Good morning, ladies and gentlemen, and welcome to the Third Quarter 2018 Generac Holdings, Incorporated Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at the time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. York Ragen, Chief Financial Officer. You may begin your conference.

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

Thanks, York. Good morning, everyone, and thank you for joining us today. Our third quarter results came in ahead of our expectations and represent the best quarter in our history. Continue broad-based strength in all of our end markets, coupled with additional residential product shipments due to Hurricane Florence, were important drivers for the quarter. Year-over-year, overall sales increased 23% with core organic growth of approximately 20% when excluding the impact from acquisitions and foreign currency. Gross margins improved by 110 basis points and EBITDA margins improved approximately 280 basis points, with the increase in sales allowing us to once again demonstrate the earnings power of Generac. Shipments of residential products were at record levels with demand reaching new highs as increased power outages across the country continue to demonstrate the importance of having a backup generator. Commercial and industrial or C&I product shipments were also higher in the current year quarter, with both stationary and mobile products experiencing strong growth. Additionally, order rates for stationary C&I products were significantly higher than prior year as businesses are also concluding that a backup power system is an important component of mitigating the risk of disruption to the operations that a power outage can cause. Those higher orders are expected to convert to shipments in the quarters ahead as we enter the fourth quarter with a record backlog for these products. Interest in home standby generators in particular remains strong, very strong during the quarter, with elevated levels of in-home consultations or IHCs. Activations during the third quarter were also at an all-time high as the more robust power outage environment in the last several quarters has led to a dramatic increase in awareness of the product category. Given these strong end market conditions and when combined with lower levels of home…

Thanks, Aaron. Before discussing third quarter results in more detail, recall that effective January 1, 2018, Generac adopted the new GAAP revenue recognition accounting standard. For comparability purposes, the full retrospective method was elected under the standard, which requires application to all periods presented. Although the adoption of this standard did not have a material impact on our financial statements, the prior year 2017 figures that we are discussing this morning have been adjusted accordingly. Now, looking at our third quarter results in more detail, net sales for the quarter increased 22.7% to $559.5 million as compared to $455.8 million in the third quarter of 2017, including $13.4 million of contribution from the June 1, 2018, Selmec acquisition. Core sales growth, which excludes the impact of both acquisitions and foreign currency, was approximately 20% over the prior year. Foreign currency had an approximate 1% unfavorable impact to net sales during the current year third quarter, mainly due to the weakening of the euro relative to prior year. Looking at consolidated net sales by product class, residential product sales during the third quarter increased 24% to $311.9 million as compared to $251.2 million in the prior year quarter. As Aaron mentioned, the current year quarter experienced incredibly strong growth in shipments of home standby generators as end market demand for these products continue to be robust. Given the elevated frequency and duration of power outages over the last couple of years, we are seeing very strong demand for our home standby generator products, helping to drive penetration of the product category as it becomes more mainstream in the marketplace. In addition, our efforts to drive awareness, availability, affordability, and connectivity for automatic home standby generators has helped to drive adoption of the category on an everyday basis. Recall that last year's…

Thanks, York. As our end markets continue to strengthen more than originally expected, we are once again raising our guidance for revenue growth for full year 2018. We now expect net sales to increase approximately 19% to 20% over the prior year, which is an improvement from the 13% to 14% growth previously forecast. Core sales growth is now expected to be approximately 16% to 17%, which is an increase from the previous guidance of approximately 10%. This improved net sales outlook is primarily due to stronger residential product sales given higher than expected power outage severity and favorable market conditions. Adjusted EBITDA margins for the full year 2018 before adjusting for non-controlling interests are now expected to be approximately 21%, which is an increase from the 20% previously forecasted. The improvement in margin guidance is a result of increased operating leverage on the higher core sales growth, as well as an improved sales mix. We continue to monitor the status of the current and proposed importation tariffs very closely. Given our inventory turns, we expect these tariffs to be largely a 2019 consideration. In order to mitigate the anticipated future impact, we are currently evaluating pricing, supply chain, engineering and operational strategies. We're also monitoring external factors such as commodity prices and foreign exchange rates. Overall, we remain confident that we can fully offset any additional tariff-related costs through these activities, as well as other potential cost reduction initiatives. Given this increased net sales outlook for the remainder of 2018, we are currently ramping up our production efforts to execute on the robust demand that is in front of us. As we drive incremental organic growth, our operational and free cash flow generation is still expected to remain strong and follow the historical seasonality, with the conversion of adjusted net income to free cash flow now forecasted to be approximately 80% to 85% for the year. In closing today, we are very pleased with our record third quarter results, which demonstrates our ability to execute as demand remains strong across our business. The fundamentals of our residential products business have never been stronger, with IHCs, activations, dealer count and portable generator market share at all-time highs. C&I order rates and backlog, particularly for natural gas gensets, continue to grow as the current economic environment remains strong. Higher oil prices, growth in non-residential construction, and the prospects for additional large-scale infrastructure projects should benefit our C&I mobile products in the future. Internationally, we continue to expand our geographic penetration as we continue to build a Tier 1 global power generation solutions provider. With the momentum we are seeing across our business, I'm optimistic about our performance for the remainder of 2018 and beyond. This concludes our prepared remarks this morning. At this time, we'd like to open up the call for questions. Operator?

Your first question comes from the line of Brian Drab from William Blair. Your line is open. Brian P. Drab - William Blair & Co. LLC: Hey, good morning. First of all, congratulations to the whole team for, again, rising to this enormous challenge that you have to face there. And I just wanted to ask a high level question first. You talked at the Analyst Day, Aaron and York, a lot about the rollout of the prime power demand response opportunity, the potential to double the TAM. I'm asking this question first just because I think we're very quickly going to be answering questions for investors around difficult comparisons and where does the growth come from down the road. And this just sounds like a very, very important driver. So, if you can give an update there and when we start to see more of the impact from that initiative.

Yeah, thanks, Brian. So we talked about a lot of things at the Investor Day, but we talked about one thing in particular there, was around our Lead Gas initiative part of our strategy, which today, – so, there's two components of that. The first component is the continued substitution in the market, the existing market of legacy diesel, a traditional genset being switched over to gas. And we're starting to see that and have been seeing that for a number of years, and as we've said many times before, we believe we're the leader in that industry. We also believe that there's a lot of legs to go yet, a lot of room to run with that substitution. And we estimate the U.S. market today is about 60% diesel gensets, 40% natural gas. And that's changed dramatically over the last 30 years. And we believe that it's going to continue to change in a very positive fashion, and we're going to be at the forefront of capturing that. To that end, we're introducing a lot of new products, larger nodes, additional product options and features, controls, things that will, in our minds, make us – make those gensets, even in the larger KW ranges, very attractive; natural gas versus diesel. Longer-term, we also talk about one of the growth areas with natural gas being the potential for demand response, time of use type programs, combined heat and power, other uses for that natural gas generator technology beyond the standby market. So we're referring to it as kind of beyond standby internally here. And so, today, we have non-standby ratings or limited prime and prime ratings for certain gensets, and basically de-rated machines with some existing – with some additional feature sets, and obviously, the appropriate certifications when it comes…

Yeah. I think, at this point, if you were to look, and there's a lot of public information available on this, but about two-thirds of the sites are being flagged as in compliance. But when you dig a little deeper on that, in compliance means they could also be receiving a waiver for a period of time to extend beyond the end of the year. So, in terms of the raw dollars that have probably been deployed, it's maybe 50% of the dollars to-date, and there'll be a little bit more obviously here in the remainder of the year. And then there's going to be a chunk of that that's going to roll forward into next year. So, we're trying to get our arms around that. For us, it's a little bit hard to pull together all of those numbers because we use an omni-channel approach for distribution. So, we have a lot of channels where the product goes through and we don't have great visibility in the end application in all cases. We do when it's in our industrial channels as we have much more limited distribution there, and we're generally involved in much more complex projects in terms of the engineering work that goes behind that. So those we have better visibility to. The smaller bed facilities where you're going to get a more standard machine implemented, we don't have great visibility. That could be going through our residential dealer channels, our wholesale channels, maybe even – some of our e-comm channels for all that we know. Brian P. Drab - William Blair & Co. LLC: Okay. Thanks a lot. I'll get back in line. Thanks.

Thanks, Brian.

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open. Ben Burud - Goldman Sachs & Co. LLC: Hi, good morning, everyone. This is Ben Burud on for Jerry.

Hi, Ben.

Hey. Morning, Ben. Ben Burud - Goldman Sachs & Co. LLC: Morning. Your guidance is for sales to be down sequentially in 4Q off really strong levels compared to normal seasonality of higher sales in 4Q. Have installed rates for residential standby slowed significantly or are there other drivers of this?

Yeah. The sales in Q4 are going to be roughly flat and in line with Q3.

Yeah. I mean the implied guidance would have it pretty darn close, and the reality is you got Q3 coming there. We're selling a large amount of portables in Q3 as the immediate impact from Hurricane Florence, which – with Michael being – in terms of portable generator sales, we didn't see as much of an event in terms of impact on portable generator sales with Michael. There might be a sequential decline there, but we expect that to be made up with home standby. So, I'm not expecting a big decline sequentially. Ben Burud - Goldman Sachs & Co. LLC: Understood. And for residential standby, did you reach a new shipment record this quarter? And what's the backlog in the business as we enter 4Q?

Yeah. We did reach a – all of our metrics for resi were highs for us. Portable shipments were – they comped a little bit below last year, but just an incredible quarter even for the quarter we had. But, across the board, when you look at all the resi products, they were in record territory. As far as backlog, we don't comment specifically on backlog, but I think, again, I'd point to my prepared remarks this morning, which when we look at our leading indicators of in-home consultations, those have been very strong all year. In fact, they're actually, on a year-to-date basis, comping positive to the prior year. And the prior year IHCs were amazing in terms of the volumes we saw. As we said, Ben – we said this on previous calls but the systems we have in place today to find and target and market directly to potential home standby buyers, in particular, those systems are all largely new in the last five years. So, we really hadn't had kind of an up-cycle in terms of outages in which to pressure test those systems. Last year was really the first opportunity to do that with Irma and Maria and some of the other events that happened. And we saw just some tremendous numbers in terms of the indicators there. And those are translating well into record activations. Our dealer count is at 6,000 dealers and growing. So, we see some great days ahead in terms of growth on a year-over-year basis for residential. So, a lot of really good leading indicators there for those products. Ben Burud - Goldman Sachs & Co. LLC: Got it. Thank you.

Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys.

Hi, Jeff.

Good morning, Jeff.

Hey, can you just talk on – I don't know if you can rank it or rank order of magnitude, the growth rates in the mobile versus healthcare versus telecom just so we can get a sense of how strong each of those markets are.

Yeah. I think oddly enough, Jeff, when you look at them from a growth percentage rate, mobile actually was the leader in that if I had to rank order it. When it comes to resi or – excuse me, to telecom and healthcare, telecom was up very nicely in the quarter, and then healthcare was also up nicely. But if I ranked order them, I'd go mobile, telecom and then healthcare.

And I think they were all strong, though. I think...

Very strong. Yeah.

So...

Okay. And then tariffs, you said mostly a 2019 impact. If you take the 232 and all the 301 lists, how big of a headwind does that look like? Is there a way to quantify it? You talked about kind of reengineering in supply chain. What are some of the things that you're contemplating to kind of move around some of those headwinds?

Yeah. I think, again, Jeff, we'd point to the fact that rather than commenting like on specific dollars, we don't think – the headwinds themselves, we don't think will be headwinds because we think we're going to take and we are taking actions to mitigate those through pricing, supply chain moves and operational strategies, things of that nature. Specifically around supply chain, there are abilities for us to – there are certain things we can onshore here. Now, obviously, those could be at a premium to cost, but – to current low cost country outsourcing, but the premium would obviously be lower than the tariffs. So, I think there's still some things to be decided there on – the tariffs today are slated to go from 10% to 25% on this – the third list of the 301 items. And that's going to happen on January 1, unless something else happens before that. So we're approaching it as if it's going to happen. And there are some things to resource, but remember, resourcing takes time, there's qualification of new suppliers. When we can move it in our own factories, it's easier. When we have to move it to other countries, whether that'd be other countries in Asia or India, there's other low-cost countries around the world that have suddenly become popular outside of some of the targeted countries that are impacted by the tariffs, it will take time to resource supply chains to those countries because they just don't have the same level of development that exists today in China. So, we continue to work with supply chain partners. We'll continue to work very hard with our teams internally. We have a separate team that we've established internally here that's targeting – it's a cross functional team that's targeting all aspects of tariffs because obviously, the impact of that is – we actually believe it's something we can turn into a positive for ourselves. Portable generators are a good example. Every portable generator in North America is imported with the exception of the ones that we make in Jefferson, Wisconsin. So, nobody else makes portable generators in North America, we do. We import gens as well and we'll have tariff considerations there, but we have the ability to shift production to an existing facility here in the U.S. So, I think that's more difficult for other competitors and something that will give us, we believe, an advantage. And that's just one example.

Okay. That's helpful. And have you announced any price action specifically or do you do that through less discounting or...

Yeah, so we've begun to talk to our channel partners about pricing. We haven't announced any formal price increases at this stage of the game. Again, kind of waiting to see with certainty, what's going to happen with – will that 25% actually kick in on January 1. That's the big one for us. To be honest, the 232 tariffs had some impact, but it's minimal. Some of the previous 301 lists that are in place already also have an impact, but the larger impact is coming in the third list, which is this 10% to 25% step, which we want to see how that plays out.

Okay. And if I could sneak one more in, just what kind of feedback are you getting from Florence and Michael on home standby? Thanks.

Yeah. So we've seen – again, when you get these types of – even though – let's just talk about those events for a second. They're not big events in the context of an Irma or something like that, right? I mean, they're horrible, tragic, property damage causing, life losing types of events, not to minimize the impact, but in terms of power outages, they don't have the same type of impact that previous events have had. So, in our vernacular, we wouldn't classify them as major outage events. That being said, they have all happened in a similar area in the country. And with that type of serial nature of events like that, when people experience outages, even if the duration is not long, it's only a couple of days instead of a couple of weeks, things like that, the impact of and the prospect for more outages like that is really what can be what tips people into buying the product, right? We've always said that duration is an important element of what gets people to buy the category, but so is frequency; the combination of frequency and duration. So, these storms, with the nature of the frequency over the last two years, has got people definitely shopping the category a lot more. As I said before, in-home consultations, which is our leading indicator for sales leads for residential standby, they're actually comping positive this year, which, after last year's numbers that we saw, we didn't know that, that could even be possible. But I think what we're deciding is that, and York kind of alluded to this on the call, the category is becoming a lot more mainstream. Awareness is much greater for the category. We've got tremendous coverage in terms of distribution with over 6,000 dealers. The category's available ubiquitously in many, many places, and it's become a lot more mainstream. People – 10 years ago, you would have said home standby generator and they wouldn't have known what you're talking about. Today, you mentioned that, and in particular regions, it's something that is part of the everyday vernacular. So, I think this is an important turning point, we believe, in the category. And I think it was demonstrated last year. Everybody talked about tough comps in the second half of this year. Here we are, we're going to comp positive back half of the year, no problem. Obviously, we've got some weather, although not major, that has winded our back for that, but we like the setup here going forward with all the indicators.

Okay, thanks, Aaron. Good color, as always.

Thanks, Jeff.

Your next question comes from the line of Mike Halloran from Baird. Your line is open. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Hey. Morning, guys.

Hey, Mike.

Good morning, Mike. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): So, just kind of want to piggyback on the last question. Obviously, the dynamics around the multi-year, the last couple years of outage activity are different than the dynamics seen historically when you've had significant periods in a row of outage activity. Maybe if you could just talk about some of the puts and takes here, particularly how that backlog that you see today, which is at record levels, how that should bleed relative to history, what your expectation is for carry-through relative to history, and maybe try to put some framework around the concept you just mentioned about how the awareness has up-ticked and what you think that can mean for what the ultimate new normal can look like here.

No, it's a great question, Mike. I think, just to clarify on backlog, our comments about record backlog were really about C&I products. So, resi products are not – we had frankly larger backlog dollars coming into 2013 after the successive years of Sandy and some of the other events in the Northeast. So, that aside, we'll have a decent backlog coming into 2019 with resi, but nowhere near record levels. Our capabilities to ramp production today are in a much different place. But the numbers we're talking about, just the daily rates and things, which we don't quote because it's competitively sensitive, are really very encouraging for the category and what's transpired over the last five years. So, let's talk about that. After that period of elevated outages and those kind of serial patterns we went through kind of in 2010, 2011 and 2012, we saw 2013 and 2014 were nice years for the category, but we went almost five years without any types of events after that. So, it was a very low period in terms of outage activity. Our own tracking mechanisms showed that, a lot of other data corroborated that. And yet, the category, still, when you looked at it from this concept of a new higher baseline that we talk about, the baseline category, even after the initial demand surge settled down from those events back then, settled into a pattern that was materially higher than where it was previous to that. So, fast forward to today, we've gone now a couple years with some of these events kind of back to back to back, and in some of the same regions of the country. And I think what's different this time and what gives me pause to say, well, it's going to settle back…

Yeah. So I think there's a couple of larger factors at play there, Mike. The first is just the macro trend of outages, right? I mean, even though we went through a period of low outages, outages, when you look over a 30-year period, have been increasing. And so, if you're a business owner, the prospect of losing power and the disruption that that causes to your operations, and in particular today, the digitization of business, the economy, the impact on productivity when you lose a continuous supply of power is unbelievable. I mean, things stop and get very primitive very quickly. It's one thing for a homeowner, right? There's the inconvenience factor in most cases or property damage, other things that are severe. But, for a business person, you're talking about a disruption in livelihood. And especially if you're in a significantly prone area to outages, it's almost untenable to think you wouldn't have – we all have disaster recovery plans and other risk mitigation plans in our businesses today. This just becomes an element of that in my mind. So it's become a part of managing that what is, for most people, a real risk of losing power. So, I think there's that piece of it. I think the other piece of it, though, is that the product offering, again, when you look at natural gas, becoming more available, becoming more ubiquitous, it's affordable. So when you look at smaller businesses, this is not something that you have to think of in terms of a 10-year payback. A reciprocating engine driven genset powered on natural gas can pay back in one outage for a small business. We've said this before. Eight hours of outage for a grocery store or a small gas station can be paid for. The entire genset's paid for in that single outage. So, I think the ROI is very strong for the category. A lot of that is because that cost position on the product has come down very nicely over the last couple decades.

I think with the favorable economic environment backdrop that's helping, too, with the strong residential construction, you see buildings being built everywhere. Everywhere you travel, that's helping obviously, and you alluded to that, Mike, but I think the regulatory impacts, too. When you have outages, then, you tend to get more discussion around the regulatory impacts, and we see that in the Florida healthcare opportunity. And then, you start getting more dialogue about telecom and having mandates around backup power on cell towers. And so, I think you put all of those factors together and all that's driving our C&I business at least domestically. And then you have all the other factors internationally as we continue to grow out our international business. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Great. Appreciate the answers as always. Thanks.

Thanks, Mike.

And there are no further questions at this time. I would now like to turn the conference over to Aaron Jadgfeld.

Well, I thank everyone for joining us this morning, and we look forward to reporting our fourth quarter 2018 results, which we anticipate will be at some point in mid-February. So, with that, we'll leave you to your morning. Thank you very much.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.