’re seeing in there. I mean, can you quantify that a little bit more, be a little more granular on kind of what you’re seeing now as you’ve owned it for a little bit relative to when you bought it and maybe get some numbers around what’s kind of synergy you might see a little bit longer term?

Yeah. So, are you speaking more in terms of cost synergies, Charlie, or product synergies, revenue synergies? Charles D. Brady – BMO Capital Markets: Well, I guess I’m probably speaking of both.

Some question on my part. Of course you are. So on the product cost side, right now, what we’re seeing is we’re coming in line with the synergies that we kind of expected. I don’t think we provided any discrete numbers around that, but we think there is a significant upside to the business. That business was very sub-optimized from a class perspective as we said, I think when we talked about that when we announced a deal in the fourth quarter call, we talked a bit about Baldor. The margins in that business were not where we would expect to see and as a result when we peeled the onion back on that, we did this during our diligence and we continued to execute on this. Really a lot of that’s on the sourcing side, but then also on the optimization of the manufacturing footprint. And this is one of the reasons why we really like this business, we’re kind of busting at the scenes. Our C&I business as we talked has been growing pretty rapidly here over the last several years, as we made that a much bigger part of Generac and we’ve run our space. So we had to do something about that. It’s one of the main reasons why we really like the Baldor acquisition and we’ve got a big beautiful facility, built, purpose built for these types of products. And so the better utilization in that facility, the sourcing synergies that we’re going to get. Those are kind of really meaningful things that are going to start to progress into the back-half of this year, that’s going to start to show up. And so, there is a lag analysis that you do, you had to run through their inventory and ramp up to the new stuff, but really, it’s some of the numbers are really startling in terms of, just on a component level. What we see in terms of opportunities there. So really excited, that’s the cost side, without giving too granular revenue side. I think this has been a little bit of an area of upside surprise for us as we got into it. We liked what they were doing in certain end market verticals, but I don’t think what we really understood, even though we caught it during diligence was just their kind of the breath of their exposure to oil and gas. They’ve really staked out a nice position there. It’s a niche space, no doubt, but we were able to take their kind of exposure through certain customers. They serve certain, I will call them kind of specialty rental companies focused in power, providing those types of back-up power, rental power to the oil and gas industry. We’re customers of Baldor and what we’ve been able to do is take our capabilities in gas technology, combine that with our cost position, our kind of sharp cost position with mobile gen sets at Magnum. Put that together and take it to Baldor’s customer base. So it’s kind of a, it’s kind of what you’d always hope to see when you do acquisitions is, is to kind of knit those things together in a very cohesive way. It doesn’t always work that way, but in this case, we think that it’s really been beneficial, because we’re able to take our gas technology and our ability to operate the engines on natural gas and propane, very cost effectively, put them on wheels and skid mounted basis, and take them out to the oil fields and gas fields through the Baldor customer base, and it’s been very well received and that’s a cycle; there is an up cycle. There is no question that what we’ve seen through the first quarter of this year and what the expectation is for the balance of this year is the oil and gas is going to continue to grow. We see that as we called out a number of times as an upside from a long-term secular growth trend for natural gas gensets in general, but I think broader than that is just the production side of that, the extraction and production of oil and natural gas in this country. We really like our exposure of that now through Baldor and that’s one thing I would say as an upside through the acquisition that has become a little bit more evident to us here recently. Charles D. Brady – BMO Capital Markets: Great and on the gross margin impact, can you quantify, maybe you did, the mix impact on gross margin in the quarter?

Yeah, it was effectively almost all of it. There was a modest level of price cost, but it was very small, so the vast majority of the gross margin delta year-over-year was mix related. Charles D. Brady – BMO Capital Markets: Okay. And one more from me, and I’ll get back in the queue here. On the M&A pipeline, you talked a little bit about looking at your fire power for that, I know it’s a little farther down maybe on the list of capital allocation uses, but can you give us a sense of kind of – if you look at Tower, you’ve obviously got the Towers, you’ve got the Baldor deal, but are there product lines that tie into what you’re doing or is it, give us a sense of the geographies or give us a sense of kind of what you’re thinking about when you talk about M&A pipeline?

Yeah, it’s really, it’s both, Charles. I mean it’s both geography and as we’ve called out a number of times and I mean I think when we look at things like Tower Light, you look at things like Magnum, some of the other products that they come with those acquisitions that are, I wouldn’t – they are not generators, but they’re engine powered equipment. We view those spaces as right spaces, so if you look at our pipeline, which we don’t give discrete comments on, but if you look at that pipeline, it would have a mix in there of engine powered equipment companies that would have a mix of other generator through generator companies in other geographies or other engine powered companies in other geographies. So I would say this, that we’ve been working very hard on that M&A pipeline over the last four years, and I think we have – not everything is actionable, it’s right, it’s about timing in a lot of cases and good asset spreads in certain businesses and industries, but at the end of the day, we think we got a lot of opportunities there. So your comment that it’s lower on the priority standpoint. Again we’re as we said just kind of stepping through that. The first priority for use of cash is to grow the business organically. When you kind of have kind of margins we got, we want to put as much capital against that as we can, but that’s you kind of get. There is a bit of point of diminishing returns there just in terms of bandwidth your ability to execute.

CapEx.

So CapEx only about 2% of sales, when you look at our working capital needs on every dollar of sales. As we grow, it’s about 20%, so it doesn’t eat up a lot of cash that way and paying down debt, which is our second priority. We said that we kind of like where we are at right now. The liability structure we built is very cost effective. In fact, in our prepared remarks, our borrowing costs stepped down another 25 basis points here beginning in Q2 because we’re sub three times on our leverage ratio. So that’s a nice little feature that makes the debt structure even more attractive, so we are sub three times on leverage. We don’t see borrowing cost dramatically increasing. If interest rates went up dramatically, we would probably focus little more heavily on debt pay down, but in the meantime we kind of get our sight set on M&A and organic growth, so that’s really where we’re focused. Charles D. Brady – BMO Capital Markets: Great. Thanks very much, Aaron.

Thanks, Charlie.

The next question is from the line of Jerry Revich from Goldman Sachs. Please go ahead. Matthew Rybak – Goldman Sachs & Co.: Good morning, and it’s Matt Rybak on behalf of Jerry. How are you?

Good, Matt. How are you?

Hey, Matt. Matthew Rybak – Goldman Sachs & Co.: Very well, thanks. Portables were strong in the first quarter despite what sounded like a pretty full channel heading into the quarter. Could you just give us an update on any sort of inventory restock you’re seeing in April in the portable side and how we should think about the run rate going forward?

Yeah, I think Matt my comments previously here on kind of where inventory levels are on portables. We feel that right now we look at our – we have a fairly decent insight, we’re the number one market share player in portable generators, so we have a pretty good insight into what’s going on in the channel as well as what’s going on inside Generac, but we feel that inventory levels are kind of right size right now. So we don’t see a lot of load-in in Q2 for additional portables, minus some of the new products that we talked about with Power Dial, and that’s reflected in our guidance. I think our portable shipments in Q1 to your point were a little bit better than what we are originally expecting and that was really the result, the direct result of some of the events that happened in Q1. It was not only the combination of drawing down some of those portable Gen levels to more normalized levels, but also taking some inventory from us. The draw down was low from us as well as of retail channel levels, and then – but it drove down to a level that everybody is kind of comfortable with going forward into the season, so that’s kind of how I would characterize it. Matthew Rybak – Goldman Sachs & Co.: Great. And then on the Baldor acquisition, can you say more about how the distribution you structure and the C&I business is shaping up after the deal and update us on how the representation decisions are coming along?

Yeah, it’s a great question and it’s been a huge area of focus for us over the first quarter and here into April, and we started to make announcements in assigning different territories to distribution through a combination of our existing Generac dealers as well as the addition of a couple of Baldor dealers into that and some new dealers. Those are things that – that’s coming on very well. It’s not complete yet. I like where we’re at in the cycle. I mean, what happens when you do that in some of the markets where we’ve got changes that are occurring. Because you have a long sale cycle in C&I products, bringing in new dealer up to speed is something that takes a while. So it’s a little bit of a – you got to take a step backward to take two steps forward, market-to-market, but at the end of the day, we’re going to end up with a much stronger distribution position overall than we had before the Baldor acquisition. And that’s I think the important thing I would say, this is the second thing that we’ve done there is we created a much stronger second tier of distribution than we had before. So what we’ve just been talking about is the primary care distribution for C&I. There is now a formalized second tier of distribution, we have a specific program, we call it GAIN. It’s a Generac authorized industrial network. We’re going to take and create a secondary distribution network, a secondary level of distribution that will take, I would say, what we referred to as kind of smaller dealers who want to have access to industrial product, because they have – they see opportunities in their local markets that perhaps the primary dealer doesn’t, but they will work with the primary distribution in the market. It’ll be at a set price and there’ll be programs to not only promote that, but also to make that work from a program element standpoint. So that’s brand new for us. That didn’t exist before, that second layer of distribution. We’re pretty excited, because actually what it’s taken is, it’s taken some of our larger residential dealers who want to kind of grow into becoming broader generator dealers and be a little more inclusive of broadening their product line to include C&I, and allow them access to that product where they didn’t have access before. So that’s kind of an interesting new development for us that was a result of this combination of the industrial dealer networks. We felt that they were some really good dealers that came out of that combination, but that maybe we’re not, where you had multiple dealers in a region and it didn’t make sense to just say good bye to two or three of those dealers and made sense to put a program together to support them and that’s effectively a pretty significant change for us in terms of distribution philosophy going forward.

Thank you. The last question is from the line of John Quealy from Canaccord Genuity. Please go ahead. John Quealy – Canaccord Genuity: Hey, thanks. Good morning, guys. Thanks for squeezing me in here.

Hi, John. John Quealy – Canaccord Genuity: First on the residential side, obviously you had a tough compare in Q1 with Superstorm Sandy, but can you talk about the dealer churn. I imagine the dealers last year, I think, you added something nearly 200 dealers. I imagine that’s down commensurately and how you’re looking at dealer growth or churn in 2014 on the standby product?

Yeah. I mean, it’s a great question, John. Again, we had a pretty good cadence on dealer adds, on a net basis between 300 dealers and 400 dealers every year the last year. That was actually above – we’re about that last year. I don’t have the exact number in front of me, but it was something 500 to 550, I think. 550 dealers, we added last year. Now, obviously that’s seasonal as well, right. So, that does the cadence of distribution adds or dealer adds on a net basis somewhat follows our residential sales pattern seasonally. So Q1 was more challenging there, but we’re still holding to back into that normal cadence of between 300 net dealers and 400 net dealers on an annual basis. So, we would expect that to pick up in the remaining quarters here throughout 2014. And again I think we have by far the largest distribution network in this category and you would expect that from the 70% plus market share leader, in fact our market share is crapped up a bit here in Q1, so we think we’re doing well to continue to not only hold on to our share and it’s things like distribution ads and it’s things like new products and some of the things we talked about, but again it’s distribution is an enormous part of that strategy and an enormous part of our success here over the last decade in terms of building this business.

Thank you. I’d now like to turn the call over to Mr. Aaron Jagdfeld, President and Chief Executive Officer for closing remarks.

Great. Thank very much for joining us this morning. We look forward to talking to you again on our second quarter earnings call, which should be sometime in late July of this year. Thanks, and have a good day.

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. And have a very good day.