Good day, ladies and gentlemen, welcome to the Fourth Quarter and Full Year 2016 Generac Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host Mr. Michael Harris, Vice President, Finance. You may begin.

Good morning and welcome to our fourth quarter and full year 2016 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial 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 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 will now turn the call over to Aaron.

Thanks Mike. Good morning, everyone, and thank you for joining us today on this Valentine's Day. Fourth quarter results provided a strong end to 2016 with organic net sales improving over the prior year, adjusted EBITDA growing at a strong rate and operating and free cash flow achieving quarterly record. Hurricane Matthew which occurred in early October drove significant portable shipments and to a lesser extent contributed to increased home standby volumes during the quarter. The higher shipments of residential products during the fourth quarter helped to offset continued declines in shipments of mobile products both domestically and internationally. Although, we didn't consider Matthew a major event in terms of power outage severity, the incremental volumes during the quarter demonstrated the operating leverage inherent in our business model. Adjusted EBITDA margins within our Domestic segment grew significantly over the prior-year and we were able to monetize a notable amount of portable and home standby inventories, both of which contributed to quarterly records for both operating and free cash flow. This strong level of cash flow allowed us to remain active with our share repurchase program, make a voluntary prepayment on our term loan and fund our most recent acquisition of Motortech during the quarter. On a year-over-year basis, net sales in the fourth quarter increased 17% to $417 million, as compared to $358 million in the prior-year with core organic growth of 3% and a full three-month contribution from the Pramac acquisition. Adjusted EBITDA, adjusted EPS and free cash flow during the quarter all grew in the low-to-mid teens range, as compared to the prior year. An area of our business that remain challenging however was our domestic mobile product offering, primarily serving the rental markets. While average energy prices improved during 2016 from the trough levels experienced earlier in…

Thanks, Aaron. Net sales for the quarter increased 16.7% to $417.4 million as compared to $357.8 million in the fourth quarter of 2015, including $50.7 million of contribution from the Pramac acquisition, which closed on March 1, 2016. Looking at consolidated net sales by product class. Residential product sales during the fourth quarter of 2016 increased 20.3% to $238.9 million as compared to $198.5 million in the prior year quarter. As Aaron mentioned, we experienced a strong increase in organic sales for residential products during the quarter, as Hurricane Matthew drove a significant increase in demand for portable generators and to a lesser extent home standby generators. Residential product shipments were also aided by improved buying sentiment from our distribution partners which in turn improved the effectiveness of our promotional programs for home standby generators during the fourth quarter. Also contributing to the sales increase was the modest contribution of portable generator sales from the Pramac acquisition, along with increased organic shipments of DR branded outdoor power equipment from Country Home Products. Looking at our commercial and industrial products. Net sales for the fourth quarter of 2016 increased 12.3% to $148.1 million as compared to $131.9 million in the prior year quarter. The increase was due to the contribution from the recent Pramac acquisition and to a lesser extent increased shipments of stationary generators sold into the Latin American region. Partially offsetting these increases was a significant reduction in shipments of mobile products, both domestically and in Europe. In the fourth quarter, we continue to experience the deferral of capital spending by our key equipment rental customers, as a result of ongoing softness in the domestic oil and gas market, as well as declines in infrastructure spending in the European region, particularly within the United Kingdom due to the Brexit-related…

Thanks, York. Today, we are initiating guidance for full year 2017 as we expect net sales to increase between 5% to 7%, when compared to the prior year with 1% to 3% core organic growth. The as-reported growth rate includes two months of the Pramac acquisition, which will annualize on March 1, 2017, as well as the contribution from the Motortech acquisition that closed on January 1 of this year. Importantly, this top-line outlook assumes no material changes in the current macroeconomic environment and also assumes the power outage severity levels similar to that experienced during 2016, excluding the impact of Hurricane Matthew. As a reminder, should the baseline power outage environment improve or if there is a major power outage event in 2017, it is likely we could exceed these expectations. For historical perspective, an average major outage event could add between $25 million to $50 million of additional sales depending on a number of variables. We expect the seasonality of quarterly results to demonstrate a normal historical pattern assuming no major outage events occur during the year. As a result, we currently expect the first half of the year to represent approximately 45% to 47% of total sales and the second half approximately 53% to 55%. By way of comparison, 2016 organic seasonality was 46% in the first half and 54% in the second half. Specifically, we anticipate that the first quarter of 2017 will be the lowest revenue quarter of the year with sales in the range of $315 million to $325 million, reflecting normal seasonality for residential products as well as the impact of field inventory destocking by distribution partners during the first quarter, due to the success of our home standby generator promotional campaigns in the fourth quarter of 2016. In summarizing our sales growth…

Thanks, Aaron. In 2017, we expect interest expense to be in the range of $46.5 million to $47.5 million, which represents an increase compared to $44.6 million for the prior year. The primary driver of the increase is the assumption that LIBOR rate exceeds the minimum floor of 0.75% on our term loan for the entire year. The forecast for interest expense includes $44 million to $45 million of cash for debt service costs, plus approximately $2.5 million for deferred financing cost and originally issue discount amortization for our credit facility. This interest expense guidance assumes no additional debt prepayments during 2017 and our existing interest rate swap contracts remain in place. Based on our guidance provided for 2017, our cash income taxes for the year are expected to be approximately $26 million to $27 million, which translates into an anticipated full-year 2017 cash income tax rate of approximately 14%. This represents a notable increase as compared to the 5.9% rate in 2016. The projected higher cash income tax rate is a function of several factors, most notably higher pre-tax profitability levels, as well as expected reduction in share-based compensation expense for tax purposes during 2017 compared to the prior year. Our GAAP income tax rate is projected to be approximately 35% in 2017. Depreciation expense in 2017 is forecasted to be approximately $21.5 million to $22 million. GAAP intangible amortization expense in 2017 is expected to be approximately $29 million to $29.5 million, which is a reduction from the $33 million in 2016. The decline in expense is primarily the result of certain definite-live intangibles becoming fully amortized during 2016. In 2017, GAAP stock compensation expense is expected to increase to approximately $11 million to $11.5 million. Our capital expenditures for 2017 are forecasted to be approximately 2.5% of…

Thank you. Our first question comes from the line of Jeff Hammond from KeyBanc Capital. Your line is now open.

Hey, good morning, guys. This is James Picariello on for Jeff.

Well, good morning. good morning, James.

So, you mentioned this pivot in the Powering Ahead strategy away from regional expansion and now primarily focused on natural gas applications, it makes a lot of sense. Could you just talk about when this revelation occurred internally, and maybe how you're thinking about the company's current portfolio as it stands? Is there anything you would consider non-core at this point?

Yeah. So, James, every year we do a strategic planning session, and review with our management team here at the company and with the board of directors obviously and we go through – again, we evaluate our strengths, our weaknesses. It's kind of classic SWOT analysis where you start, our position in each of the markets we're in, what's working, what's not working, where we think – kind of where is the puck going to be as we look out three years to five years. And in this year's session, I think – and maybe this has been tugging at us a bit, but really the pivot for us is this element of our strategy that's actually played a really significant part in actually York's final prepared remarks there a significant part, and I think the diversification of Generac, that part of the strategy of going after new products and new markets, we feel that we have become very diversified. We've gotten ourselves into a lot of new markets, a lot of new product categories that we weren't in before. They all have an engine at the heart of them, which is what we like. They provide some great scale for us in terms of not only a manufacturer of engines, but a customer of engine suppliers. And a lot of the new markets that we got into was great for the adjacencies that they gave us for our products – our existing product line. But also, I think we all feel that to go further from where we're at today might be a bit dilutive in terms of our focus. And so, we've been feeling that as we've slowly diversified the company. I think it's been clear to us that we needed to probably rein that in a bit.…

Got it. Very helpful. And then just on International margins, can your provide some additional color on what's driving that segment's lower profitability? You mentioned UK weakness. So to what extent is FX just playing a factor there? And then with respect to the ongoing integration efforts at Pramac, can you just maybe provide some range on what the targeted revenue and cost out synergies are for this year? Thanks.

Yeah. So I'll start the – the margins in International, I think were challenging this year. That segment has largely been our Tower Light business along with our Ottomotores business down in Latin America. And we're in a very fortunate position to be supplying the market in a very favorable way with products that that had very good margins and they still do have very good margins as a matter of fact, it's just unfortunately the Tower Light business in particular, we saw a breakdown in the capital spending by those larger rental accounts in Europe, primarily in UK, which is a big component of Tower Light's business and that really was last year, some of it precipitated by Brexit, I think that was probably the excuse if you will. We've seen large rental companies, they tend to throttle back CapEx very quickly. And it's pointed out, I think some opportunities within that business to expand our customer base into some reaches and some areas in maybe the second and third tier-type of customer layers there that maybe we weren't as concentrated on that we probably need to expand on, so I take every negative and try to make it a positive, of course, but that was really at the core of what happened there. And then obviously you layer in the Pramac business, which is a lower margin business. I mean typically when you look at power generation businesses globally and we've looked at a lot of them, they're really kind of mid single-digit EBITDA type margin businesses. The reason for that is they're primarily packagers. They are buying somebody else's engine, they're buying somebody else's alternator, buying somebody else's control, there is a limited amount of value add in the value chain. And so their margins tend –…

Our next question comes from the line of Brian Drab from William Blair. Your line is now open. Brian P. Drab - William Blair & Co. LLC: Hi. Good morning.

Good morning, Brian.

Hi, Brain. Brian P. Drab - William Blair & Co. LLC: See I wanted just to ask about the breakdown of the revenue for the year first – last couple of years, first half of the year accounted for 46%, 45% of revenue and you mentioned that in the prepared remarks. But the difference between 2015 or 2016 versus this year in my mind is that we had this major weather event at the close of the previous year. So why wouldn't we see a little bit more revenue in the first half, so that balance be a little bit different?

Yeah, Brian, this is York. I think Aaron – we talked about a steer in terms of where Q1 sales at $315 million to $325 million, and in Aaron's prepared remarks, he was referring to the success of our promotional campaigns in the fourth quarter of 2016. That will just result in a level of destock in the first quarter of 2017 here, so that guide is reflective of that. And then, the reality is Hurricane Matthew wasn't really a major event, I think there was – while it took the power out for a lot of people, it wasn't for a long duration. The severity was short (42:06) infrastructure wasn't really damaged. So, the afterglow of Matthew into 2017 is muted.

It really was a portable generator, and that's more than anything is what we saw in Q4, Brian. I think what happened is our channel partners both on portables as well as home standbys, they get into a buying mood pretty quickly when they see a storm like that and we run normal promotional cadence those times of the year, and we got a high receptivity of those promos. And as York said, that's going to result in really higher kind of fuel inventory levels as we enter the year here, and there'll be some amount of destocking that will occur in Q1, and that's really what's reflective of that kind of seasonal steer that we gave first half, second half.

So, Brian, it's a fair question, but I think given those comments that that would then cause the weighting first half, second half to be similar to 2016 here in 2017. Brian P. Drab - William Blair & Co. LLC: Yeah, great. That's really helpful. And then, can you go back and talk a little bit more about Motortech and the timing of maybe some of the new products and opportunities that would be associated with Motortech? And have you been able to quantify in any way, how much you're expanding your TAM with those products?

Yeah. We think the TAM for those products is about – it's about 1.5 times bigger than what we currently serve today in the emergency backup market. And so that – it's a pretty good opportunity for us and Motortech is currently selling into – that market is largely by the way I should say that TAM expansion is largely in Europe today. And we think that that is starting to appear here in North America as well and in Latin America. So, the Motortech technology and the competencies that we gain there, we believe are going to allow us to put ourselves in a position to capture that expanding TAM here domestically and in Latin America and then the existing TAM in Europe. In terms of timing, Brian, those are big product cycles for us, and so it's going to be something we're going to begin to work vigorously on here, already actually have in 2017 here. And that'll – I think we'll be in a position to give better updates throughout the year as we go forward, but we're excited about it. Because it's – again natural gas is going to be the world's fuel supply for a long time. We think we're going to where the puck is going to be here in the future and we're seeing evidence of that the traditional – even in the traditional backup generator markets, we've seen this for a couple of decades in the U.S. market, there's been a shift away from diesel and to natural gas. Outside the U.S. and Canada, it's still largely a diesel market for backup generators. We think that's going to change as well over time, gaseous-gensets are becoming much more accepted as a substitute, if you will, for diesel, and we believe we're going to be at the forefront of being able to capitalize on that.

Our next question comes from the line of Jerry Revich from Goldman Sachs. Your line is now open. Jerry Revich - Goldman Sachs & Co.: Hi. Good morning, everyone.

Good morning, Jerry.

Good morning, Jerry. Jerry Revich - Goldman Sachs & Co.: Aaron, I'm wondering, if you could talk about for your core Magnum business for light towers, what are you embedding in terms of the CapEx outlook for your customer base? In that business we saw one of your major customers put out some pretty positive CapEx indicators that also suggest the very good first and second quarter on a year-over-year basis in their planned spend. And I'm just wondering, if you anticipate your share of the CapEx budget for U.S. rental companies staying similar or is there anything that we should keep in mind about where dollar utilization stands for them in your products compared to the overall portfolio?

Yeah. It's a really good question Jerry, and obviously, one that we paid very close attention to in terms of all the major metrics there around the categories that we serve in that market. Lighting towers have been traditionally one of the better return on invested capital type products that's in a fleet for a rental customer. And so, as you would expect that's typically where we see recovery first, when we see fleet replacements occurring, and where we see capital expenditures deployed first. And that's basically what we're seeing. As I said in my prepared remarks, it's what gives us confidence that we've kind of seen the bottom, we've steered it down and we believe there's going to be a nice rebound in that business this year. We're already seeing order rates strengthening from those national account customers in those particular categories around towers. We think that gens generally will follow a little bit later. The generator markets are little different because there's a dynamic there around a shift in the average sell price for those products, it's reflective of the move from Tier 4 interim to Tier 4 final engine powering in many of those products, including the generator product line that we offer. So in effect, until rental rates are – there is an ability to increase rental rates in those products, it's going to probably keep a bit of a lid on maybe the CapEx spending there, until fleets – I think fleets are going to age a little bit more in those category. But we're seeing some really nice rebound there, we're watching and conversing with our national rental account customers on a daily basis in fact. And frankly, probably the bigger challenge in that business for us is just having rationalized the footprint of…

Yeah. So what we saw in Q4 Jerry, I mean we typically see a push towards the year end on activations which we saw in-home consultations usually perceive that by a couple of months, which we saw. I wouldn't say that the spikes were as large. Regionally speaking, the Northeast was down regionally for the year and also in the quarter although not nearly as severe as previous quarters. The Northeast still continues to come off of, I would call it the hangover of the events that had transpired out there in 2011 and 2012. So that decrease in that region put pressure overall on those things. That being said, I think that was offset largely in Q4 as we mentioned in our prepared remarks by the impact of Matthew. Now, as you're also learning, and you mentioned, a lot of that was sell-in, not necessarily sell-through as channel partners took a fair amount of inventory, took advantage of promotional cadence we have, they were in a better buying mood because of the outage events. And coming into the beginning of the year here, we see kind of from an end market demand standpoint, very similar trends to what we've seen in years past, not materially different. I would say that activations in in-home consultations in areas that we saw impacted by Matthew are up year-over-year and the rest of the market is either kind of flattish to maybe slightly down continuing in the Northeast still, which is pretty phenomenal, just goes to show you how big that market had gotten, but I think it's pretty stable trends. We've got a number of things, as we said, that we're working on to focus on improving close rates. I think that's a really big focus area, it has been last year, but we've adjusted some of our programs this year to reflect the importance of close rate in the rankings of residential dealers, which we hadn't done in the past. So we think that trying to better use market forces to our advantage to improve close rates. If we could just see even a slight improvement in close rates, it's a material impact. We do a lot of quotations, I mean, a lot of quotations and the close rates are relatively small. And if we could get those close rates to move just a little bit, it's going to have a nice impact on overall home standby demand. So I think that's really the game for us and our focus is that end of the market.

Our next question comes from the line of Charley Brady from SunTrust Robinson. Your line is now open. Looks like we've got...

Maybe go to the next one, operator.

Hello. Charley, we're not hearing you.

Can you hear me, York?

We hear you now.

Okay. My apologies on that. My question is just quickly on the raw material costs, we've seen copper go up a little bit. We've seen some other raws go up. Any impact on the fourth quarter and kind of what's embedded in your expectations in 2017?

Hey, Charley. This is York. Yeah. In Q4 – starting with Q4, so we have realization lag, as you can imagine, with our supply chain and through our inventory. So what we're seeing come through Q4 can be commodity levels from six months ago or more. So we actually had a tailwind in Q4 relative to commodities and whatnot. But when you do flash-forward to 2017, you're right, copper, steel, aluminum are all up and trending up. So what we need to do is put initiatives in place from an engineered cost reduction standpoint, a sourcing standpoint, a pricing operating standpoint to help offset those headwinds on the commodity side. So, we did bake in some level of commodity pressures in our guide, but we also did include some price and some engineered and sourcing cost reductions to help offset. So that was reflected in our gross margin guidance for 2017.

Okay. Thanks. That's helpful. And so, let me go back to commentary in the prepared remarks on the new product development and bringing down that installation cost and the labor cost of that installation. Can you just maybe get a little more granular on kind of (53:47) kind of what's the pipeline as to where, how much that could come down because obviously that's a very large factor in the decision process on buy or don't buy for those home standby products?

Yeah, Charley, we think that it's probably somewhere in the area of a 5% reduction overall, it's really focused on the labor component by just reducing the overall cost to install, the time it takes to install. So 5% to 7% reduction in that, which again when you look at kind of the sensitivity analysis around a decrease in price there that should have a move up in volume. But that being said, as we've said repeatedly over the last several years, we do think it's going to take probably a more meaningful reduction in total cost of ownership. We've got some things that we continue to work on where we believe we can take a further step in that direction. We haven't really seen it show up yet in our proposals, obviously we're doing a lot of proposals, as I said before. So we haven't really seen it show up yet in proposals too dramatically because the product line simply just launched end of Q3, beginning of Q4. So, as proposals are put together, and as dealers get more experience installing the new version of the products, we think it will be – will improve that TCO push downward over the course of this year, but more to come on that. We've got a lot of work, we spend a lot of time on this internally, and we believe there are some things materially here in the future that could bring that down further.

Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is now open. Christopher Glynn - Oppenheimer & Co., Inc.: Thanks. Good morning.

Good morning, Chris. Christopher Glynn - Oppenheimer & Co., Inc.: Hey, as we look at the implied 1Q impact from the promotional program successes in the fourth quarter, just wondering, if sell-through ultimately rules the volume demand over time, what's the net utility of the seasonal promotional programs?

So the net utility of those promotional programs is really to make sure that there's field inventory for dealers, right. I mean if we were to keep all the field inventory here in our distribution centers and the ability to react to outage events as they occur becomes very constrained, very quickly. So we've always been keen to make sure that field inventory levels are healthy, that's an important element of reacting to demand. Demand happens quickly, it surges quickly, and it goes away quickly. So if levels are appropriate, we believe that that puts us in a position to win and not lose market share, should an event occur. So that's a big part of it. We also know frankly that having those products in front of those dealers for them to sell really gets them to focus on it. So if they don't have that unit in their shop, they are not looking at it. They are less focused and less likely to do the local advertising and the local marketing that we need for them to be successful and us ultimately be successful. So it's really kind of – it's a multipronged approach. And trust me, because we've questioned ourselves a numerous times on this, is there – are we leaving dollars on the table, where is that kind of balance in terms of how much promotion, there's too much promotion, what's not enough. And so, it's difficult to kind of walk that path, but we think we have the right approach. I will say the one change we're going to make going forward, last year we did our first kind of what I would say, we call it a pull promotion more at the consumer-oriented and level. So we did some extended warranties and things. Those were very well received, those were in the third quarter. We think that a better cadence of push and pull promotions, a better balance there is a way to kind of reduce our overall total costs while still creating the same level of engagement we need with distribution partners and ultimately changing the conversation a bit over at times of the year or two – a direct conversation with end consumers about having the product. So we continue to refine that, but that's really what the additional utility is all about with promotion. Christopher Glynn - Oppenheimer & Co., Inc.: Okay, that makes a lot of sense. And then on the organic 1% to 3% for the year, how does that course respectively for the residential versus C&I?

Hey, Chris, this is York. So, on the resi side, I guess qualitatively we gave a guide that basically said we're assuming power outage severities similar to 2016 excluding this Matthew event. If you factor that as your overarching assumption on the residential side and then you factor in this destock in Q1 and then given the assumption of not having another Matthew happen in Q4, you'll have a tough comp in Q4. When you put that all together, resi is probably down slightly year-over-year from 2016 to 2017. Obviously, you get an event, any type of event and that will take that to positive growth year-over-year. On the C&I side, we're seeing solid growth in the core stationary business, be it domestically in Latin America or in Europe, but it's that mobile business that Aaron alluded to versus where we're seeing some strong trends. So we see on the mobile side both domestically and in Europe some strong growth year-over-year on the mobile side, but stationary, we are also seeing solid growth. So, I guess qualitatively that would be the direction we can give you on the resi versus C&I growth.

Our last question comes from the line of John Quealy from Canaccord. Your line is now open.

Hey, thanks, guys for squeezing me in. Good morning. Just one question.

Hey thanks John.

Hey, guys.

Yeah.

So some of the newer or sort of refreshed opportunities combined heat and power, DR, peak-shave, talk about what you're going to do on the third-party side? I mean, are you going to talk to utilities or DR aggregators, maybe some E&C firms on the larger scale CHP, just talk a little bit about go-to-market? Thanks, guys.

Yeah, thanks, John, good question. And so, as I said, I think we're in the early innings here on lining up the key initiatives around that, as we refer to it internally here we're calling it, lead gas. And so that lead gas initiative for us is going to get fleshed out here as we go forward. But clearly, from a go-to-market standpoint, it's not our traditional channels. I think that that's where probably the biggest amount of work has to happen. And frankly the products themselves require a bit of work, but not too dramatically, there are some different emissions levels, there is some different – some of the engines are a bit more heavy-duty, the alternators and other components may reflect a bit more heavy duty in nature to reflect the higher demand cycles for those products, but it's really the go-to market side of that, I think you've nailed it that is where our big – where really our heavy lifting has to be done. So, we'll be all the players and actors that you mentioned there are potential interfaces for us going forward. And that's going to require a different effort on our part. And as I said it's probably not going to look similar to what we do today. We've actually been down this path before, 15 years ago when distributor generation was going to be all the rage going forward when utility costs were going to up and gas prices were going to stay low, unfortunately gas prices went up and utility cost stayed low. So, it was the opposite effect and we ended up disbanding several sales initiatives and efforts that we had targeting distributor generation at that time. We had products in place and we had sales forces in place that we ended up ultimately moving away from and they were targeting utilities and other demand response aggregators, other places in the marketplace where you would expect to see that. So, more to come, early innings, but we think it presents really a whole new kind of area for us as we go forward here in 2017.

That now concludes our Q&A session. I will now like to turn the call back to Aaron Jagdfeld, President and CEO, for any further remarks.

Great. Thanks. We like to thank everyone for joining us this morning and we look forward to our first quarter 2017 earnings release, which we anticipate will be sometime in late April. With that, we'll bid you adieu. Bye, bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.