Good morning, ladies and gentlemen and welcome to the First Quarter Generac Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at the time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. York Ragen, Chief Financial Officer.

Thank you very much. Good morning and welcome to our first quarter 2019 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, 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 SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we'll make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable 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. Our first quarter results represent an outstanding start to the year for Generac as we experienced very strong core organic growth of approximately 15% in the quarter. Overall net sales increased 17.6% compared to the prior year when including contributions from the Selmec, Captiva [ph] acquisition, which were slightly offset by unfavorable foreign currency impacts during the quarter. EBITDA margins expanded by 60 basis points to 18.5% as compared to the prior year first quarter driven largely by favorable operating leverage on the higher sales volumes, which helped to counteract the impact of higher input costs. EBITDA dollars on a trailing 12 month basis reached an all-time high of $440 million as we continue to demonstrate the earnings power of the company. Strength in end market demand underpinned the increases in the first quarter with interest in home standby generators in particular remaining very robust as increased power outage activity over the last two years alongside the impact of our initiatives to grow the market resulted in continuing penetration gains. Shipments of C&I products were also significantly higher year-over-year as growth in demand for backup power increased, particularly from wireless carriers as they worked to further harden their networks. In addition, we experienced solid organic sales growth within the international segment as our Pramac subsidiary experienced year-over-year increases in spite of strong currency headwinds. Awareness for home standby generators continues to benefit from elevated power outage activity in recent years and remain very strong for the first quarter as activation and in-home consultations both paced well ahead of prior year levels. We have worked very hard over the last two decades to build out the market for home standby generators through our efforts in developing distribution, creating targeted…

Thanks Aaron. Before discussing first quarter results in more detail, recall that effective January 1, 2018, Generac adopted the new GAAP revenue of recognition standard. Upon finalizing our accounting under the new standard, at the end of 2018, we made certain immaterial prior quarter reclassifications to our consolidated statements of comprehensive income related to extended warranties. Therefore, the prior period in our earnings release has been updated accordingly. See our press release for more information related to these reclassifications. Now looking at our first quarter 2019 results in more detail, net sales for the quarter increased 17.6% to $470.4 million as compared to $400.1 million in the first quarter of 2018. Excluding the $14.9 million of contribution from the Selmec, Captiva real acquisitions and the negative impact from foreign currency, core growth rate during the quarter was approximately 15%. Looking at our consolidated net sales by product class, residential product sales during the first quarter increased 14.4% to $217.8 million as compared to $190.5 million in the prior year quarter. As Aaron mentioned, the current year quarter experienced very strong growth once again in shipments of home standby generators as end market demand for these products continue to be robust coming into 2019. Shipments of portable generators, while still strong, were down in the current year first quarter versus the prior year, which included the impact of multiple winter storms that affected millions of people in northeastern parts of the United States. Looking at our commercial and industrial products, net sales for the first quarter of 2019 increased 19.4% to $209.1 million as compared to $175.1 million in the prior year quarter with core growth being approximately 17% when excluding the M&A contributions from Selmec and Captiva and the unfavorable impact from foreign currency. Domestically, as Aaron discussed, we continue…

Thanks York. As we have discussed, our end market conditions for domestic, residential and C&I products remains strong and better than expected. In addition, our recent acquisitions of Neurio and Pika have accelerated our entry into the energy management storage market. As a result, we are raising our guidance for revenue growth for full-year 2019 as we now expect net sales to improve between 5% to 9% depending on the severity of power outages during the year which is an increase from the 3% to 7% growth previously forecasted. On a core basis, full net year sales growth is expected to be approximately 3% to 7% which is an increase from the 2% to 6% core growth previously expected. Seasonally, we now expect net sales in the first half of the year to grow approximately 12% to 14% on an as reported basis and 9% to 11% on a core basis. For the second half of 2019, we expect net sales growth to be approximately flat to up mid-single digits on an as reported basis. The low end of the range would assume no major power outages and an average baseline outage of environment while the high end of the range would assume more elevated outage activity which could include a major power outage event during the second half of the year. Net income margins before deducting for non-controlling interests are now expected to be between 10.5% to 11.5% for the full-year with adjusted EBITDA margins also before deducting for non-controlling interest, now expected to be between 19.5% to 20.5% for the year. Importantly the low end of the range would assume no major power outages and an average baseline outage environment and the high end of the range would assume more elevated power outage conditions. The modest decline in…

[Operator Instructions] Your first response in the line of Jerry Revich of Goldman Sachs.

Hi, good morning everyone. This is Ben [ph] on for Jerry.

Hi Ben.

So just you guys were very active with M&A this quarter, going for the go forward do you have the full suite of products that you think you need to execute on your strategic focuses and or do you still remain in the marketplace for any missing pieces that you need to fill out the portfolio. And can you kind of give us well, give us a timeframe of profitability across those different businesses?

Yes, it's a great question, Ben. And while we don't give specific comments on our pipeline, we have been very active. I think the Neurio acquisition represented our 14th, or 15th acquisition here in the last seven years and more recently here as indicated by our prepared remarks, we've been very focused on both building out our capabilities geographically but also into some of these newer spaces like energy monitoring storage. With respect to your question, do we have all the pieces, I think that we have a lot of great pieces in fact I think the pieces that we have acquired really give us the position that we desired to go after this market with a lot of vigor. That being said, I think there are some other areas that that could be potentially bolted in to augment some of those things in energy management and energy storage. I won't comment specifically on them here but we are continuing to look at that space. Our pipeline is full of a number of potential companies that that could give us some additional opportunities there whether it be in the commercial and industrial spaces or whether it be in certain aspects of the management or monitoring. I think that there are a couple of things that we could do there. Also geographically, I would say Captiva which we did in the first quarter was a way for us to get an entry point into India which we had not had prior. There are a couple of areas of the world where we still feel we have where we lack representation. So I would say that our pipeline also would have the types of acquisitions there that would give us the kind of manufacturing and distribution footprints that we think are important…

Got it. And then in the mobile business, I believe in the prepared remarks you called out a shift in volumes of rental customers into later quarters. Can you just maybe elaborate on that. And can you give us an idea of how you give visibility of those volumes actually coming through in the coming quarters?

Yes, it's another good question. That industry is at least for us with our share, we're probably over index to the national account customers there. In fact in our prepared remarks, we actually we'd like to see some of the independent rental house growth that we saw. That's a good kind of, I would say counterweight to the National Accounts, National Accounts are great. We love them, we serve them very well. We think we have a unique formula to doing that, it's why I think we serve in places like the Telecom spaces and others we serve major customers like that in the retail spaces. We do a very good job of that and the rental space is no different. But they were a little bit slow to get out of the gate this year, one or two of them in particular. And what we've seen is we've seen order rates here pick-up recently. So that's why I think we have the confidence to say that that's going to be something that's coming in the back half of the year and we have a lot of dialog with those rental houses as well. So I think we have pretty good visibility on what's going to happen. It's not perfect obviously things can change but at least based on what we see today, we would see quarter-over-quarter growth going forward, year-over-year growth excuse me in the quarters ahead and full-year growth as a matter of fact as well for that product line.

Got it. Thank you very much.

You bet.

Thank you. Your next response is from the line of Jeff Hammond of KeyBanc Capital.

Hey, good morning guys.

Good morning, Jeff.

Hey Jeff.

Just good quarter in home standby. Just can you just update us on what you're seeing in terms of activations and inquiries and what that suggests for kind of pipeline into 2Q and can you just talk about if weather would seem to be impacting a lot of companies, did it help or hurt you in terms of ability to install et cetera? Thanks.

Yes, good question Jeff. What we're seeing today, we continue to see strength in activation rates on home standby, in-home consultations a little bit of moderation there but that's only because the comps got really large versus last year, we had the nor'easters in the back half of Q1. So a lot of IFC activity at this time last year. That being said, I mean we're holding our own on IFCs and in particular when you compare it to previous years it's quite a bit elevated. So that gives us a lot of confidence that the trend is going to continue and probably more importantly is field inventories are extremely lean for home standby. I think what has happened here is our teams have we've tried to be very disciplined around the promotional environment for that category. I think in years past, we would have maybe scheduled a national promo in Q1 timeframe, we didn't do that this time around. We did some promoting at our national conference this year which was well attended by the way over 2500 dealers just an amazing conference. But we had, we did a little bit of promoting there but by and large, it's really surprised us in terms of the underlying strength. And so we've been disciplined here and that discipline though has worked to kind of drain some of the field inventories out as I think our channel partners maybe wait us out a bit for a more promotional environment. And I think if seasonality plays out the way that it would, we're going to do some promotion of course as we would seasonally and we've got a national promotion schedule here in Q2 but we like the trends that we're seeing and as far as weather's impact, weather obviously is kind…

Okay. And then just coming back to the acquisitions and the strategy, one can just as you look at Neurio and Pika like what's the mix of commercial versus res, is it mostly res, kind of how do they go to market, how do you kind of put it together with your home standby and your dealer network and just trying and wondering how that all comes together as you pull it all together? Thanks.

Yes, and that's obviously the area of focus and one of things that we really like about this. So your first part of your question is residential versus commercial, the majority of what Neurio and Pika are focused on is residential in nature. That being said, Pika has commercial oriented products as well. These are both pretty, they're not necessarily new entities per se in terms of age, relatively young in terms of a decade old or sooner than that. But they haven't quite gotten a ton of systems out there. Now Neurio has delivered a couple hundred thousand of their energy monitoring devices into the market and their newer energy monitoring and management devices will be just hitting the market here more recently. The go to market strategy is pretty clear though, what we're going to do is we're going to take that big page out of the playbook of home standby and we're going to run those plays, it's a student body right all day long there in terms of awareness, availability and affordability. So focusing on omnichannel distribution, so taking these products to retailers to wholesalers on a direct basis to our contractors, our direct channel, it's going to introduce us to new channel partners potentially in the solar industry. The area of first interest for us is people that already have installed solar systems. There are roughly two million solar installations around the U.S. and only 2% of those installations actually have a battery backup system. The addition of a battery backup system has come down nicely in price over the last several years and with the addition of that, you can dramatically improve the payback on your the money you've already invested in solar. And it gives you a lot more flexibility and you couple…

Okay, good color. Thanks so much.

Thanks Jeff.

Thank you. Your next response is from Christopher Glynn of Oppenheimer.

Thanks.

Hi, Chris.

Good morning, I was wondering if anything's happening with resale and upgrade. Curious what proportion of stand by today is replace and upgrade versus expanding the penetration rates and what kind of movement, you're seeing along those lines?

Yes, thanks Chris. It's another area we watch, we track it very closely. We have the ability to do that with all the data and our activation data and homeowner file that we have here. So I think we have a very good view on this and we see a reliable march upward in replacement. The category's been around 20 years now and in fact, some of the older parts of the market are starting to hit that 20-year mark and that's the life expectancy of these products is between 10 and 20 years, pretty reliably. And as we get into that, today it's about 5% of the sales that we experienced in home standby are four that we can tie directly to replacement but every quarter that goes by, it is pretty cool because you can kind of see it just in the math. We see a reliable march upward in that number.

It sounds good. And question on the dynamic around the kind of wave emerging around 5G and overall telecom backup. What's your view of the duration of this, it seems like it might be sticky for a while and corollary to that, how accessible is the international opportunity for telecom customers given your footprint and legacy incumbents outside the U.S.?

Right. So I would say and I think I may have mentioned in my prepared remarks, an extended cycle and extended up cycle that we're entering here, when we've seen this in the past and we've been serving this market now for almost 30 years with backup power, so we have longstanding relationships, we have a lot of cycles, we've been through both up and down. And typically when we enter a cycle like this and we really entered it kind of in the back half of last year, we really saw it start to pick up, beginning of last year into the back half. And it really has picked up steam here in Q1, that has generally, historically based on our experience that's been a couple of years of a run as those just the projects cycle themselves for them to acquire the equipment, the carriers to acquire the equipment actually get the project management together and get the installations in as they build out those networks that they harden those networks. It generally runs several years, so two to three years might not be out of bounds in terms of what to think about that and obviously things can come and go that can change that. If there are economic conditions that change, if there are M&A activity sometimes can put a pause on those activities., if there is rationalization of network assets and things like that to be had in an acquisition or in M&A. But we think it's going to we're headed into an up cycle here. Second part of your question on the international opportunity, how accessible is that. I'll address accessibility in two ways. One accessibility in terms of our footprint. I think this is the beauty of what we've been doing internationally. We…

Thank you, helpful.

Thanks Chris.

Thank you. Your next response is from the line of Chip Moore with Canaccord.

Morning, hey thanks. Congrats on the strong momentum. Maybe one area we didn't touch on was healthcare. I think you called out some good demand there. Maybe you can update us on some of the trends you're seeing in that market?

Yes, healthcare remains another important vertical for us. And you're right. Chip, I didn't mention it this morning directly maybe out of respect of time for everybody. Just we had so much to talk about but the healthcare market's been good. You know it's been one of those verticals that continues to grow. It's actually a vertical where we're focused on a more direct basis and engaging with those customers. And this is maybe a bit different from our normal industrial distribution channel where we would go through our fixed distributors and we've got about 25, 30 fixed distributors across the U.S. and in other parts of the world for that matter where we sell products through. But there are certain verticals, telecom being one of them as we talked this morning but also healthcare where we will sell on a direct basis because we believe that that's how those channels want to buy frankly in terms of and they need to be served because of the breadth of the offering they need and also the breadth of coverage that they desire. More specifically the Florida Healthcare opportunity that we've talked about coming off of the events of the last couple of years, there were some regulations that were put in place, a lot of companies had to comply with those regulations for critical care facilities by the end of the year, so that they can have backup power that not only backs up certain critical circuits but also HVAC which was I think the miss in previous regulations and the addition of HVAC obviously adds quite a bit of additional power needed, power needs and the generators grow in size considerably. That went into effect at the end of the year but there were a lot of waivers issued…

Absolutely, thanks.

Thanks Chip.

Thanks Chip.

[Operator Instructions] Your next response is from Brian Drab of William Blair.

Hey good morning. Thanks for taking the question.

Hey Brian.

Good morning, Brian.

Just a quick modeling question first on Pika and Neurio, you're not giving us the revenue but I think what you're - I think what you're signaling is that these are going to add maybe about point revenue growth. These are each maybe like in the $5 million to $10 million revenue range. Am I far off there?

Yes, that's fair. Like Aaron said, these are more startup businesses that are getting into this emerging category, so their revenues are in that range, Brian.

Right. And I understand the point here is the technology in building the portfolio?

The team and the technology that's what we're after.

Right, right. Got it. Unfortunately, I have to build a model and nail down the details.

That is unfortunate.

Yes, we'd like to think longer term, we've got to build these models as well. So on the mobile market, Aaron you talked a little bit about that and can you talk about what percentage of total revenue now is tied to energy. And are you seeing. Is this a lot to do with kind of reduction activity in the Permian. And do you need there's a lot of companies do for that pipeline capacity to come on in the second half of the year and activity to start-up before you see recovery or is it not so much that specific event that's causing you challenge?

Yes, I mean the energy piece is still a pretty small piece for us Brian, it's not I wouldn't call that out specifically is more. Actually, I think the National account pullback was less about energy excuse me and more about just I think General rentals, the general rental market just they were a little bit slow to get off the dime purchasing, these guys have bought remember the national accounts have been doing, they've been through a pretty strong week fleeting exercise over the last couple of years. So they're kind of absorbing all that fleet and actually they would tell you their utilization statistics were a little bit soft in Q1, as they kind of were rationalizing some of this equipment. So putting more out to pass through so to speak and getting out of the secondary market and kind of thinning out the herd a bit. All indications are that they intend to be back and in the second, third and the remaining quarters, your fourth quarter as well. And I actually that's on the back of firmer energy prices. What's going on in the Permian? We've actually been seeing a lot of opportunities in the Permian actually from our specialty rental guys, who not the national rentals but actually the special rental companies have been we've seen a marked increase uptick here as we start the second quarter in natural gas gensets which go are directly being used in those energy plays to generate power off of the flare gas and off the wellhead gas. And so we're seeing a nice lift there and I think with the energy prices being in the ranges that they're at here, it's very supportive for continued investment in the types of mobile equipment that we would typically see there. And then that alongside as I said kind of the general recap, the general rental market kind of getting going here what gives us a lot of kind of confidence there is that the independent companies we're still buying in Q1, we had inventory available and we saw a nice actually a nice shift away from rental, the national rentals and into the independent rentals. So the markets there, I think it was just it's a purely in our view a timing issue mainly attributable to just these national rental accounts from just from Q1 shifting into the later quarters.

Okay. Got it. And then just quickly, York you mentioned the tariffs that that could come, that could create a new tailwind or new headwind. Can you talk about what the worst case scenario is there and what you're looking at?

Yes, I think well we've been paying the 10% tariffs on list three started up in September of last year. So we've been, we've been absorbing that for the last call it six months. So what we're seeing run through our P&L is those tariffs. Obviously, we reacted to those tariffs with pricing actions and whatnot. But I guess it's still yet to be seen, if they negotiate away. The threat of the 25% tariff but that that isn't in our - I guess we don't have that necessary in our math, in our outlook statement. But what we have - but what's running through our run rate today is that the 10% tariffs. So it's and we've been absorbing that through pricing actions and other cost reduction initiatives.

Got it, okay, thank you very much.

Thank you. Your next response is from the line of Stanley Elliott of Stifel.

Good morning guys. Thank you for fitting me in. A quick question on this energy management business. Just to make sure, I'm hearing it correctly it sounds like that there is a stronger preference for M&A one, two on the SG&A side and then on the R&D side that going through the distribution channel, we shouldn't see much of an change there and then the R&D piece, probably don't need to see much of a change I mean I'm just trying to get a sense for how this business is going to look longer term then I guess then the last question would be kind of with the growth rates that you're seeing right now, is there any way you could ballpark when maybe this becomes I don't know like 5% or pick a number of overall revenues?

Yes, thanks Stanley. Just to kind of parse your question there. So you're right, I don't think we need to add a ton in distribution in like headcount there, although the western parts of the U.S. as I mentioned today we're pretty underrepresented. In terms of distribution, so I think if we're going to put dollars towards distribution anywhere it's going to be in that area. I think from the standpoint also though in sales and marketing effort, the way that we built the home standby market, we developed in-home selling tools, we developed targeting marketing - targeted marketing types of approaches. I think we can leverage a lot of what we've already created there but we still will have to buy media to go out and develop that market, right. So it's one thing to use what we already have is another thing to deploy what we have aimed at a new market. So it's not going to be at the same level of spend what we're doing with home standby. But it will be an increase over where we're running today and that's what we've kind of I think at least begun to model here as we think about, as we think about the future. As it relates to product development, yes, we bought these companies because we like the products they have, the technologies they have. But we need to continue to invest in that, so we can build it out. There are opportunities in the commercial space that we want to build out, there are opportunities in new generations of products, battery costs continue to drop. Technologies continue to change. We've got to tie the products together with our existing home standby products. So there is product development effort there and there's cost. Obviously, whenever you…

Multi-billion dollar opportunity?

Yes, it's forecasted to be a multi-billion dollar market very quickly. So we're really excited about. I mean it represents a whole new area for us and we look we've looked for a long time for kind of I'll call it ancillary products that we could bolt into our this awesome thing we've built in home standby and we've looked at a lot of different things and we've just we haven't really found the right thing that fit naturally that didn't distract from what we're trying to do in home standby and actually fit with the channel and everything else we're trying to do in creating a market, market creation type of activities. This energy monitoring and storage market is spot on and it could be huge. It could be as big or bigger than home standby. And if you look at the way it's projected, it could be twice the size of home standby in not too long times, not too long the time. So incredibly excited about it. We really like our positioning here. We think that the solution that we're putting together by taking Pika and Neurio and our expertise in power electronics manufacturing and sourcing putting all that together we're going to get - we're going to be able to bring to the market a very unique solution, a very differentiated solution from the solutions that are on the market today and that I think is going to give us a fantastic position to replicate what we've done with home standby. I don't think it's going to take 20 years either. I think we can be able to do it lot faster because of all the learning cycles we have under our belt and very bullish about that. It's going to be pretty exciting stuff going forward.

Very interesting, indeed. Well thanks for the time and best of luck to you guys.

Thanks Stanley.

I'm showing no further questions at this time. I would now like to turn the conference over to Aaron Jagdfeld.

Great, thank you. We want to thank everyone for joining us this morning and we look forward to reporting our second quarter 2019 earnings results which we anticipate will be at some point early in August. Thank you again for your time this morning. Good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a good day. You may all disconnect.