Generac Holdings Inc. (GNRC) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Generac Holdings Inc. Earnings Conference Call. My name is Tahisha, and I’ll be operator for today. At this time, all participants are in listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. York Ragen, Chief Financial Officer. Please proceed.

Good morning and welcome to our third quarter 2012 earnings call. I’d like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, our President and Chief Executive Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time-to-time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or our SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today’s call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I’ll now turn the call over to Aaron.

Thanks, York. Good morning, everyone, and thank you for joining us today. Before we begin this morning, I want to say that our thoughts and prayers go out to those that are currently being affected by the major storm at the East Coast. This storm was built significant with regards to shrink for the large region that has impacted. Our teams at Generac are working around the clock producing and shipping products to the affected regions, assisting customers with their questions and providing technical support to our distribution partners. As the company focused very heavily on backup power generation, our business model has built around providing a very high level of service and support during times like these. In addition to our teams here at Generac, we have the industry’s largest and most well trained generator-dealer network of more than 4,500 partners that are focused on taking care of our customers during major outage events. We believe that this event as well as other recent outages will have a positive impact on our results going forward. And accordingly, we have significantly raised our guidance for the remainder of 2012. Now I’d like to turn our attention to Generac’s third quarter results, which we believe continue to demonstrate the accelerated option of standby generators into the residential and life commercial markets. Our third quarter net sales increased 26% over the prior year to $300.6 million. This follows the third quarter of 2011 that grew 49% over the third quarter of 2010. The significant growth that we have delivered over the last several years clearly illustrates the progress that we’re making in executing our Powering Ahead strategic plan Growth in shipments of home standby generators were again strong during the current year third quarter as the market for this product category continues to develop with more homeowners becoming aware of the importance of having a backup power system for their home. As a result of our execution and meeting the increased demand for these products during the current quarter, we believe we have expanded upon our leading market share position for home standby generators, as consumers further realize the advantages of the Generac branded, including the breadth of our product offerings, our industry-leading price points, and the support we provide for both our customers and our distribution partners. Major power outage events continue to be an important catalyst for demand and highlight the powerful macro drivers for our business as the prolonged underinvestment in the aging electrical grid is leading to more frequent and longer power disruptions for homeowners and businesses. Although the category has been growing at a compounded annual rate of nearly 17% over the last decade, home standby generators are only installed in roughly 2.5% of all single family and attached homes. The market opportunity for these products remains very attractive with every 1% of additional penetration representing $2 billion of market value. As the leader in this relatively nascent market with over 70% share, we believe Generac is very well positioned for additional future growth in our residential markets. The latest series of major power outages have helped to create additional momentum and the awareness for automatic backup power solutions for homes, and this is awareness coupled with our greater marketing and distribution efforts have continued to drive significant baseline growth for home standby generators in North America. With regards to our Commercial & Industrial products, an important driver for our business going forward, is the increased market interest in cleaner-burning, more cross effective natural gas fuel backup power solutions. While still a much smaller portion of the overall C&I market, demand for these products is increasing at a faster rate than traditional diesel fuel generators given their lower capital and operating costs. As a leader in the North American market for natural gas fuel generators for over 30 years, we believe we are well positioned to capitalize on the secular shift towards these products. During the current year third quarter, we continued to see a year-over-year increase in natural gas generator shipments providing attractive organic growth for our C&I products. In addition to natural gas fuel generators Magnum branded light towers and mobile generators have also performed well as demand for mobile equipment continues to benefit from a secular shift towards renting versus buying, and as the equipment rental companies replace their aging fleets. We’ll remain excited about the strategic fit of these products through the additional diversification and cross-selling opportunities they bring to our business. After now owing Magnum for over a year, we’re also very pleased with our integration efforts and are on track to achieve our cost synergy targets. We also continue to make important progress in executing our strategic plan. Our Powering Ahead strategy, which we implemented less than two years ago, has served as a template for investments in our company that we expect will position Generac for longer-term growth. Since this implementation in 2010, we’ve exceeded our performance goals established at that time, reaching many of those targets a year earlier than we had originally planned. As we look to the future, our Powering Ahead strategic plan will continue to be driven by the same four key growth objectives of growing the market for home standby generators, increasing our share of the Commercial & Industrial market, diversification of our business through new products and services and expanding our geographic reach. As we continue to move the Powering Ahead plan forward, we are focused on a number of new initiatives that will continue to grow the baseline business for Generac as follows. In working to grow the residential standby generator market, we have made important progress in 2012 in designing and implementing a number of focused dealer development programs, we believe, will allow us to create and close sale leads more effectively. These programs incorporate new sales tools, training improvements and more structured processes that are designed to better align our dealer network with Generac and improve the overall consumer sales process. We have also enhanced our efforts in using data regarding the location of our installed products to implement targeted marketing techniques for new sales prospects as well as having developed a more sophisticated and efficient process to capture and track sales leads through our dealer network. Additionally, we have further expanded our residential and light commercial distribution network ending the third quarter with over 4,500 dealers representing an increase of approximately 500 channel partners over the last 12 months, increasing both the awareness and the availability of home standby generators are two important elements for driving the penetration of these products higher. We also believe improving, the consumer purchasing process will allows more quickly growth as emerging product category. With regards to growing the commercial standby generator market, we believe there is significant opportunity to tap into this highly underpenetrated end-market consisting mainly of small footprint commercial buildings such as gas stations and convenient stores, restaurants, pharmacies, bank branches and clinics and other small healthcare facilities. We believe, our expertise in natural gas generators, our vast distribution capabilities and our national account customer focus will allow us to increase the market for commercial standby generators. By using a targeted marketing approach and funneling opportunities to our distribution partners, we’re confident we’ll be able to effectively penetrate this market by presenting a very compelling return on investment for business owners, who are looking to protect the revenue streams as well as their inventories of backup power protection in addition to our initiatives associated with growing the market for home standby and commercial backup generators. We have a number of new product development initiatives underway as well. Innovation is always been a part of Generac’s culture, it is something we view as a core competency of our company. As we work towards diversifying our business, we believe innovation can play an important role in helping us to achieve this goal. One example in this area that we are particularly excited about is our ability to bring so much new innovation to the power washer product category. Our one wash product line was introduced at the Lawn and Garden Show in Louisville, Kentucky last week, and is the latest addition to our growing power washer product lines. Market exclusive features such as variable pressure output for different path, automatic shutoff protection and increased ease of use differentiate this product from any other power washer on the market today. We have made good progress on liner views with the one wash product, as well as with our legacy power washer products for the 2013 selling season. In addition to power washers, we also have several product development projects underway to broaden our commercial and industrial product offering, which we believe will significantly expand the addressable market for Generac and our dealers over the longer term. Going forward, we will continue to focus on new product development as part of our growth strategy and Powering Ahead will help to guide our investments in this area. Regarding expanding our geographic reach, our international expansion continues to remain a focus as we look to increase our distribution footprint and support functions globally, as well as expanding our product offering to better fit the needs of individual local markets. Going forward, we will continue to make our international expansion efforts a priority given the significant global market opportunity that exists for backup power generation. We are also looking forward to providing further insights with regards to our Powering Ahead growth strategy at our upcoming Investor Day on November 8th. I would now like to turn the call back over to York, to discuss third quarter results in more detail. York?

Thanks, Aaron. As previously mentioned net sales for the third quarter 2012 were $300.6 million, a 25.6% increase as compared to $239.3 million in the third quarter of 2011. Looking at net sales by product class, residential product sales increased 17.8% to $191 million in the third quarter of 2012, relative to a strong prior year net sales comparison to $162.1 million, which saw a year-over-year sales growth of 60.5%. During the third quarter, Generac continued to experience a very strong double-digit increase in shipments for home standby generators in comparison to the prior year. Significant awareness and baseline growth for this product category continues to be generated through a combination of major power outages over the last year, expanded distribution in active markets, and increased sales and marketing efforts to create and close leads more effectively. As demand for home standby generators has significantly increased over the last several quarters, we’ve been able to execute by officially increasing our production levels to meet this demand. Portable generators shipments during the third quarter of 2012 were coming up against a difficult comparison versus prior year, which showed a strong sequential increase relative to the second quarter of 2012. Our broad relationships at retail have provided us with expanded placement for portable generator products. And as a result, we believe we’ve gained market share in this product category compared to prior year, further enhancing our leading position in the market for residential backup power in the U.S., also, contributing modestly to the revenue growth for residential products during the third quarter of 2012 with increased revenue from our power washer product line, which first began shipping in the second quarter of 2011. We also continue to see increased sales volumes for our Honeywell licensed residential products. While we’re still in the relatively early stages of both programs, we continue to be encouraged by the quarterly sales trends related to our power washers and Honeywell licensed generators. Looking at our Commercial & Industrial products, net sales increased 48.3% to $93.6 million in the third quarter of 2012 from $63.1 million in the third quarter of 2011. The increase in net sales was primarily driven by the Magnum Products acquisition and to a lesser extent, increased shipments of natural gas fuel backup generators. Partially offsetting these gains with a year-over-year decline in shipments to certain national account customers during the third quarter, relative to a strong prior year comparison. As a reminder, given our strong telecom market share, there can be some variability in our C&I product shipments primarily due to the timing of capital spending by our national account customers. On October 3rd of 2012, we reached a one-year anniversary of our acquisition Magnum Power Products. Over the last year, we’ve made significant progress with the integration of this business and we remain on track with our goal of achieving roughly $2 million in cost synergies on a run rate basis. As discussed on previous calls, much of the savings we’re projecting will come primarily as a result of improved purchasing scale with certain components and commodities as well as from improved utilization and efficiencies in Magnum operations. We’ll continue to realize these cost synergies during the fourth quarter of 2012 and remain on track to achieve the full realization on our annualized basis by the end of the year. In addition the cost synergies, we’ve also taken advantage of opportunistic revenue synergies through cross selling opportunities across the businesses. Looking forward, we expect to further expand on these cross-selling opportunities with Generac’s industrial national account customers and industrial dealers purchasing Magnum mobile generators. And we continue to track a number of leads across sales teams both domestically and internationally. Our other product sales category improved to $16 million in the third quarter of 2012 an increase of 30.5% from prior year third quarter sales of $14.1 million. As a reminder this product category is mostly comprised with sales of aftermarket service parts as well as loose engines sold directly OEMs for using engine powered products across a wide range of applications. Gross margin as a percentage of sales for the third quarter of 2012 was 38.5% compared to 37% in the prior-year third quarter. The 150 basis point increase over the prior year was primarily due to higher mix of home standby generators and a lower mix of portable generators. The positive impact from commodity cost moderation, improved pricing and improved overhead absorption also contributed to the improvement in gross margin relative to prior year. All these margin improvements were partially offset by the mix impact from the addition of Magnum Products sales. Operating expenses for the third quarter of 2012 increased by $12.2 million or 27.4% as compared to the third quarter of 2011. These additional expenses were driven primarily by operating expenses associate with Magnum, increased sales, engineering and administrative infrastructure to support the strategic growth initiatives and higher baseline sales levels of the company, increased incentive compensation expenses as a result of company’s financial performance during the quarter and lastly increase variable operating expenses resulting from the increase in organic sales. Adjusted EBITDA increased to $76.3 million in the third quarter of 2012 as compared to $61.6 million in the same period last year. The last 12 months adjusted EBITDA as of September 30, 2012 was $268.5 million, a 24.4% of net sales during that period. GAAP net income for the third quarter of 2012 was $25.5 million as compared to $37.4 million for the third quarter of 2011. Current year net income was impacted by an $11 million increase in interest expense from the refinancing of the company senior secured credit facilities in May 2012, as well as a normalized income tax provision of $16.3 million, this is only $126,000 in the prior year quarter. Talking further about income tax – talking further about income taxes, the third quarter of 2012 includes the impact of a normalized effective income tax rate of 39% as compared to a tax rate of 0.3% in the prior year third quarter. As we’ve discussed in recent earnings calls, until the fourth quarter of 2011 a full valuation allowance as recorded in the company’s net deferred tax assets resulting substantially no income tax provision. In the fourth quarter of 2011, it was determined that a full valuation allowance is no longer required against the company’s net deferred tax assets and that valuation allowance was reversed. Therefore, starting in the first quarter of 2012, a normalized income tax provision has been recorded through our income statement. More importantly though, the vast majority of this income tax provision is non-cash in nature, as we will continue to realize significant cash tax savings, primarily from the step up in asset bases and NOL carry forwards relating to the 2006 change in control transaction and to a lesser extent the recent Magnum acquisition. As a result, we believe the company will only pay nominal federal income taxes for the foreseeable future, which is why we only reflect cash taxes in our adjusted net income calculation. Adjusted net income, as defined in our earnings release, increased to $54.1 million versus $50.6 million in the prior year third quarter. The increase in adjusted net income was attributable to improved operating earnings during the quarter resulting from the 25.6% increase in revenue including the incremental results from Magnum acquisition, partially offset by the higher interest expense due to the refinancing of the company’s credit facilities as discussed previously. Diluted net income per share for the third quarter was $0.37 compared to $0.55 per share in the third quarter of 2011. Diluted earnings per share for the third quarter of 2012 include the net $0.23 per share impact from the normalized effective income tax rate as well as a $0.10 per share impact from higher interest expense levels. Adjusted diluted net income per share as reconciled in our earnings release with $0.78 for the current year quarter compared to $0.75 per share in the prior year quarter. Free cash flow as defined as net cash provided by operating activities less capital expenditures was $61.6 million in the third quarter of 2012, compared to $60 million in the same period last year. Strong operating earnings and monetization of inventory levels were partially offset by an increase in capital expenditures, primarily related to capacity expansion initiatives. Free cash flow over the past 12 months was $188.9 million and unlevered free cash flow was add back cash interest expense was $214 million. As of September 30, 2012, we had $882.9 million of bank debt outstanding, net of unamortized original issue discount and $58 million of consolidated cash and cash equivalents on hand resulting in consolidated net debt of $824.9 million. Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the third quarter was 3.1 times down from 3.5 times net debt leverage ratio at the end of the previous quarter on June 30, 2012. A strong cash flow profile and availability on our unfunded $150 million revolving credit facility gives us significant operating flexibility to further invest in our future organic growth initiatives, paid down debt to our targeted leverage levels, while also executing on potential strategic acquisitions. With that, I’d now like to turn call back over to Aaron to provide some additional comments on our outlook for 2012.

Thanks, York. Due to the substantial power outage activity currently occurring on the East Coast, we’re significantly revising our guidance upward for the remainder of 2012, mainly due to increased demand for home standby and portable generators in the fourth quarter. Full year 2012 net sales are now expected to increase in the low 40% range over the prior year, which represents an increase in the low 30% range previously provided on our October 1st business update. As a result of the higher sales outlook, our adjusted EBITDA for the full year 2012 is now expected to increase in the mid-40% range over the prior year, which is an increase in the mid-30% growth rate previously expected. In addition, diluted net income per common share for 2012 is now expected to be in the range of a $1.21 to a $1.27 per share as compared to the $1.02 to $1.08 per share range previously expected. Adjusted diluted net income per common share is now expected to be in the range of $2.95 a share to $3.00 a share as compared to our previously expectation of $2.65 to $2.70 a share. We believe the long-term impact of the recent outage events will continue to increase awareness for residential and like commercial standby generators. This higher level of awareness is expected to drive further expansion of our distribution network in the affected regions, as well as create opportunities to our enhanced sales processes and marketing techniques. These are important factors in accelerating the adoption of these products, which we believe will lead to the establishment of a new and higher baseline demand for automatic standby generators. As a result, we now expect residential product shipments for full year 2012 to increase in the high 30% range. This is on top of a very strong year for these products in 2011, as residential sales last year increased 32% in comparison to 2010. With regards to our Commercial & Industrial products, despite there continuing to be a number of macro data points that suggest a moderating growth environment at least in the near-term, our outlook for C&I for the remainder of 2012 is modestly improved compared to our prior forecast, driven by increased capital spending by certain industrial national account customers, as well as increased demand for like commercial generators and certain mobile products due to the recent outage activity. As a result, we now expect our C&I product sales to increase at a mid-50% growth rate for the full year 2012 on an as reported basis. Gross margins are expected to be approximately flat for full year 2012 when compared to the prior year. A higher sales mix of home standby generators and improved pricing coupled with lower input cost should be offset by the addition of Magnum Products in our sales mix. As a result improved operating leverage, full-year 2012 operating expenses has a percentage of net sales excluding amortization of intangibles are expected to decrease nearly 100 basis points as compared to the prior year. On an absolute basis, full-year 2012 operating expenses have increased compared to 2011, as we continue to invest in our infrastructure to support our strategic growth initiatives and our overall higher level of organic sales. In closing, we believe our third quarter results clearly provide further validation of the powerful growth drivers for our business. We continue to believe increased awareness of automatic standby generators and execution on our Powering Ahead strategic plan will further build on our track record to strong organic revenue growth. We’re focused on growing Generac top-line through product innovation, expanded distribution and targeted marketing for our products. When considering all of these factors, we believe our company is very well positioned for future growth. This concludes our prepared remarks. And at this time, we would like to open up the call for questions. Operator?

Thank you. [Operator Instructions]. Your first question comes from the line of John Quealy from Canaccord Genuity, please proceed. John Quealy – Canaccord Genuity: Hi, good morning. Congratulations.

Hi John. John Quealy – Canaccord Genuity: Just a couple of quick questions here. First, with regards to the raising guidance for 2012, can you folks talk about, were you producing or getting inbound increase last week ahead of the storm. Give us if you would a little bit more the visibility of the channel, are you dealing with stockouts et cetera?

Yeah. It’s a great question, John. We have got and obviously a lot of questions and enquiries on over the last I’d call, you know, four, five days here. Really going back to since last – mid-week last week, when it was pretty clear that all the forecast were kind of aligning to indicate a pretty severe event that was going to occur. We immediately went into a mode where we work with our channel partners to figure out where their inventory positions are. We have inventory station not only here in the Midwest where we have our distribution center, we also have third-party warehouse and logistics companies that we work with across United States, many of those are in the more populated – populous regions in the country, like East Coast. And so, we began immediately shipping products mid-week last week and all the way through this weekend and frankly up and through till today here. Obviously, stock is starting to run low, the portable generators, I think, it would be pretty hard-pressed to find a portable generator anywhere. We do know that our retail partners are bringing portable generators from other regions of the country. And they are now just putting in the logistics to get those generators to the East Coast. The problem is logistics are still very difficult, moving trucks even from the Midwest here out of East Coast has been a challenge. There is a lot of debris on roadways. They are just now getting things opened up with bridges and tunnels in a lot of metropolitan areas of East Coast. And so some of the harder hit areas, it’s a challenge getting the product where it needs to be at this point, but we continue to ramp up our production and send product directionally towards that area. John Quealy – Canaccord Genuity: And then two quick follow ups. First in the Mid-Atlantic region in particular, as you folks raise your expectation of baseline business, is this the capitulation that some folks are seeing with they had a bring spring storm and now we’ve Hurricane Sandy, is that what is giving you the confidence to raise that baseline at least qualitatively with us? And just one quick follow up.

Yeah. It’s – that’s an excellent part of – a great part of that John, I mean it’s a – when these events happen and when they happen in succession, they build on each other and the time period between the events shortens. What is does is it gets people to what we call the tipping point and so each family each person had kind of their own tipping point in terms of where, how they view this category, when their power is out, right. I mean, sometimes people can go an hour, two hours a day, two days, three days and they are not at that tipping point, they go to a second outage and they have an another extended period of time without it. That might get them over the tipping points for some people to third outage or even the fourth outage before they become very interested in the category in serious, serious prospects for a home standby generator. So, when we see events like this happen in kind of serial fashion that they have happened over last 14 call it months out east in the Mid-Atlantic region in particular. That certainly creates an awareness for the category that didn’t exist before and that awareness is going to help us and we’ve seen this over the last decade here. These events happened, they create, we see a spike in sales, that spike in sales settles down and it settles down to a baseline of sales that was higher than the previous baseline prior to the events. John Quealy – Canaccord Genuity, Inc. :

You bet. Thanks, John. So, on the natural gas side, you know again in our prepared remarks, we said our third quarter sales, we actually saw some modest increases in our nat gas shipments year-over-year in the third quarter. We continue to see a trend there with natural gas products. This is a niche market that we been serving for the last 30 years. It’s still a very small piece of the C&I market overall. But one that we do is having the better growth trajectory than traditional diesel solutions, mainly because again the initial capital across of those products up to a certain KW point are lower and the operating costs certainly are lower as well. They have also other inherit benefits. Certainly they are cleaner burning from an emission standpoint. They don’t have a lot of the refueling requirements. So, take for instance a hospital or a commercial application right now in New York City or New Jersey or anywhere out in the East Coast without power. If they have a diesel, traditional diesel generator, the big constraint today is getting fuel to that generator. So everybody has the same constraint at the same time. You have a scarcity of resource in fuel trucks. And frankly fuel delivery mechanisms, which are many times are often, electricity is an important component of that fuel delivery mechanism. In terms of the fuel lifting stations and the pumping stations, some of those stations are off-line as well because they don’t have power or backup power. So diesel fuel becomes scarce to the commodity, the delivery and logistics have become very challenging in the storm, that has all taken away. Natural gas often times during major events and natural gas delivery is uninterrupted. In fact, natural gas becomes more abundant because there are fewer people using it during times of severe crisis. And so, it’s really made these products very attractive for a lot of reasons and we’re really seeing that pickup here in last few years.

Your next question comes from the line of Charlie Brady from BMO Capital Markets. Please proceed. Charles Brady – BMO Capital Markets: Hey, thanks. Good morning, guys.

Good morning, Charlie. Charles Brady – BMO Capital Markets: Hey, just with respect to the updated guidance and kind of the mix that you’re seeing, I’m wondering how that plays out in terms of your gross margin outlook into the room for the remainder of the year?

Yeah, I mean, this is York. Charlie, I think if you go the annual full year guidance that we alluded to you in terms of gross margins being roughly flat from 2011 to 2012, if you get back into that, that would show Q4 gross margins being similar to Q4 2011’s margins, which will be sequentially down from Q3 2012 and the main driver there. The price cost dynamics that we’re seeing here in Q3 2012 will really be similar in Q4 2012. What you’re seeing there is that there will be a mix shift towards more portable as Aaron mentioned when – when you get an event like this immediately you’ll sell a number of portable generators, and as a result were reflecting that in our guidance. Longer term as Aaron talked about that and as more people become aware and hit the tipping point to start the research home standby generators. We’ve talked about the impact of these events having two, three, four quarters of impact having – having higher order rates for home standby generator. So, as a result of Q4 will be a higher mix – Q4, 2012, would be a higher mix of portables, which would drive that mix to a lower a sequential decline in margins. Charles Brady – BMO Capital Markets: All right. And then, just on the C&I business you talked about tick down on some of the national account sales. Can you just expand a little bit on that and what’s driving that end? Do you think the storm activity maybe drive some of the rental customer to increase purchases maybe more than they otherwise would have just to get rental equipment into those markets?

Yeah, Charlie that was kind of a long lines of our comments. What we meant by national account customers was, we are a primary supplier to the telecommunications industry and if you’ve been following along with the – the power outages out east I mean obviously that the a lot of those companies are having difficulties as well, both for flooding and loss of power. And it’s estimated that upwards 25% of the cell phone capacity or mobile phone capacity, wireless capacity is offline. Right now, as we stand out on the East Coast in the affected areas, we do believe and have seen indications that the telecommunications customers that we serve in those markets are going to be improving their purchase activity here in the fourth quarter. Certainly, and then to your point of our mobile products, we definitely do see a bit of influx of orders around mobile gens, when we get events like this a lot of that is around, the immediacy of needs for those types of products. And then also what we tend to see with our national account customers there, the big rental yards oftentimes, it gives them an opportunity to do a change of equipment. They’ll oftentimes sell older pieces of equipment off and kind of refresh their fleets at a little bit faster rate as a result of maybe a higher use – higher level of utilization of these products over the next couple of months. Charles Brady – BMO Capital Markets: Great. Thank you.

You bet.

Thanks, Charlie.

Your next question comes from the line of Christopher Glynn from Oppenheimer. Please proceed. Christopher Glynn – Oppenheimer Securities: Thanks, good morning.

Good morning, Chris.

Good morning Chris. Christopher Glynn – Oppenheimer Securities: Just looking back at – in October, how they played out the snowstorm last year, seems that the bulk of the Sandy impact could be 2013. So just wondering what your thoughts are on – the timeframe to settle back into a new baseline type of level and whatever that turns out to be?

Right. I mean that’s the question, I think is on not only your mind, Chris, but ours as well. I think it’s a little too early to tell just based on, we are not sure how long these outages going to last. The duration of an outage, obviously the severity of an outage is a few components. It’s – how many people are impacted, but it’s really also for long they’re impacted. And so the longer the outages go, power is fully restored by tomorrow and the duration is shorter, that could have an impact on the, what we refer to sometimes as the afterglow of demand that we see generally on home standby. I would also like to point out though that there are really few impacts from these kinds of events. We have an immediate impact with portable generators. We are North America’s number one share of in terms of brand – brand share of portable generators in terms of producers. And we see an immediate impact from that right away and we’ll see that here in the fourth quarter. That dies [ph] down immediately, there is a little bit, there is some replenishment of stock, that’ll occur may be in the first half of next year, but the bulk of that demand surge will occur here in the fourth quarter almost immediately and has already occurred. The afterglow with home standby because that’s a – there is a – that’s a research purchased it’s a – for longer sales cycle. There is – there is a lot more things involved there, so it’s a bigger ticket item. There is building permits to pull when homeowners want to go through project like that. And so that afterglow can last between six and twelve months after this type of event. So, again, a lot of that is going to depend, we’ll watch our order rates, we’ll see how it settles out. I do believe the one thing that could push this maybe towards the back half of that six to twelve months period in terms of being longer in duration is the fact that we’ve had a number of these outrages kind of one after another here over the last 14 months. Christopher Glynn – Oppenheimer Securities: Makes sense. And then, if – if we don’t know if this going to be another event at some point, but while there will at some point, but if there is another step function change in your demand, you’ve absorbed what’s transpired here tremendously well like, just how would your supply chain and your own capacity be prepared to respond to another step function change like it has over the past 12 months?

Yeah. It’s, whether it’s fortune or not, I mean certainly not fortunate for people who are going through outage, but from our standpoint we’ve had – we’ve gotten quite a bit of practice that going through this in terms of testing the capacity of our supply chain, making sure we understand the ability of our supply chain to hit higher levels of output and so that’s been something that we’ve been very focused on the last year. Additionally, as we’ve said – we’ve said kind of all long, we felt that organically this is pretty Magnum, we felt that we could achieve about $1 billion in sales with our – our current manufacturing footprint of about 1 million square feet. We did add quite a bit to that when we bought Magnum, but we recently we added another facility here, we bought a facility in September ahead of all of this, kind of thinking longer-term, and we’re going to bring that facility online later next year in 2013. We’ve actually accelerated our plan to bring that facility online towards the beginning of plan 2013. So, we believe with supply chain, the addition of manufacturing capacity here in the U.S. and also we will go out and watch the higher people as well, then we’re going to be very well positioned to take that next leg of growth up and handle that really without – without any kind of a hiccup. Christopher Glynn – Oppenheimer Securities: Great. Thanks a lot.

[indiscernible], Chris.

Your next question comes in the line of Jeff Hammond from KeyBanc Capital Markets. Please proceed. Jeff Hammond – KeyBanc Capital Markets: Hey, good morning guys.

Morning, Jeff.

Good morning, Jeff. Jeff Hammond – KeyBanc Capital Markets: Have you guys been able to do any – I know it’s early and the storm is still kind of going on, but have you been able to do any kind of assessment on, how this compares or doesn’t compare to Irene?

Yeah, not. Something we – we actually tracked outages, Jeff, I mean we – I think we’ve talked about this in this past because that’s – it’s part of our marketing and how we market to people after areas are impacted by outages. So, we tracked and we have a pretty robust system actually we’ve developed over the last several years. And right now, what we – what we show is that at the height of the outages, over 8 million people were impacted by this event and that compares with Irene being just shy of 6 million and that’s just – and there is a lot of reports out there in the media, a lot of different places. This is our own tracking. We think, it’s like-on-like in terms of being comparable. So we would, again to answer your question, we feel that this would be a larger event at least in terms of the number of people. And as I said previously, not exactly sure the duration yet, we’ll have to see that. There were areas of Irene were certainly impacted for a week or longer. It does sound like all the initial reports around this event put the restoration process of, at least something on par with what happened with Irene. Jeff Hammond – KeyBanc Capital Markets: So, you’re saying, your internal process which was the same for both storms, put you at 8 million versus 6 million?

That’s – that’s how we see it, yes. Jeff Hammond – KeyBanc Capital Markets: Okay – okay, perfect. Jeff Hammond – KeyBanc Capital Markets: Then – and then just on your penetration rate number of 2.5%, how up-to-date is that. Does that reflect Irene and some of the recent storms, and maybe give a better sense of, maybe some of the areas that have higher penetration rates or where you see penetration rates in some of these more affected areas like the East Coast and Northeast?

Yeah. The 2.5% is the pretty recent number. We updated that early this year, so it did reflect at least some of the Irene demand, that’s something that we track again very closely. And again our addressable market as we define it. Jeff, just to remind you, is a single family unattached housing stock, greater than a $100,000 in value, which is about 50 million U.S. homes. So every 1% of penetration is about a half-a-million homes. We use an average sell price at retail of about $4,000, so that’s the 2 billion market opportunity number that we’ve talked about in our prepared remarks. As far as other – looking at areas, kind of area by area or state by state in terms of penetration, which we track, we’ve got some states that are clearly more further along that penetration curve than the 2.5% average. States like Florida where you would expect, some coastal areas, New York is approaching something that’s – it’s not at – it’s not 4%, but it’s not – it’s greater than 2.5%, somewhere between there. States like Illinois that has poor power quality and Michigan also are a little bit further along in the penetration curve kind of in that low-to-mid single digits at 4% to 5% range. But we have a lot of states that really – I mean when you look at the states that just – they are – just really still very, very underpenetrated. And then, a lot of states are right around that 2.5% range. So again we just think there is a tremendous amount of opportunity in this category. It’s really only a decade old and something that we feel that – the power quality in the United States is really unbelievably poor. We traveled the world and there are places, around the world where people just can’t understand in U.S. how we can have the kind of issues of power quality we have. Now, we do have some unique situation around just the geography and the climate that we deal within the United States that make that more challenging and make it so that our grid is mainly above ground in lot of areas, but the chief cause there is it is under invested in, and that underinvestment has created just a very frail and fragile system that continues to suffer from outages. Jeff Hammond – KeyBanc Capital Markets: Okay, great. I’ll get back in queue, thanks.

Thanks, Jeff.

[Operator Instructions] Your next question comes from the line of Jerry Revich from Goldman Sachs. Please proceed. Jerry Revich – Goldman Sachs & Co: Hi, good morning.

Morning Jerry.

Morning Jerry. Jerry Revich – Goldman Sachs & Co: I’m wondering if you talked about your capacity to deliver standby [ph] products [indiscernible] potential winter storm activity. If you could just give us some update on where lead times span today and just quantify for us how much added supply chain capacity you think you have today versus year ago? Thank.

Okay. Thanks, Jerry. So, in terms of just lead times we’re at today, we still do have home standby products available. Certain skews are starting to move into a backlog situation and lead times are moving out to reflect that. We have seen lead times as we saw with Irene. We have lead times get extended. I think what we’ve said about this category is it because it is a longer sale cycle and there is more involved in this process and coordinating the trades and project managing inflation of this, everything from obtaining permits to landing up contractors to the electrical work as well as the natural gas and LP work, it’s involved with the installation of these products. There is a longer cycle and once the storm passes, I think people have made up their mind that there are going to jump into the category and they’ll wait if they need to wait. Obviously, we don’t want them to wait long. We want them to get those products for the next event that may happen given my comments here previously about the fragility of the grid and the susceptibility of two further outages. The ability for us to ramp up as I said before, we’ve been testing our supply chain and pressure testing our supply chain in terms of output increases. Here over the last 14 months, we feel very good about, where we’re at on that. We’ve brought on additional suppliers where we’ve got certain components that we’re still sourced in the past. We’ve gone to duel sourcing. Many of our critical components to make sure that we have adequate supply of those components. Not only to ramp up, but in the event of some unforeseen interruption of supply of a source. So, we feel very good about we are in a supply chain. Our actual constrain was starting to become manufacturing capacity. As I said before, we acquired a plat here recently in September. When we bring that plant online, much quicker that we’d originally thought and we believe that we will be in producing products in that plant and reallocating our production between all our facilities to kind of reflect the additional need of capacity that we’re going to have to serve the market going forward. Jerry Revich – Goldman Sachs & Co: And last year you were able to pick up some portable share because you carried higher inventory during the storm season. How do you think that’s playing out this year? And can you talk about it third quarter end how much portables inventory you had on hand? Thanks.

Yeah, Jerry, we felt that we were in really good shape coming into the season. Obviously, this event was really kind of the first and only event after the June windstorm out east in the mid of Atlantic, excuse me, we really don’t have much of a hurricane season. And so, inventory levels were relatively high, both our channel partners not only in East Coast, in the southern states as well as our inventory level. So, we feel we were in better shape this year than we were last year. We also had increased our inventory levels mainly because we had picked up share and we’ve got additional placement of those products. So, just with the broader distribution pipe, we need to make sure we’ve got product to fill that. So, we believe that the – having those products on hand is going to serve us well with our channel partners going forward as we look at additional placement next year. But we think that we satisfied that demand pretty well. The key now is going to be resupply, how quickly can we get additional portable generator manufacturing ramped up and get the supply of those products moving into direction to not only stock our own distribution centers with those products but our third-party logistics warehouses and our channel partners as well. Jerry Revich – Goldman Sachs & Co: And on that last point, can you assure lead times with us currently or just the rough sense on how long that resupply last?

Yeah, that resupply starts – it actually starts immediately. We produce homes – excuse me, we produce portable generators, we’re talking portables now Jerry, we’ve produced portable generators here in the U.S., we also contract manufactures some of those products as well overseas. So – and obviously with regards to supply chain to bring those products online, we’ll produce what we can as quick as we can here for our safety stock levels on raw materials. And so, we’ll start resupplying right away. We’ve ramped up our production levels already over the weekend, as it relates to portable generators. And then we’ll have a resupply process lasting over the next 4 to 12 weeks, we’ll see quite a bit of stock coming into the marketplace, and we’ll see how the market absorbs that. We think that generally what we see after events like this is a fairly knee-jerk reaction by channel partners. They tend to go heavier on stock for the next season after going through major events. So what that means for next year’s stocking. It could – could it be greater than this year? I don’t know if it’s going to be greater than this year, we will have kind of the same effect last year. We had another event in 2011 that led to a pretty strong stocking here in 2012. It could – I think, it’s going to look at least similar here in – going into 2013. Jerry Revich – Goldman Sachs & Co: Thank you.

You bet.

Your next question comes from the line of Brian Drab from William Blair. Please proceed. Brian Drab – William Blair: Good morning.

Good morning, Brian.

Good morning, Brian. Brian Drab – William Blair: One of my questions have been asked, sorry, but going back to a question that Jeff asked. I don’t know if this is more of a comment or a question really, but just want to see if you have a thought on this. When you’re looking at the $8 million household that are without power and comparing that with Irene, do you think – how do you think about the location of those people, because in this case you’ve got some estimates that 2 million people in New York are without power and imagine there is a lot of people without power right now, they live in something like a 400 square feet apartment in lower Manhattan?

Yeah, no – I mean, it’s an excellent point Brian and one that – we would have to dig in deeper into those outage numbers. I’m sure that the 5.8 million or the nearly 6 million we saw on Irene had a bit of that as well. I’ll go to your point, I do believe the New York Metro area in particular, New Jersey Metro area is in particular where you’ve got – those are not necessarily prospects for this product category. It quite higher concentration in this outage event than there was, so perhaps the 8 million in relation to the 6 million maybe a bit overstated, you’re just looking a raw percentage increase. I think it’s a fair point. Brian Drab – William Blair: Okay. And then you talked about international expense and could you give us maybe a little bit more of a detailed update on how things are progressing in Australia, the main focus is on the U.S. today, but if you could about that, that would be great?

Yeah, the Australian agreement that we signed with the company by name of Allpower, we signed that last quarter, we made that announcement, that was going to roll here late in the fourth quarter. We’re on target to achieve our rollout plans. We’re excited about that market. We do caution people, it’s a relatively small market in relation with the U.S., but again it’s the market that today the home standby generator category frankly doesn’t exist like commercial markets don’t exist. They have diesel generators as you would expect all over the world. Portable generators are another opportunity for us in Australia as well. We’re excited about our international efforts, Australia notwithstanding. Latin America continues to be a focal point for us. We’ve made some significant investments organically. We’d love to see that market growth faster for us. Organic growth in international markets is a difficult thing. There is no question about it. It takes a lot of resources and it’s going to build – it’s going to take time to build that out. But we are very focused on it and I think for us, getting on board with a cultural change of getting outside of U.S. market with our products both from a design standpoint as well as support and distribution standpoint have been very – those have been critical hurdles for us to overcome, because we haven’t have to do them before. We’re not a large multinational company today and we want to become one in the future. We think that we have a fantastic opportunity over the long term to get the Generac brand and to do something very special with it worldwide, similar to what we were trying to do here at North America with that or in the U.S. market with the Generac brand. But it’s going to take time and it’s going to take – it’s going to take a fair amount of resources and that is reflected in our increase on an absolute basis the operating expense, as the business have gone up, as we’ve made investments in things like international expansion. Brian Drab – William Blair: Okay. Thanks. And then, you mentioned the power washer business a couple of times and if one of you could first remind me how or may be update us on how you proceed with the size of that market. And could you quantify at all with what your level of sales in the quarter was into that market or what you’d expect it to be for 2012?

Yeah, so when you – when we think of the power washer market from a retail standpoint, we look at – and this is – this will be gas-powered washed. We see that as a market that’s somewhere in the $800 million range – a $700 million-$800 million range from a market standpoint. It’s a market that – it’s actually kind of gone through, this year was a drought. So droughts are not favorable to power washers because of water restriction. So, that’s something that actually hurt the market this year and I think the leaders in that market will tell you that. We’ve got very small piece. We used to be the leader in that market. We sold that business. It’s dominated by couple of others out there, who do a very good job, serving the market. We believe there is room for growth there in innovation, which is what I spoke to in our prepared remarks. We’re not going to break up the sales individually here on the quarter. But I will say this, as we said in the prepared remarks, we believe that with some of the innovation we’re bringing to market by 2013 and based on conversations we’ve had with our channel partners there. And in particular what we debut at the Lawn and Garden Show at Louisville last week, we’ve got some new products there. We’ve got some channel partners that are excited about this. We believe we are going to be a player in this market going forward. We are committed to doing it. We think there is a lot of opportunity to with innovation to, not only to increase the size of the market, but frankly to increase the average sell price of these products. Unfortunately, the market over the last several years has been a bit of raise to the bottom with average sell price. And we believe with innovation, we can create in the minds of consumers than in the minds of our channel partners a better value, a product that has more feature and benefit and can absorb a higher retail price point. [ph] Jury is out on that. We’ll see if that – for theory supported going forward. But we believe innovation is a key to that no matter what product we’re talking about, but certainly in this power washer category. Brian Drab – William Blair: Okay. Thanks for your time.

Thanks.

Thanks, Brian.

All right. Your next question is a follow up from Jeff Hammond from KeyBanc Capital Markets. Please proceed. Jeff Hammond – KeyBanc Capital Markets: Hey, guys. Just a follow on the pressure washing, do you have a sense of what the market size is and how you’d maybe frame where you think you can take your share to – relative to where you took portables?

Yes. So, it’s a great question, Jeff. I think the market is probably in that $700 million and $800 million range for gas powered coldwater washers here in the U.S. market that would be kind of last year’s market estimate, 2011 I should say. In terms of where we can take share, we believe on the portable generator side, we’re kind of in that mid-20% share range now today on portable generators. Is it reasonable to believe we can take power washers there, I don’t know – we had some pretty unique situations converge with portal gens and we had the kind of one of the larger providers of portable generators. When we reentered the market back in 2008, one of the larger providers of portable generators exited the market through a liquidation at that point. And so, it opened up a hole in supply and we were able to fill that hole very quickly and take advantage of that. Obviously the Generac brand we believe carries quite a bit of weight, not only with our retail distribution partners but with consumer as well, we’ve seen that. And that’s been demonstrated time and again. And so, where we can take share going forward? We believe that it’s likely that we’re going to grow. Right now, we are very low-single digits in this market. I would say a double digit share – a low-double digit share here in the next several years is a very real possibility for us, given some of the receptivity we’ve had to being back into marketplace and frankly to receptivity to some of the innovation we’re bringing to the market. And the fact that there is room in this market for growth and there is room in this market for innovation. I think, we are going to do – I think, it’s going to be a very nice platform for us, as we grow out, and it’s going to give us confidence to look at other potential engine-powered tools to add to that platform. So, we are starting to do that analysis today and starting to think about beyond power washers, what’s next for Generac. We’re very aggressive with engine-powered products, we are an engine manufacturer ourselves, on our own right, we manufacture really great air-cooled engines and liquid-cooled engines, and we think that there is room in the market for products that use those engines. And so, we are going to continue to push on that going forward. Jeff Hammond – KeyBanc Capital Markets: Okay. Great. And just a couple of follow ups on commercial. Can you give us the Magnum acquisition contribution in the quarter? Sure, Jeff. It was – if we grew 48% total for C&I, Magnum was basically most of that grew just over – its 50%. Organic C&I was slightly down, and again that was mainly due to the – some of that timing of those national account telecom customers ordering patterns, so, exclude Magnum and telecom actually. But, we’re about flat on C&I in the third quarter. So... Jeff Hammond – KeyBanc Capital Markets: Okay, great. And then – that was my follow up. What are your national accounts – some of these big national account telecom customers telling you about CapEx plans into 2013?

We wish we could get them to tell us a lot more. Unfortunately, the planning cycle there – we – I’m not sure that they are completely done yet frankly and that might be why we don’t get a lot of insight. Although in years passed, it’s been difficult to get quite a bit of information, they can give their CapEx planning at large levels. We get sound bites of what those CapEx levels look like, but unfortunately if you doesn’t filter down necessarily to exactly how that translates out into generator purchases. So, we can just look what we’re seeing right now, Jeff, and what we can tell you is that interest has increased for those products with 25% of the wireless capacity offline as a result of the events out there, some of it, not all related to power losses, of course flooding and everything else being part of that. But certainly that puts pressure on carriers to make sure that they’ve got robust plans to have their networks up time be a lot greater than they are today when events like this happen. So, we think that, that’s going to be a net positive for us with those customers going forward. We stand ready to serve those customers with increased capacity. We’ve got products for all of those customers that we’ve been channel partners with them, and we have been a strong provider of those types of products to the industry for a long time. And there are a lot of Generac backup generators running on cell towers right now today as we speak around East Coast. Jeff Hammond – KeyBanc Capital Markets: Okay. Thanks, guys.

Thanks, Jeff.

Thanks, Jeff.

And that concludes the question-and-answer portion of this conference. I would now like to turn the conference back over to Aaron Jagdfeld, CEO and President for any closing remarks. Please proceed.

Great. Thank you. We really like to thank everybody for joining us this morning and just one last quick reminder that again we have an investor day for the company next week on November 8th. So, we intend to detail out more of our Powering Ahead growth strategy a little bit more of a granular level and we look forward to discussing that with those of you that will be in attendance. Thank you again this morning.

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