Generac Holdings Inc. (GNRC) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Generac 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 will 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.

Thank you. Good morning, and welcome to our Second 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 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. Our second quarter results reflect seasonally higher shipments as compared to the first quarter of 2014, driven by the expected sequential increase in residential products. In addition, our results further demonstrate the ongoing diversification of our business as shipments of Commercial & Industrial products continue to represent a growing portion of our sales as we’ve increased our exposure to new markets such as oil & gas, broadened our industrial product line, and strengthened our industrial distribution network. Second quarter net sales increased 5% to $363 million, as compared to $347 million in the second quarter of 2013. C&I product sales increased 23% during the second quarter, due to a combination of recent acquisitions and strength in the oil & gas market. As expected, residential products faced a strong prior year comparison as sales were $180 million compared to $197 million in the prior year quarter, which benefited from elevated demand due to Superstorm Sandy. Excluding this prior year benefit, residential product sales increased at a solid rate over the prior year, primarily as a result of strong shipments of home standby generators. The strong year-over-year in home standby generators was achieved in spite of the backdrop of a power outage environment that has been trending well below normalized baseline levels in recent quarters. As we have previously mentioned, we monitor power outage activity internally and over the last six quarters outage severity has declined considerably as compared to a previous normalized period, which excludes the impacts of major outage events. We believe the growth experienced in home standby generators during the second quarter despite this lower power outage environment supports our position in permanently installed standby generators on an emerging product category as a backup power solution for…

Thanks, Aaron. Net sales for the second quarter of 2014 increased 4.6% to $362.6 million as compared to $346.7 million in the second quarter of 2013. With the prior year benefiting from elevated demand from Superstorm Sandy. Looking at net sales by product class, residential product sales were $179.6 million in the second quarter of 2014, as compared to $164 million in the first quarter of 2014, a 9.5% sequential increase over the last quarter. Compared to the prior year quarter, residential product sales declined from the $196.6 million that was shipped in the second quarter of 2013. Shipments of residential products during the prior year, second quarter of 2013 were positively impacted by approximately $40 million as we continue to ramp production levels, to satisfy the extended lead times that existed during the quarter. By contrast, lead times during 2014 have been at more normalized levels. Excluding this $40 million of benefit during the prior year quarter, residential product sales increased approximately 15% year-over-year driven mainly by strong shipments of home standby generators. Demand for these products benefited from both normal pre-season patterns as well as numerous initiatives to drive a new and higher baseline for the category. In addition to home standby generators, we also saw significant year-over-year percentage increase in sales of our power washer products as we continue to gain market share and brand recognition in this product category. Partially offsetting the strength was the year-over-year decline in sales of portable generators due to a combination of lower power outage severity over recent quarters, coupled with the prior year second quarter still benefiting from elevated demand and replenishment following Superstorm Sandy. Looking at our Commercial & Industrial products, net sales increased 22.5% to $163.5 million in the second quarter of 2014, as compared to $133.4 million…

Thanks York. We are reaffirming our prior guidance this morning for 2014 in terms of revenue growth, EBITDA margins and free cash flow. For the full year 2014, net sales are still expected to increase in the mid-single digit range as compared to the prior year. This sales outlook assumes an increased level of power outage severity in the second half of 2014 as compared to recent quarters, returning to a more normalized annual baseline level. Additionally, as we have previously discussed the timing of CapEx spending for certain telecom and other national account customers can vary from quarter to quarter which may have an impact on our previously guided seasonality. Our current sales outlook does not assume a material deferral in CapEx spending with these customers and contemplates a sequential sales increase from the third quarter to the fourth quarter. In summarizing our sales growth assumptions for 2014 excluding the impact of the $140 million headwind related to the first half 2013 production ramp in residential products to normalize lead times, we still expect total organic year-over-year growth to be between 9% and 11%. When including the prior year headwind we still 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 resulting in an overall year-over-year next sales increase in the mid single-digit range. With regards to gross margins we’re expecting sequential improvement in the second half of 2014 of approximately 150 basis points, as a result of a higher mix of residential product sales, and price cost improvements expected in the second half of the year. We are also reaffirming our adjusted EBITDA margin guidance for 2014, as we continue to see adjusted EBITDA margins remaining in the mid 20% range, which is consistent with the average level of experience during the past four years. Adjusted EBITDA margins during the fourth quarter are expected to increase approximately 150 basis points as compared to the third quarter. Furthermore, we expect we will continue 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 still 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 a long term secular growth drivers for our business we believe, we will continue to generate strong free cash flow for the foreseeable future. As a result, we are confident in our ability to continue to investment in the future growth of the business, both organically and through M&A, while also evaluating priority uses of cash to enhance shareholder value. This concludes our prepared remarks and at this time we would like to open up the call for questions. Operator?

(Operator Instructions) Your first question will come from the line of Jerry Revich from Goldman Sachs, please proceed. Matthew Rybak – Goldman, Sachs & Co.: Good Morning, York and Aaron, it’s Matt on behalf of Jerry.

Hi Matt.

Hi Matt. Matthew Rybak – Goldman, Sachs & Co.: I want to start on the residential standby side and may be, Aaron on you could talk a little bit about the order levels and improve trends that you’re seeing as we start-off the third quarter and how those are tracking versus expectations?

Yes, I think, in our comments are – I will talk about it in a couple of ways, Matt, I mean the thing that we watch some indicators as we look at this residential business, it used to be we didn’t have a tremendous amount of visibility to it. It was the tough business to kind of predict and I’m talking about the standby business now, of course, and in terms of, future kind of thoughts around that it was really kind of related just to what’s going on with the order book, currently today because lead times are pretty short on those products. What’s really Interesting is over the last year and a half as we have introduced some of these new tools that we got, and we are driving leads into our call centers here, we not only, obviously track lead volume, but we track the – what we call in-home consultations right, it sees that we create on a go-forward basis, coming out of those inbound calls. And so, what we have seen both, kind of closing out the second quarter and as we start the third quarter here, as we have seen a nice improvement in the IHC (ph) rate, and again this is on the backdrop in our comments, our prepared remarks this morning, overall outage events have been pretty quiet in the last six quarters since Sandy, and in fact, pretty down compared to the historical kind of longer term averages than we look at – if you look back to last couple of years. Even when you exclude, any kind of major events like Sandy or Irene or anything like that, the outage activity has been pretty weak. And that’s – we saw those cycles from time to time, we are in one of those cycles now. Our guidance contemplates version in the mean basically in – from an annual baseline level of outage activity that we believe needs to happen here in 2014 in order for us to realize, our guidance on the residential side. That being said we are coming into our season now third quarter is where we would see that so, we’ve seen a nice pick upcoming out of the second quarter. You see that in our second quarter results of home standby as we get the channel, ready for the season. That is the cadence for this business, when you get a year kind of following year without storms. So everything is kind of falling in line the way we see it. And we like where we see some of these leading indicators IHC. Matthew Rybak – Goldman, Sachs & Co.: That is very helpful, and then if I could just switch gears briefly and turn to the commercial business. If you may be quantify the headwind in Latin America that you’re seeing and maybe talk a little bit more about how you expect that business to progress for you over the rest of the year?

Yes, I am not going to quantify it directly though, but I will talk about that business, because I think it’s an important discussion point. Ottomotores was a – we talked about Ottomotores a lot, as a company and we talked about it to our investors – great business. It’s a great business down in Mexico City, they are located down there. A couple of plants in Mexico City, and distribution kind of throughout Mexico. They sell a lot of the product on a direct basis, within the Mexican City area. Obviously, Mexico City is almost a little bit of a different entity unto itself from Mexico. In terms of its dependence on what kind of goes on in the government there in Mexico that kind of – has in terms of ebbs and flows of spending, in particular CapEx spending as it relates to infrastructure. There was a – it’s been a fairly notable pull back with the change in administration there that happened a year ago. I think, due to a couple of things, one I think everybody was kind of expecting CapEx spending probably to pick up not pull back. But what happened is the administration is – I think doing the right things for the long-term. But unfortunately it’s impacting things negatively in a short-term. For the longer term, they are trying to open up the energy markets there to private investment. And in doing so, obviously that’s been bit of a slog for them, politically. But they have gotten to a point now, where there is a kind of a quasi public/private approach to that. And I think that is going to be good long-term for the energy sector in Mexico, good for the economy in Mexico. Good for people who are investing in Mexico…

Your next question will come from the line of Ross Gilardi from Bank of America. Please go ahead. Ross P. Gilardi – Bank of America Merrill Lynch: Hey, good morning. Thanks guys.

Good morning, Ross. Ross P. Gilardi – Bank of America Merrill Lynch: Good morning. Aaron, I just was wondering if you can flush out your outlook statement a little bit more and maybe give a little more color on what specifically need to happen in the second half of the year with respect to power outage activity to deliver your full year outlook. So, in your outlook segment are you saying that the level of power outage activity in the first half was subnormal and therefore you need a greater than normal level of outages to return to a more normalized baseline for the full year. Or are you just saying that you need normal seasonal power outage activity to pick up in Q3 and you’ll be fine?

It’s the former, not the latter. So what we saw is the first half of year outages were down considerably, down 65% in fact to kind of the average prior to Sandy. And that’s something that we track internally. We watch outages and we watch duration of outages, frequency of outages, number of people impacted and outage activity has been soft. And as generator manufacturer as our primary product category, I made reference to before, I mean that outage is ebb and flow. The reversion of the main comment that I made is exactly what we need to have happened, which means in your words, an elevated level in the second half over the lower level that we had in the first half to return to that kind of normal annual kind of cadence that we would see in outages for the baseline level and that excludes major events. Now, that return to the main can happen and a major event could happen in a series of smaller events. We have seen a much reduced volume here. It’s just been pretty quiet in the last several quarters. Ross P. Gilardi – Bank of America Merrill Lynch: And if you just see this sort of continued law on power outage activity despite the normal seasonality, can you give us a sense as to what your full year outlook would look like?

Yes, I mean, we’re going to stick to our guidance because we believe in the reversion. Everything reverts to mean over time. And, again, because of our history and we’ve seen this before, an outage can happen tomorrow, an outage could happen today, could happen 10 minutes from now, could happen four quarters from now. There’s no exact science to it. All that we can say is that we continue to look at the long-term macro thesis of the business in terms of the quality of power that is i.e. major power outages or power outages affecting large amounts of people continue to increase and that has been on the rise for more than a decade. And, again, we believe that that’s tied to all the things that we always talk about, Ross, in terms of underinvestment in the grid, the age, the components of the grid, our dependence on electricity as a society, the aging in place concept that we talk about a lot in terms of people willing to stay in their homes as long as possible, automatic power generation, backup power generation gives people independence to do that. All those trends are in place. Those haven’t materially changed. It’s just some of this quarter-to-quarters stuff in terms of what outages can do over the long haul. And so, again, our view is that we’re going to have a reversion of the mean in the second half. Ross P. Gilardi – Bank of America Merrill Lynch: Okay. With respect to residential and the 15% gain ex- the $40 million in the base year, is it possible to say how much power washers contributed to that because you’d mentioned that you had a higher than historical mix there? And if you excluded power washers, would your standby generator business been up or less than that 15%?

The overwhelming majority, Ross, is home standby generators. I mean power washers, it’s an important category for us, a growing category, but we’re still a pretty small player in that. So, the overwhelming majority was home standby generators. Ross P. Gilardi – Bank of America Merrill Lynch: Okay. And how about your dealer count? What does your dealer count look like in the second quarter? And are you still confident that you can get 300 to 500 net adds this year? And are you seeing any abnormal levels of attrition? Or you have incentivized new dealers with stronger promotions to get them to come on board?

Good question. Our dealer count was roughly flat with the first quarter. So we think that we’ve kind of hit the bottom of kind of losses on the dealer count side, kind of worked around the corner there, if you will, in terms of what the cycle goes like with dealer adds and losses over the course of post outage of that like we experienced here. So we like the fact that we’ve kind of flattened out a bit there. As far as guidance for the rest of the year, as we’ve said on previous calls, we’re going to be at the low end of that 300 to 400 that we normally add on a net basis. So that’s we’re still folding in there on that guidance. We think that the second half of the year, again, in particular with our comments about reversion to the mean and outage events, obviously, you tend to get more inbound traffic and outbound traffic on dealer acquisition as we refer to it, new dealer adds when you have an environment that has more power outages. So we would anticipate if all of that kind of holds together that we would still achieve the low end of that range at the very least. As far as what we had to do to bring on new dealers, we’ve got a pretty consistent pipeline that we work on that. Now obviously when you don’t have as many outages you backdrop, you work harder to bring those dealers into the fold, but we still have a tremendous amount of interest in the category. It’s not real hard to sell people on the idea of adding this to an electrical contractor, an HVAC contractors business. It starts out being kind of an ancillary part of their business and…

You did hear that correctly, Ross. So in terms of – telecom business is, as much as I say, we’ve been fortunate enough to improve our visibility as it relates to residential. Our visibility on the telecom side is really challenging for us as a business, and that’s why we call it out as a risk. Basically on every call we say that that business in particular can be somewhat lumpy from quarter-to-quarter. Our expanded comments there this morning are really related to the fact that – we’ve witnessed in the past, when some of the major customers we have there, do acquisitions or announce other major deals, has been announced by one of these customers recently that can create a deferral in CapEx spending. We have not been notified directly of any such deferrals, but at the same time there’s always a caution around these guys in terms of what they can do with that CapEx and take that CapEx budget. Recently one of those customers came out and did reaffirm their CapEx guidance for the balance of the year. For us we’ve kind of read that as somewhat a positive sign. It wasn’t a reduction in the CapEx spend that they were forecasting, but we’ll see how it translates into spent on generators, right. Unfortunately, that level of detail is not given to us and not given to the public market. So there’s a fair amount of uncertainty just in timing. It’s a great market, long-term, 300,000 sale sites. Only about 30% of those sites having backup power today and we think that that is, in terms of a long-term secular, opportunity for us just given the amount of critical voice and data that is going through wireless lines today and the conversion to 4G from 3G. There’s a whole host of reasons why these sites should have a generator, why 100% of the sites have generator on them. Whether ultimately it gets legislative or not, it’s not up to us, but what is up to us is to continue to serve those customers with the right product offering and to be able to react quickly when they do want to change course up or down in terms of their CapEx spending. Ross P. Gilardi – Bank of America Merrill Lynch: Got you. Okay, guys. Well, thanks for all the details and best of luck. I’ll jump back in queue

Thanks Ross.

Your next question will come from the line of Hammond from KeyBanc Capital Markets. Please proceed. James Sturgill – KeyBanc Capital Markets: Hi, guys. This is James Sturgill filling in for Jeff.

Hi. How are you doing, James?

Hi, James. James Sturgill – KeyBanc Capital Markets: Can you just provide some more color on the oil & gas space, particularly with respect to natural gas flaring, what you’re seeing there and how close Generac is to having a viable product?

So actually we have products today. We have products to run off well ahead of gas. We are continuing to evaluate what the product mix need to be as these forward. A lot of is kind of on the [fly booked] (ph) for the producers, the E&P producers themselves, the rental companies and ourselves, try and figure out what’s the best way to utilize that flare gas. And flare gas, as you mentioned, James, is one of the leading drivers there in the ship that’s going on, not only at the state level, but also the federal level. There is a lot of discussion right night now on the flare gas. New regulation is being proposed. Some of those regulations take place beginning of next year. And so, there is a lot of discussion between ourselves and our channel partners and our end customers on what kinds of ways can that flare gas be consumed either to produce power or light or pumping. There’s a whole host of applications in particular. I think what we like is that through the acquisitions we made both at Magnum and at Baldor, it’s really positioned us quite well in terms of a relationship standpoint with the rental companies that serve those customers, both the large national rental companies as well as the specialty power rental companies that serve the oil & gas markets. But those acquisitions have given us a great kind of starting point for a product platform, great relationships as I mentioned, and it’s helped us kind of conceal our thoughts around what we need to do to be successful in this going forward. So, we’ve had a taste of it here over the last couple of quarters, we called that out in terms of success of oil and gas. We look at it as a secular opportunity going forward. We think that the flaring of that Wellhead gas is going to continue to play a role, obviously that’s a bit of a regional thing, it happens – flaring is a bit of more of a something that happens in the Bakken rather than down in the Eagle Ford and some of the shale plays in the south. But we’re learning a lot, we’re quick studies and we think that we are well positioned to capitalize on that. James Sturgill – KeyBanc Capital Markets: Got it. That’s helpful, thank you. And then just for a clarity in telecom, did I hear correctly that your top line forecast bakes in sequential second half improvement in that space. Or are you speaking to the broader consolidated revenue?

Actually it’s sequential improvement from third quarter to fourth quarter is what our reference was, so… James Sturgill – KeyBanc Capital Markets: Okay, and that’s in line with typical seasonality or do you have something in the backlog that gives you confidence of that?

Now, there is not a lot of seasonality with the telecom business, it’s – CapEx spending kind of comes and goes, the ebbs and flows of that are – there is first string somewhere at corporate office and that’s unfortunately as I said before, our visibility is very limited but we do see it shaping up more as a back half of the second half than more of a fourth quarter event than a third quarter event. James Sturgill – KeyBanc Capital Markets: Okay, thanks, I’ll get back in queue.

Right, thank you.

Thank you, James.

Your next question will come from the line of Charley Brady from BMO Capital Markets. Please proceed.

Hi guys, this is actually Patrick (indiscernible) standing in for Charley.

Hey, Patrick.

Hi Patrick.

Hi how is it going? Just on residential side, can you maybe add a little bit more flavor as to how much each of the standby power washers sort of breaks down in terms of revenue?

Yes, Patrick, we don’t breakdown the categories of product, I mean that’s a – just from a competitive standpoint, again the preponderance of the increase that we saw in Q2 was mainly driven by the overwhelmingly driven by home standby.

Overall all of our residential products the vast majority is home standby product, that’s the key point.

Okay, perfect. And I think you mentioned that there is standby market still only have 3% penetration, what do you think it sort of the realistic improvement there and is there an overall I guess industry trend of improving the awareness for that category or is Generac doing a lot of the heavy lifting therefore improving that awareness to drive that number up?

We’re doing all the heavy lifting. Our competitors are so small in the space that we’re driving that market. It’s our bus and we’re in the front seat there. In terms of where it could go ultimately penetration rate, and we’ve made a lot of discussion around this, we’ve had a lot of discussion, but we kind of look at the first fence post in the penetration curve there Patrick is really when you look at portable generator penetration rates which are kind of in the low teens in terms of household penetration, and that’s all households, remember we subset the number of households that we think is our addressable market at about 50 million households for that 3%. So, about 1.5 million households of the 50 million have a permanently installed backup generator today. That’s something that we think at the very least, we think that the first fence post in the penetration curve is those portable generator owners because this an overwhelmingly step up type of category of product in terms of – when we look at that, particularly the buyers of our automatic systems, over half of those buyers either own or owned a portable generator. So, you look at the product lifecycle of a portable generator. The normal replacement cycle there is between 10 and 12 years. So the category for home standby generators is only about 12 to 14 years old. So, the awareness levels still remain kind of in that 30% to 40% range. So, we have a lot of work to do even though we’ve been doing a lot of the heavy lifting. There’s still a lot of opportunity there and a lot of work to be done just to get the awareness levels up to something more respectable on the 70%, 80% range. So, we think that all the things that we’re doing with our in-home selling solution, which we call PowerPlay, an iPad based solution, the infomercial that we do that we’ve been running, we call it Power You Control, are AMP direct marketing process, where we combine third-party household data with our activation data with power outage data. Those are all very unique things and nobody else in our industry is doing because they don’t have the scale to do it, nor do they have the data or I think or the stomach to probably spend the kind of capital that we are spending on it. So one of the things that we mentioned is the free cash flow that we generate in this company has given us a great opportunity to invest in some pretty meaningful things to try and move the needle on awareness and to move the needle on this category more quickly than it would do on its own in the absence of our efforts.

Your next question will come from the line of Mike Halloran from Robert Baird. Please proceed. Michael Halloran – Robert W. Baird & Co.: Good morning, guys.

Good morning, Mike.

Good morning, Mike. Michael Halloran – Robert W. Baird & Co.: So when you think about the rental demand side of things today, what are you seeing from the trajectory there, obviously some types of commentary from some of the public rental guys and some of the contacts. What do are you seeing in your business, what’s the outlook there as well?

The rental market for us has been a great market, I mean the Magnum acquisition has performed very, very well over the roughly 2.5 years, almost come up on three years in October of our 10-year of ownership and all of that we believe or lot of that there is kind of couple underlying trends, I mean certainly oil and gas we’d call it out Mike, here more recently but longer term the secular trend of renting versus buying underpins that and you see that, as you said in the rental companies that you guys cover or you watch out there. Those rental trends in terms of CapEx, now the CapEx can be somewhat lumpy and there are cycles to fleet refresh there, that we continue to learn about but they are pretty staggered in terms of how the customers come and go. We are pretty excited, we got some new products that we are launching there particularly in Light Tower side, that’s the one we haven’t talk much about probably should have to give the guys at Magnum they will do on this but they’ve done a fantastic job. We are the number one light tower provider to the global market and really number one here in the U.S. and we want to hold that position. We’ve got some pretty cool product coming down the line to kind of change the game a little bit on light towers. There is a lot of discussion around, the compactness of those products, the affordability of those products. I think a lot of the rental companies would tell you that probably one of the better performing piece of equipment from an ROIC standpoint on there a lot would be a light tower, and there is, it is good piece of equipment we’ve got some great scale in manufacturing there. We’ve been able to do some new things with Tower Light on light tower side. But we like the rental trends. We like the rental trends in Europe actually. We are starting to see some signs there that the current kind of economic malaise that has gone on in Europe is resulting a heightened interest in renting versus buying of again those types of pieces of support equipment like light towers, generators and pumps. So, we are anticipating that overtime the European market will follow some of the same growth curves that have occurred domestically here. So, we are pretty bullish on that. Michael Halloran – Robert W. Baird & Co.: And then could you update us again on the capital deployment side obviously very strong cash generation expected again this year, any change to what the prioritization is from your perspective?

Mike this is York. No we pretty hold firm on our prior use of cash capital that we’ve been talking about ever since we went public like everybody you want to grow organically, we’ve talked about paying down debt but we are at our leverages today at 2.6 times we are in our target range so, you pretty quickly go to M&A as our third priority, and we talked at length as well on these calls about our M&A pipeline and we are fostering asset pipeline, we’ve talked about our relationships and I think we have demonstrated we can when something becomes actionable, we can move on the M&A side. So those are the top three priorities and then once we get through that at that point the board would evaluate the return of capital to shareholders, at that point but there is other some priorities above it.

I think Mike, I have a couple of comments to add, I mean I think we generated a lot of cash. We had almost $200 million of cash on our balance sheet at the end of the quarter. And obviously we didn’t announce any M&A deals in the first half, so although we have a robust pipeline, but sometimes M&A is about the timing of things and certainly about being disciplined in terms of the price that you paid for assets and so, if there were to be a situation where M&A activity would not occur, I mean obviously I think we would owe it to ourselves and our shareholders to continue to evaluate the best uses of that cash with respect to creating shareholder value. So, you can anticipate that our board will continue to monitor that very closely, and as we kind of move through the rest of the year here, if we don’t see the right kind of activity from an M&A standpoint that we want to see or we can get a deal done for the price we want to get the deal done for, then we’ll have to do something else with that cash.

Yes, we’ll monitor excess liquidity and the board will evaluate it.

Exactly. Michael Halloran – Robert W. Baird & Co.: Thanks guys, I appreciate the time as always.

Thanks Mike.

Thanks Mike.

Your next question will come from the line of John Quealy from Canaccord Genuity. Please proceed. John Quealy – Canaccord Genuity: Hey good morning folks. So…

Hi John, how are you doing? John Quealy – Canaccord Genuity: I’m doing all right, how are you? So, first question, back to this reversion of the mean in can we get quantify that a little more so for example, are you looking for two or three events of 100,000 outages like how do we gauge this like, what moves the needle for you guys when you say reversion to the mean is government data that we all track about outages, but how do we sensitize this to your comments.

Yes, John I mean again we track outages internally, we look at so instead of just raw outages and this is the problem with some of the public data that is available. Most of the public data is really kind of password relative (ph) just kind of available reporting from utility companies around the U.S. and we’ve actually developed some pretty cool proprietary index and we track internally here, that measure kind of combined not only the frequency of outages, but also the severity or the duration of those outages. And so to answer your question, I mean, I can’t tell you with a high degree of specificity on this call, what that means in terms of whether that’s one big outage for seven days. It also regionally is important right, so you get these kind of echo effects that happen, if I – if we had an outage even a small one in maybe the northeast because that market has gone through a number of outages over the last couple of years, the impact of that small outage in that market could have a greater impact than it would be may in the midwest or maybe in the southwest. So, I mean it’s an (indiscernible) science although we are trying to put more science to it, it’s still there is not a great answer to the question. Reversion the mean comment and that concept is that on the long-term average in terms of what the number of people impacted by outages we were down against that long-term average in the first half of this year. And have been down against their long-term average for the last six quarters, as we mentioned. And so, the reversion of the mean here for the full year 2014, would mean some kind of increased outage activity in the back half of the year. So, again I can’t put my finger on exactly whether that’s four small outages or one big one or where it is. But that is kind of how I have to answer the question. John Quealy – Canaccord Genuity: Okay, that is fair. You mentioned some increased informercials and training and maybe some PowerPlay financing. I assume that is baked in your guidance. Can you talk about how much of a drag that is –is it 20 bps or 10 bps or not even. How do we think about the monetary aspects of the increased demand activities?

Yes, I don’t have that number directly in front of me. I mean that increased spending level though has been pretty much baked in our rate here. If you look at, in particular in Q2, I think Q2 is probably pretty solid indicator there, although you could see as it relates to from an informercial spend standpoint, we are kind of evaluating right now, how far do we want to go with that. Some of that depends on this reversion of the mean right I mean you don’t want to go overboard advertising. If you don’t have a lot of eyeballs that you’re hitting that haven’t experience some kind of an outage event. I mean that does not as effective advertising for us in this business. So we can be very pinpoint and very accurate, where we advertise but at the end of the day you do want to advertise in markets, where there has been outage activity. So, I do think that what we are seeing there – I think the run rate is from Q2 is probably a pretty good approximate.

Which is a lot more than we did last year. That is the key.

At this point last year which was the key to the comment, but you’re right, it includes training, it includes a lot of the advertising informercial spend. Continues to spending on the PowerPlay platform that is – it’s not cheap platform. I mean you put those applications together and all he back end. The iPad app is one thing, but all of the subsystems that go around it takes the lead, schedule the leads to improve that process and the metricking that comes out of that process, the amount of data that we are getting out of that process is phenomenal. And shifting through that to help us kind of direct what we need to focus on next is what we’re spending a lot of time and money on doing. John Quealy – Canaccord Genuity: All right, great thanks guys.

Thanks, John.

Thanks, John.

Your last question will come from the line of Tim Mulrooney from William Blair. Please proceed. Tim Mulrooney – William Blair & Co.: Good morning, guys.

Hey, Tim.

Good morning, Tim. Tim Mulrooney – William Blair & Co.: Just a couple of clarification questions on the call here. First of all, can you guys tell us, may be you did, can you tell us exactly how much recent acquisitions contributed to C&I in the quarter.

We didn’t – necessarily in prepared comments. I can give you more color there. Looking at organic C&I in the second quarter, that was up year-over-year in the low single-digit. So of the 22% growth, the vast majority of that was acquisition-driven, low single-digit organic growth. Tim Mulrooney – William Blair & Co.: Okay, so around $25 million. Is that a fair estimate for the acquisition revenue in the second quarter?

Roughly. Tim Mulrooney – William Blair & Co.: Roughly, okay. Okay. And then secondarily, do you guys still expect adjusted EBITDA margin to expand 400 basis points in the second half from the first half?

In the outlook statement, actually we alluded to gross margins. So, we anticipate gross margins will go up about 150 basis points from first half to second half and that’s a higher resi mix, some price cost improvements. I know you’re going to leverage your SG&A in the second half more so than the first half. So that would play out around that level of increase first half, second half. Tim Mulrooney – William Blair & Co.: Okay, great. And then just lastly, I was wondering if you guys could provide any more color on oil & gas opportunity. I know there have a lot of questions about that so far, but could you maybe just talk about how large this market is for your C&I business today or maybe how big of an opportunity you think this could be within the next several years? Thank you.

Thanks, Tim. So we don’t break specific protocols in detail, but I can tell you that in terms of trying to frame the discussion or how big it could be, that’s exactly what we’re kind of in the middle of right now. It’s just getting our arms around, some pretty detailed research and analysis around go-to-market strategies, resources needed, size of the market obviously being a component of the research. We think there’s a large opportunity there. We haven’t been able to quantify how large. And looking at how the market moves and what’s important to that, we’re starting to understand a bit of where generators and other supporting equipment are important to the customer, how they are used on the site or in the process whether it be upstream or downstream or midstream. So we’re starting to get a much better feel for that. And I think in the quarters to come we’ll be able to comment with a higher degree of confidence in terms of kind of qualifying the market side and the opportunity and for that matter our efforts to go after it. But at this point we’ll still kind of in the early innings of what we believe to be a high growth secular trend here towards opportunities in oil & gas for us.

Hi, ladies and gentleman. That will conclude the Q&A portion of the conference. I would like to turn it over to Aaron Jagdfeld for any closing remarks.

Thank you. We want to thank everyone for joining us this morning. We look forward to our third quarter 2014 earnings release, which we anticipate will be sometime in late October. Thank you again for your time this morning.

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