Good day, ladies and gentlemen, and welcome to the First Quarter 2018 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 is being recorded. I would like to introduce your host for today's conference, Mr. Mike Harris, Vice President of Finance. Sir, please go ahead.

Good morning, and welcome to our first quarter 2018 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'll make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks Mike. Good morning, everyone, and thank you for joining us today. Overall, first quarter results provided a great start to 2018, with robust year-over-year organic sales growth leading to strong improvements in margins and cash flow. Specifically, overall net sales increased 20% compared to the prior year, with core sales growth of approximately 17% when excluding the favorable impact from foreign currency. This sales growth drove an overall 230 basis point improvement in gross profit margin, 400 basis point improvement in adjusted EBITDA margin, and a significant improvement in operating and free cash flow as compared to the prior year. The fundamental demand environment for residential home standby and portable generators continued to expand, benefiting from another quarter of elevated power outages, which contributed to strong growth in both in-home consultations and end-user activations. Shipments of domestic (00:02:15) commercial and industrial products also experienced significant growth during the quarter driven mainly by the ongoing replacement cycle for mobile products. Sales once again grew organically within the International segment, which resulted in a year-over-year improvement in margins as well. Additionally, with the improving demand trends in several of our end markets, we were opportunistic buyers of Generac shares during the quarter investing $26 million under our current buyback program. First quarter results continue to benefit from the increased awareness of the home standby product category, primarily from the afterglow demand generated by the active 2017 hurricane season and elevated baseline outage activity experienced during the prior year. Accordingly, shipments of home standby generators during the first quarter increased significantly compared to the prior year. In addition, baseline power outage activity remained strong during the first quarter of 2018 from a series of storms that impacted the northeast region and led to a peak of nearly 5 million utility customers without…

Thanks, Aaron. Before discussing first quarter results in more detail, I'd like to point out that effective January 1, 2018, Generac adopted the new revenue recognition accounting standard that all companies are required to follow. For comparability purposes, the full retrospective method was elected under this standard, which requires application to all periods presented, and the prior-year first quarter of 2017 results that we are discussing this morning have been restated accordingly. However, the adoption of the standard did not have a material impact on our financial statements. Now looking at our first quarter results in more detail, net sales for the quarter increased organically 20.3% to $397.6 million, as compared to $330.5 million in the first quarter of 2017. Core sales growth, which also excludes the impact of foreign currency, was approximately 17% over the prior year. Looking at our consolidated net sales by product class, residential product sales during the first quarter increased 23.5% to $190.5 million as compared to $154.2 million in the prior year quarter. As Aaron mentioned, the quarter saw strong growth in shipments of both home standby and portable generators as end market demand for these products continues to be robust as a result of the elevated power outage environment. Looking at our commercial industrial (sic) [commercial and industrial] (00:09:35) products, net sales for the first quarter of 2018 increased 16.2% to $175.1 million as compared to $150.8 million in the prior quarter, with core sales growth being approximately 11%. This core growth was primarily generated by very strong shipments of [ph] domestic (00:09:54) mobile products driven by the continued fleet replacement cycle from our rental account customers. In addition, our International segment, which is predominantly C&I related, benefited from nice organic growth from our Pramac, Ottomotores and Motortech businesses. Net sales for the…

Thanks, York. We are raising our guidance for revenue growth for full year 2018, as we now expect net sales to improve between 6% to 8% over the prior year, which is an increase from the 3% to 5% growth previously forecasted. Recall that the second half of 2017 included elevated portable generator shipments from the active hurricane season. With no major outages assumed in our current 2018 guidance, we estimate there is an approximately 4% growth headwind relative to this strong prior year comparison. Core organic sales growth is now expected to be between 5% to 6%, which is an increase from the previous guidance of 2% to 3%. This increase is primarily due to improving end-market conditions for both domestic (00:18:53) residential and C&I products. Importantly, as previously mentioned, this guidance does not include the Selmec acquisition and does not include any impacts from major power outage activity for the remainder of the year. Our top-line guidance also assumes no material changes in the current macroeconomic environment and a baseline power outage severity level for the remainder of the year, similar to that of the longer term average. Should the baseline power outage environment in 2018 continue to be higher or if there is a major outage event during the year, it is likely that we could exceed these expectations. For historical perspective, an average major power outage event could result in $50 million or more of additional sales depending on a number of variables. Adjusted EBITDA margins for the full year 2018, before adjusting for non-controlling interests, are still expected to be between 19% to 19.5%. This guidance assumes a benefit from improved operating leverage on higher core sales growth and cost savings from our profitability enhancement program, both which are largely expected to be offset by…

Thank you. Our first question comes from the line of Charlie Brady with SunTrust. Your line is open. Please go ahead.

All right, thanks. Good morning, guys.

Hey, good morning.

Hey, with regard to the portable products in the rental channel, can you just talk a little bit more about kind of where you see it as far as the aging (00:22:36) equipment and how long you think that replacement cycle has to go? It's been going on for a while now, sounds like it's continuing to be pretty strong and it sounds like you're not seeing really expansion yet. It's really all driven by replacement. Can you please speak to that a little bit?

Yeah, I think, obviously, Charlie, it's a great question and we ask that of ourselves and our teams here on our mobile products business a lot, because trying to gauge just – we know it's a cyclical business. We know there's a lot of variables that go into what drives the cycle, everything from fleet replacement to strengthen (00:23:08) construction, both road and commercial to – as we've called out the domestic (00:23:12) energy production sector where – I get to answer your question directly that fleet replacement cycle we keep referring to, I would say last year we were obviously early in that cycle. The equipment age (00:23:23) there'd been a period of a couple of years there in 2015 and 2016, where in particular our national account customers have kind of hit the pause button on capital spending. And so, what that did is it deferred kind of the normal – we generally would see with a lighting tower or a generator, about a fifth of the fleet turnover every year. But the average lifecycle on (00:23:45) those products, four to five years, something like that. Little bit longer for certain customers, little shorter for others, but call it roughly 20% of the fleet would turnover every year. So if you go two years with low capital purchases, clearly there were some pent up demand there. We saw that snap back pretty hard last year. That was kind of the early innings of the recovery. What we've been very pleased though is throughout the beginning of this year and really even as we enter the second quarter here, we've been very surprised with just how strong it's remained. And so, then you asked a question what drives that, is it still the refresh cycle or is it something more? And we keep thinking that oil and gas is going to start playing a role in the equipment purchases there, but frankly we look at the utilization rates kind of in the specialty rental channels where a lot of that equipment goes. And the utilization rates are starting to recover. They're not fully where they are in the general rental business though. So we still think that there's legs with the rebound, in particular as it relates to oil and gas. And I would say we're probably middle innings on the fleet refresh cycle. So I think we're pretty bullish on that business overall. And in fact a part of our lift on the guidance this morning is related to mobile products.

Thanks. That's helpful. And just with regard to the Florida legislation, just to be clear, is your guidance factoring in any strength or sales coming out of that legislation yet?

Yeah, so we actually – we had kind of a line of sight on this from late last year after the storm. So actually our February guidance, our full year guidance that we gave initially did include some lift. And again, as we said in the prepared remarks, historically whenever you get an active hurricane season like we had last year, typically that bodes well for our C&I business. It's a longer sales cycle. There's planning, there's permitting, there's budgeting, and so you don't see the visceral reaction you get in the residential market. The C&I market generally will be several quarters afterwards before it kind of lights up and we're starting to see that now. But we did have to be clear. We did have some of that Florida legislation pending. It was pending legislation at that point. We had it in our guidance in February, but we took it up for the remainder of the year. Once it became clear that that was going to become law, which it did, and now as we've started to really have some serious conversations with both partners at the national level, people who own and operate those facilities on a national level, but also, I mean, frankly, it's a very fragmented market. There are a lot of facilities, a lot of small facilities across the state and so it's a lot of conversations. There's a lot of engineering work to be done. We found that we can be very useful and helpful in providing a lot of that engineering work and connecting those firms to resources whether they be our industrial distributors. But I think the other advantage we may have there is that because of our broad approach to the market from a distribution standpoint with electrical contractors as well as wholesalers and other channel partners, I think in particular the small bed facilities may not buy from an industrial distributor. They may end up buying from a smaller – their needs are smaller. They're looking for a smaller product. They can just as easily get that product direct from an electrical contractor who could be a dealer of ours. So we've opened up the product offering to those channel partners in a way that I think puts us in a position to see some nice lift from that and that's what we included in our upward (00:27:13) guidance this morning.

Thanks, and just one more from me. On just the inventory level (00:27:18) the replacement of the portables obviously from the sell out in Q1 storms, where is that level today? It's back to normal or it's still being replaced?

We've been constantly trying to catch up really since the hurricane season and the amount of portable generators that we put in the market over the last several quarters, it's amazing. I mean, we're running flat out in our facility here in Jefferson, Wisconsin. We've got our supply chain ramped up very hard. But every time we think we're getting ahead of it, then we get one successive storm after another in the northeast in the month of March. So really where I would say if we were to kind of quantify where inventories are at today, at least from a qualitative standpoint, they're low in channel and they're low in our own warehouses. Now, we're replenishing and we're coming into a very critical part of the season here in Q2 where what we've historically seen happen is that people, they'll get a lot of confidence in ordering for the upcoming season if they've had a good season last year. And so, we would expect some pretty strong order patterns here in Q2 and our guidance reflects that around portable gens and really probably even into Q3. But we're scrambling (00:28:35) to get stock and we're building as much as we can and it's good to see that market come back and we went through a period of protracted low outages and seeing it come back to this level. We've also been successful in getting a little more market share this year. Line reviews (00:28:52) are coming out right now and we're starting to kind of calibrate ourselves around some of the wins that we got. On a net basis, we're up year-over-year. We're going to be up. It's really a question of timing around when those products get placed, are they placed ahead of season, in season or after season? So we're working with the major retail partners now, but we're – on a net plus there, we're pretty bullish on (00:29:12). Our performance last year really led us to the point of winning some additional business this year. So that's a net positive.

Thank you. And our next question comes from the line of Jeffrey Hammond with KeyBanc. Your line is open. Please go ahead.

Hey, guys, good morning.

Good morning, Jeff.

Good morning, Jeff.

Hey, so just on – I guess, as you assess Irma and some of the hurricanes last year, what are you seeing relative to expectations on home standby follow through in your carry over? And then, just any early feedback that you're getting also on home standby, visibility activity from some of these East Coast storms? Thanks.

Yeah, so obviously the active season last year, Jeff, as we had said in particular, I think we made the comment, I believe is on our fourth quarter call, that we had never seen in-home consultation levels that we saw after those storms and that's a big leading indicator for us and what we weren't sure of is just how that would translate in follow through here in the first half of certainly the first quarter of 2018. We've been really happy with that. And I will say this when you look at it regionally, obviously, we said in the prepared remarks that activations in the southeast and northeast are up dramatically year-over-year. There's a couple of regions like the Midwest where because of the really poor weather conditions really through – I'll be honest. I think the snow just melted here a couple of days ago in Wisconsin, but the really tough weather conditions in particular in the upper Midwest, have made it difficult to put products on ground. And so, activations were a little bit more muted in the Midwest region in the first quarter. But even in the last few weeks we're starting to see that come back pretty aggressively. So we are really bullish that the spillover effect of a very active hurricane season in 2017 is going to continue to drive the regions that were directly impacted by that. But then also we also see this kind of afterglow effect around the rest of the regions. And then, more specifically your question about the northeast, again I see the in-home consultations are elevated and they've remained so. It's been a great test of our PowerPlay selling systems. I mean, the amount of dollars we're putting through that system, the amount of quotations, the visibility that we're getting to not only individual dealer performance, but regional performance around win rates and around just raw activity going into the areas really gives us a lot of confidence, and again is a big part of the overall story in raising our guidance, and dealer count also being up all-time high here at the end of the quarter. Those are all good things for us and I think they're directly related to the higher outage environment. So we're very bullish on it, Jeff.

Okay, great. And just one more. Margins seem – certainly were better than my model and maybe that speaks to home standby mix, but I noticed with the revenue change you're not changing your EBITDA margin. Just talk about puts and takes there and (00:32:25) any contingency or conservatism in the guide around that? Thanks.

Yeah, Jeff this is York. So on the margin guide, we did hold our margins to that 19% to 19.5% EBITDA range for the full year. And as you can imagine with where steel is going and in all those discussion about the uncertainty with tariffs and the weaker U.S. dollar that we're experiencing in (00:32:54) wage pressures and whatever it – there's lot of inflationary pressures that a lot of companies are experiencing. So we've evaluated that we've included some incremental inflationary pressures relative to the previous guide, but the operating leverage we're getting by adding roughly $50 million in sales to our guidance, which is that extra 3%, is really helping it to offset that. So I think we're pleased that we're able to hold that margin guidance despite some of the inflationary pressures we're seeing.

Okay. Thanks, guys.

Great. Thanks, Jeff.

Thank you. And our next question comes from the line of Ross Gilardi with Bank of America. Your line is open. Please go ahead.

Good morning, guys. I apologize if you've addressed this (00:33:41). I just jumped on from another call. But your ability to raise prices in home standby, Aaron, in this environment and in C&I, can you – due to – (00:33:53) to compensate for higher input cost, can you address that a little bit?

Yeah. It's obviously a question on, I think, the minds of anybody who's running company today (00:34:03) with the inflationary pressures we're seeing. We went to the market with some price earlier this year. There's kind of an annual cadence around C&I, so I'll start with that market. C&I is – the lot of the major players in that industry will come out at the beginning of the year or at the end of the previous year with couple percentage points of price. What we've seen on top of that kind of normal cadence and we followed suit with that kind of in December-January. We've seen now some of the major players in that industry, in the C&I space come back and they're taking a second bite at the apple here. And we're evaluating how we want to do that. Obviously, we know that these input costs are going to continue to rise, but at the same time we like our position as one of the value providers in the marketplace. I think we're going to end up having to do something there and are evaluating kind of what that would look like on the C&I side. Residential is interesting. One of the things we talk about residential is the importance of affordability. Affordability is kind of an important leg of the stool when it comes to growing the penetration rate for home standby. That being said, straight price increases, typically you (00:35:20) don't take the same model and just layer on the price increase. We generally take a different tact when it comes to residential products and in particular home standby. This year, as an example, the way we approached price, we have a new model that's just now coming off the production line and starting to get into…

Got it. Thanks, Aaron. And then, in holding your EBITDA margin guide, you were saying that operating leverage can offset raw materials, I think, amongst (00:37:31) some other comments, but are you making any assumptions on weather patterns in the second half of the year when you say that or do you – is the operating leverage you're counting on basically in your order book right now?

Yeah, I think – so the operating leverage as we remarked in our comments, has really calibrated around the upward guide that we did this morning. So kind of on that level. I will say this on your comment about weather and how much of that do (00:38:03) we have baked into our guide. So this is the thing with this business that I've always said is pretty – it's kind of an interesting element of our business and that we don't include any major events in our guidance. So there could be additional leverage. There could be additional top-line. As we said, a major event can add upwards of $50 million or more into the top-line. I'll also say this, the baseline power outage environment, which is an important kind of item that we use to calibrate the remainder of the year kind of view on residential, we're picking a level that's closer to the long-term average, quite a bit below where it's been, specifically well below where it was in Q1. So we were actually saying in our guidance this morning that we're looking for a lower power outage environment for the balance of the year and that yet still translated to a higher guide, an increase in our guidance. So is that upside? I don't know. We're trying to take a conservative approach to how we forecast outages. We've been down this road before. We just don't know when they're going to happen or where they're going to happen. We do know over the long-term, they do happen and they do impact that business. So we leave it to you guys and to others who watch the company to kind of pick a point on a curve and say where you're going to be. But that would only be an additional tailwind in terms of additional leverage from a margin standpoint.

Got it. Thank you, Aaron.

Thank you. And our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Please go ahead.

Hi. This is (00:39:41) for Jerry.

Hi. Good morning.

Good morning.

Good morning. Can you please frame where the mobile genset business is relative to the 2014 oil and gas peak? And what's the lead time on orders today and how much you expect production to ramp in the second half of the year?

Yeah, so they're good questions. 2014 was a very unique year with not only the fleet refresh cycle kind of in the late innings, but also oil and gas. So we're still off of that peak. And in particular, as I mentioned before, we really haven't seen utilization rates in those specialty rental markets that serve oil and gas. We haven't seen them kind of hit their stride yet. So we believe there's room to run yet as it relates specifically to oil and gas. So the product lines that we serve that market with, both the specialty lighting towers, the specialty gas and diesel generators for that market and heaters, really have not come back to the levels, nowhere near what they were in 2014 for those specific product categories. As far as lead times for products, they are starting to stretch. We've always said that that's a business – the mobile products business, you want to have some inventory on the ground, because projects come up time and again you want to be able to capitalize when a project does happen, a new project hits the street. Unfortunately, what we're seeing is lead times are going out because there isn't – we're running three shifts in our factory there. I wouldn't say we're approaching full utilization, but we're pretty close in terms of capacity at our facility there. But actually our biggest constraint is engine availability. So the world market for the diesel engines that go into products like that, smaller displacement diesel engines also go into the same type of small construction equipment. And so, skid-steers and backhoes and things like that, which also obviously is a very robust demand environment right now. And so, that's putting pressure on the major engine manufacturers and they're obviously recalibrating their own factory scheduling to fix that. But fortunately we got in early. We could see this happening and we've been down this road before in terms of cycles and I think we're in pretty decent shape with engine supply. We've taken some additional steps there, but we're flat out trying to make as much product as we can, but lead times are going out.

Great (00:42:02). Thank you.

Thank you. And our next question comes from the line of Brian Drab with William Blair. Your line is open. Please go ahead. Brian P. Drab - William Blair & Co. LLC: Good morning. And congrats on a great start to the year.

Thanks, Brian.

Good morning, Brian. Brian P. Drab - William Blair & Co. LLC: Hey. Is there any way that you could size that Florida opportunity with the assisted living facilities? Is it closer to $20 million or is this like a $50 million plus opportunity and does it carry into 2019? What's the timing do you think in the end around these guys becoming compliant with the regulation?

Yeah, it's a great question, Brian. I mean, we've done a lot of math on this, to try and quantify the size of the market opportunity there and there is a lot of factors that go into that. The existing facilities that are there, what do they already have? In some cases they already have some type of backup strategy and there's not a lot of great information when a facility has backup power versus not. Is that backup power adequate to carry (00:43:05) which is really the critical change to the legislation here that happened? But if we just kind of step back and we look at it, we would estimate the overall kind of size of the prize there including installation, and this is at a retail price point. It's probably somewhere in the neighborhood of a couple of hundred million dollars. Now, when you strip away the generator and transfer switch components of that at kind of wholesale levels, is that at $100 million to $125 million opportunity? That's probably a reasonable estimate. And then, you put a market share on that. We believe we should get our rightful share at a minimum and then maybe there's a little bit more because of the breadth of our distribution, because we have a better position with natural gas, which is also allowed under the regulation, which was a change from previous regulations. So I would say that if you were to size that, is it somewhere between – I think you hit the numbers, somewhere between $20 million and $50 million. In terms of timing, I think, it's interesting. There may be a problem with trying to get all that equipment built and installed by the state's deadline. Certainly, it's not going to happen by July 1. And…

So we can. The small bed facility (00:46:05) can certainly use a residential style generator. Because of that, Brian, we use a hybrid share number that we believe is reflective of where the larger facilities are going to use, very clearly a commercial industrial generator. Our shares is more akin to that. But then there are a lot of small bed facilities where we think a light commercial or a residential product could be used. And therefore, that's transacted through a much broader channel and we have a much greater share there. So you're right, we hybridized the share for the purposes of estimating the impact. Brian P. Drab - William Blair & Co. LLC: Okay. That's really helpful. And then, I'm pretty sure I'm not going to get you to quantify this, but if there's any way that you could help me think about this would be great, the baseline outage activity, and get (00:46:56) a sense for how you're constructing that guidance? How far above the long-term average has outage activity been, whatever period you choose, over the last 12 months would be helpful? I'm trying to get a sense for obviously how far it's dropping in your guidance (00:47:17).

Yeah, it's a good question, Brian. I mean, we haven't quoted like specific numbers around that, but Q1 was meaningfully higher than the long-term average, really kind of think of it as double kind of the long-term average. And so, we're dropping it (00:47:32) based on the way we're guiding for the balance of the year, we're reverting more to that long-term average. Now obviously, we had a strong year last year, strong couple of quarters here. We strip out major events when we look at this, and we didn't qualify any of the events that occurred in Q1 as major, but it does bring the average up slightly when you look at the long-term, right. But it's still meaningfully below what happened in Q1 and meaningfully below what happened last year. So we think that maybe that indicates there's a sufficient conservatism in our guidance, but again because we don't know, you can't predict outages. We feel it's the proper way to do that. Brian P. Drab - William Blair & Co. LLC: Absolutely. Okay. And then one more, if I could. The Motortech, Pramac kind of update, if you give (00:48:19) a little more detail on how that's going in Europe, and I saw the 5% core number international, is that kind of going as expected so far?

It is. Yeah, we've actually really, really pleased with our international businesses. The core growth rate in really all those acquisitions has done very well for us. Some of that is the strength of Europe overall. Some of it is some of the markets specifically like Motortech that are – they're focused on combined heat and power, OEMs and demand response OEMs and other gas power generation OEMs and that market is growing faster than traditional markets. Pramac has been just a tremendous grower for us, tremendous acquisition. And as we've said in these comments, our biggest area of focus with international businesses (00:49:16) is to improve the margins. But we knew we're buying eyes wide open. We went after this with a lot of vigor to give ourselves a much larger global footprint both from a distribution and manufacturing standpoint. And we knew that doing that was going to be dilutive on margins and we knew that in particular in (00:49:35) like a case like a Pramac or an Ottomotores, these companies are generally packagers of products. They're not true manufacturers I would say. They're really packagers. And what we are here in the U.S., the Generac, in particular our C&I business, which is what is most akin to these businesses, we're really a vertically integrated manufacturer. And so, there's a lot of value added work streams that we put into the product. Everything from manufacturing our own gas engines to winding our own alternators to engineering and designing our own controls, transfer switches, all of the components that are critical of the systems we think are really important. The key in these acquisitions has been in part of the thesis is to take and do that in these other businesses and then to leverage by growth to leverage there what is a relatively high fixed operating structure, because of the coverage that they have. So Pramac has 16 sales branches. These are offices with people staffed across the globe to get access to the 180 plus countries that they sell into. There's a high cost of that and the better that we can leverage that, and so we can improve – make improvements at the gross margin line by making them a better vertically integrated manufacturer. And then, we can improve at the bottom line by leveraging operating expense structure of these businesses by growing. And so, those have been the two things we've been very focused on and it's working. I mean, the last several quarters show it's working. We're seeing some nice improvements. And we have a long way to go. We said we want to double the EBITDA margins of these businesses. And we've got a line of sight to that. We think we have a solid plan to get there and we're working that plan and we've been on our trajectory.

And gas work (00:51:23).

And focused on gas as well. It's been another area of positivity there.

Thank you. And I'm showing no further questions, and I'd like to turn the conference back over to President and Chief Executive Officer, Aaron Jagdfeld for closing remarks.

We want to thank everyone for joining us this morning. And we look forward to reporting our second quarter 2018 earnings results, which we anticipate will be sometime in early August. With that, we'll bid you a good day. Thank you very much.

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