Generac Holdings Inc. (GNRC) Q4 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Generac Holdings, Inc. 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 the time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today's conference, Chief Financial Officer, York Ragen. Mr. Ragen, you may begin.

Thank you. Good morning, everyone, and welcome to our fourth quarter and full year 2018 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, our President and Chief Executive Officer. We'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 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.

Thank you, York. Good morning everyone. Happy Valentine's Day. Thank you for joining us today. Our fourth quarter results capped off a fantastic year for Generac in 2018 as we again experienced record quarterly sales through strong core organic growth of approximately 12%. Overall, net sales increased 14% compared to the prior year when including the contribution from the Selmec acquisition which was slightly offset by unfavorable foreign currency impacts during the quarter. For the full year, net sales grew more than 20% to over $2 billion with EBITDA margins expanding 210 basis points over the prior year to 21% or approximately $425 million. Continued strength in all of our end markets underpinned the increases in 2018 with demand for home standby generators in particular remaining very robust throughout the year as increased power outage activity over the last two years alongside the impact of our initiatives to grow the market resulted in continued penetration gains. Shipments of C&I products were also significantly higher year-over-year driven by continued recovery in domestic mobile products and growth in demand for backup power in the telecom and healthcare sectors. In addition, strong organic sales growth was again experienced within the international segment, which was leveraged into further improvement in adjusted EBITDA margins for the year. Awareness for the home standby generators has benefited from elevated baseline power outage activity during the past two years with end user activations remaining very strong in the fourth quarter and the full year, particularly in the northeast and southeast regions. Our residential dealer base continued to expand during the year to an all-time high of more than 6,000. Production levels of home standby generators were an all time highs for the company during the quarter and demand for these products remain strong heading into 2019. Shipments of portable generators were lower in the quarter compared to the prior year, which included the impacts of major hurricane activity but were up significantly for the full year driven by the elevated outage activity, replenishment of channel inventories, and additional retail placement experience. Demand for domestic mobile products remained strong during the quarter and for the full year as the equipment rental markets further recovered in 2018 with the rebound in the oil and gas markets and increased construction activity both contributing to the continuing fleet refresh cycle. Demand for stationary domestic C&I generators also increased in the fourth quarter as the elevated power outage environment drove broad based growth across a number of end markets. In particular, certain of our telecom account customers are investing heavily in hardening their networks in response to their customers’ needs for consistent uptime. Demand for natural gas fueled generators was particularly strong during the quarter and for the full year. While diesel gensets remain the dominant choice for C&I backup power globally, natural gas generators continued to gain acceptance as a substitute due to their economic and operational advantages. In addition to the growth experienced domestically in the fourth quarter and for the full year, our international business also saw a strong growth in mainland Europe, Latin America, Australia, Brazil, and China. Adjusted EBITDA margins for the full year for our international segment continued to expand with improved operating leverage on the higher sales volumes being the biggest contributor to the improvement. We are also seeing success with the introduction of our gaseous fuel products into markets outside the U.S. and Canada, with both residential and C&I products experiencing impressive growth rates during the year, albeit off a small base. We achieved a number of significant milestones in 2018 that we believe are important to the execution of our strategy. In May, we launched the latest version of our flagship home standby generator product line with Wi-Fi connectivity as a standard feature. As an industry first, we believe that the ability for a consumer or a dealer to remotely monitor a generator is a great first step towards enhancing the customer experience as well as enabling a deeper relationship with both end users and distribution partners. With this new functionality, we have also introduced the new software platform known as Fleet, specifically for our dealers that allows them to track the status of every single one of their customers' generators. By providing real-time information about the status of each machine as well as dramatically enhancing the level of diagnostic information available, we believe that dealers will be able to better track and schedule needed repairs or maintenance and we'll be able to do so with greater precision and speed with the outcome being to maximize the uptime of generators under their care. We also believe that the connectivity layers we are building and now deploying could have an important impact on other future opportunities by creating a gateway to the electrical system of a home or business. The market for certain services related to energy monitoring and management is rapidly developing, and we believe we can leverage our technical expertise in electronics and electrical systems, our broad distribution, our global footprint, and our brand to participate in this exciting new space. In 2018, we also expanded on our position as the largest global manufacturer of gaseous fuel backup generators with the introduction of a 750-kilowatt machine, the largest output unit in our lineup. We are very pleased with the initial acceptance of the product as interest has been strong since its release mid-year. The substitution of natural gas power gensets for traditional diesel fuel products has accelerated in recent years as the performance of newer gas machines equals or exceeds that of diesel generators while providing some tangible benefits for the end user by mitigating the need for fuel delivery, lower overall operating costs, and cleaner emissions. A core component of Generac strategy is to build on its leadership position in the market for natural gas gensets and throughout 2018. We introduced a number of new products, new programs, and innovative technologies related to gaseous generators during the year. 2018 was also a record year for sales volumes outside the U.S. and Canada for Generac with 22% of our overall revenues being generated primarily through our Pramac, Ottomotores, Tower Light, and Motortech entities. Building on our success in globalizing the company, we closed on the acquisition of a Mexican genset company Selmec in June of last year. Recall that Selmec is located in Mexico City and is a designer and manufacturer of commercial and industrial generators serving Latin America with a particular focus on the telecommunications market and strong service capabilities. The integration of Selmec with our existing Ottomotores operations is well under way with the latest milestone achieved earlier this month as we opened a new headquarters facility in Mexico City to consolidate our commercial and administrative teams into a single location. Further integration activities are planned for 2019, as we look to realize the synergies of combining the systems and production activities of the two businesses. In addition, in early 2019, Pramac acquired a majority share of Captiva Energy Solutions. Captiva founded in 2010 and headquartered in Calcutta, India, specializes in customized industrial generators. While relatively small in size, this acquisition gives us a physical presence in the important Indian backup power generation market and provides the platform to execute on the potential revenue and sourcing synergies that exist by integrating the Captiva operation into the broader Pramac business. Finally, I'd like to spend a minute this morning to tell you about some exciting enhancements we are making to our long-term strategy that we call Powering Ahead. Over the last 10 years, we have used Powering Ahead as our blueprint for making investments and prioritizing our resources. In that time, we've effectively more than tripled the revenues of Generac, while simultaneously quadrupling our served markets. As our business evolves from being a smaller more narrowly focused company to that of a larger globally focused leader in the power products industry, we believe that our strategy must also evolve. Last year you may recall that we added the strategic pillar of lead gas to Powering Ahead, as we believe that our continued leadership in gaseous fuel generator technology is a critical element of our future growth and focus. As we continue to think about other areas of our business and the markets that we serve that presents significant opportunities for us, we can see the connectivity in the technologies and markets associated with the Internet of Things will play a vital role in the way we interact with customers and distribution partners well into the future. The ability to connect will have a profound impact on the way we develop new products, the way we think about our customer service models, the opportunities to better monetize our products over their entire lifecycle and the exciting prospects around potentially creating entirely new business models around energy monitoring and energy management. As a result, we're adding a new pillar to our strategic plan simply called Connect and we are updating the name of our enterprise wide strategy to be called Powering Our Future. As we have done for the last 10 years, we intend to continue to prioritize our resources and our efforts around our strategic plan. With Powering Our Future, the four strategic objectives we have established of growing the residential generator market globally, gaining share in our existing markets, leading in gaseous generator technologies and using connectivity to develop new opportunities with our customers and distribution partners will guide our focus and investments for the future. I'd now like to turn the call over to York to provide further details on the fourth quarter results. York?

Thanks Aaron. Before discussing fourth 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 the standard did not have a material impact on our financial statements, the prior year 2017 figures that we were discussing this morning have been adjusted accordingly. In addition upon finalizing our revenue recognition accounting under the new standard, we made certain immaterial prior quarter request vacations to our consolidated statements of comprehensive income related to extended warranties. There was no impact on income from operations or net income as a result of these prior quarter reclassifications. See our press release for more information related to these prior quarter reclassifications. Now looking at our fourth quarter 2018 results in more detail. Net sales for the quarter increased 14.3% to $563.4 million as compared to $493 million in the fourth quarter of 2017. Excluding the $13.3 million of contribution from the June 1, 2018, Selmec acquisition and the slightly negative impact from foreign currency core growth rate during the quarter was approximately 12%. Looking at consolidated net sales by product class, residential product sales during the fourth quarter increased 10.3% to $293.9 million as compared to $266.6 million in the prior year quarter. Despite the fact that the prior quarter included the immediate after effects of Hurricanes Harvey, Irma and Maria, the current year quarters still experienced very strong growth in shipments of home standby generators as end market demand for these products continues to be robust. The elevated frequency and duration of power outages in recent years coupled with our initiatives to drive adoption of automatic home standby generators on an everyday basis has helped to make the category more mainstream in the marketplace resulting in record shipments of home standby generators during the current year fourth quarter. Switching to portable generators, the prior fourth quarter included the impact of Hurricane Maria and significant replenishment of portable generators with our retail partners on the back of the active hurricane season last year. As a result, shipments of portable generators while still strong were down in the current year fourth quarter versus prior year. Looking at our commercial industrial products, net sales for the fourth quarter of 2018 increased 17.5% to $223.2 million as compared to $189.9 million in the prior year quarter with core growth being approximately 15% when excluding the M&A contribution from Selmec and unfavorable foreign currency impacts. Domestically as Aaron mentioned we are seeing very strong growth in the telecom market as certain of our national telecom customers are in the middle of a large investment cycle for backup power equipment to harden their cell tower networks. In addition, demand for our mobile C&I products continues to be strong as our rental account customers both nationals and independents continue to replace their support equipment fleets for general rental and oil and gas purposes. Finally, shipments and order rates from our industrial distributors continue to be very strong during the current year quarter in particular for natural gas fuel generators as a strong economic environment and low natural gas prices are driving significant investment in non-residential construction and the adoption of natural gas as a cost effective fuel source for backup power. Internationally, our Pramac, Tower Light and Motortech businesses grew modestly during the quarter despite headwinds from the weakening euro as we continue to drive market penetration across the globe particularly in mainland Europe, Australia, Brazil and China. In Latin America, we also saw a modest shipment growth for the quarter even with certain geopolitical headwinds that are impacting that region. As we continue to make progress on the Ottomotores, Selmec integration and execute on synergies between the two companies. Net sales for the other products category primarily made up of service parts and extended warranty deferred revenue amortization increased 26.5% to $46.3 million as compared to $36.6 million in the fourth quarter of 2017 with core growth of approximately 13%. This strong core growth rate tracks with the rest of our business as the installed base of our products has expanded around the globe and replacement part demand increased due to the elevated power outage activity in recent quarters. Higher amortization of extended warranty deferred revenue also drove this increase. Gross profit margin was 36.3% compared to 37.1% in the prior year fourth quarter. A modestly favorable sales mix shift towards higher margin home standby generator sales and price increases implemented since prior year were more than offset by higher logistics and labor costs as well as the realization of unfavorable commodity and currency fluctuations relative to prior levels. Operating expenses increased $7.9 million or 9% as compared to the fourth quarter of 2017. As a percentage of net sales, operating expenses excluding intangible amortization declined 30 basis points versus the prior year primarily due to improved operating leverage in the higher organic sales volumes. The increased operating expense dollars over the prior year was primarily driven by incremental variable OpEx on the strong sales volumes and increase in employee costs including long-term incentive compensation recorded during the current year quarter and additional recurring operating expenses from the Selmec acquisition. These increases were partially offset by lower warranty and intangible amortization expenses. Adjusted EBITDA attributable to the company as defined in our earnings release was $123.9 million in the fourth quarter of 2018 as compared to $109.9 million in the same period last year. Adjusted EBITDA margin before deducting for non-controlling interests was 22.4% in the quarter as compared to 22.8% in the prior year. This 40 basis point decline compared to prior year was mostly due to the previously mentioned higher input costs that impacted gross margins offset by improved operating leverage on the organic increase in sales. For the full year 2018, adjusted EBITDA before deducting for non-controlling interests came in at $424.6 million resulting in a 21% margin and an impressive 34% increase over prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segments sales increased 14.3% to $437.8 million as compared to $382.9 million in the prior year quarter. As I previously discussed, strong broad base end market demand driven by higher power outages severity and favorable economic conditions drove increased shipments across our residential and C&I products in the current year fourth quarter. Adjusted EBITDA for the segment during the quarter was $115.5 million or 26.4% of net sales as compared to $101.9 million in the prior year or 26.6% of net sales. For the full year 2018 domestic segment sales increased 21.2% over the prior year, while adjusted EBITDA margins increased 230 basis points. International segment sales increased 14% to $125.6 million as compared to $110.2 million in the prior quarter including $13.3 million of contributions from the Selmec acquisition and a foreign currency headwind of approximately 4%. Core sales growth was approximately 6% when you exclude both Selmec and currency impacts. As I previously discussed, this overall core growth compared to the prior year was due to broad based growth across our international subsidiaries as we continue to drive market penetration across the globe. Note that we were still able to execute relatively strong year-over-year core growth in the international segment despite the prior year benefiting from larger project activity across certain of Pramac's global sales branches. Adjusted EBITDA for the segment during the quarter before deducting for non-controlling interest was $10.6 million or 8.4% of net sales as compared to $10.5 million or 9.6% of net sales in the prior year. Higher margin larger project activity in the prior year quarter and higher input costs drove the year-over-year decline. For the full year 2018 international segment sales increased 17.9% over the prior year with core sales growth of approximate 13%. Adjusted EBITDA margins for the segment before deducting for non-controlling interests increased to 8.1% of net sales during 2018 compared to 7.2% of net sales in the prior year. We believe we are on track with our strategic plans to reach double-digit adjusted EBITDA margins for the international segment in the coming years. Now switching back to our financial performance for the fourth quarter of 2018 on a consolidated basis. GAAP net income for the company for the quarter was $75.6 million as compared to $80.9 million for the fourth quarter of 2017. The prior net income includes the impact of $28.4 million of non-cash gains largely from the reevaluation of the company's net deferred tax liabilities associated with the enactment of the Tax Reform Act. As a result, GAAP income taxes during the fourth quarter of 2017 were only $2 million. When excluding the aforementioned gain, GAAP income taxes in Q4 2017 would have been $30.4 million or an effective tax rate of 36.1% on an adjusted basis. This compares the GAAP income taxes during the fourth quarter of 2018 of $20 million or an effective tax rate of 20.7%. The large year-over-year decline in the GAAP tax rate on an adjusted basis is primarily due to the enactment of the Tax Reform Act which resulted in lower federal tax rates in the United States. In addition, a favorable return to provision adjustment was recorded in the current year fourth quarter related to the finalization of our 2017 federal and state income tax returns. Diluted net income per share for the company on a GAAP basis was $1.20 in the fourth quarter of 2018 compared to $1.29 in the prior year with the prior year earnings impacted by the aforementioned $28.4 million non-cash gain related to the Tax Reform Act or $0.45 per share. The specific calculations for these earnings per share amounts are included in the reconciliation schedules of our earnings release. Adjusted net income for the company as defined in our earnings release was $88.1 million in the current year quarter or $1.42 per share versus $87.1 million in the prior year or $1.39 per share. The strong sales growth and related improvement in operating earnings just discussed were mostly offset by higher cash income taxes during the quarter. With regards to cash income taxes, the fourth quarter of 2018 includes the impact of a cash income tax expense of $15.4 million as compared to $6 million in the prior year quarter. The current year reflects a cash income tax rate of 15% for the full year 2018 with the prior year fourth quarter was based on a cash tax rate of 12.5% for the full year 2017. Higher pretax earnings in 2018 in excess of our tax yield coupled with the fact that 2017 benefited from certain incremental tax deductions that were accelerated into the 2017 tax returns resulted in a higher cash tax rate in 2018. Cash flow from operations was $108.2 million as compared to $136.7 million in the prior year fourth quarter and free cash flow as defined in our earnings release was $87.3 million as compared to $121.8 million in the same quarter last year. Higher operating earnings were more than offset by increased working capital investment due to the strong organic growth, incremental inventory purchases ahead of expected tariff changes and higher capital expenditure levels. Free cash flow for the full year 2018 was $204 million as compared to $228 million for 2017. During the current year quarter, we also made a voluntary $50 million payment on our ABL revolving credit facility paying off the entire outstanding balance as of December 31, 2018 with cash on hand. As of December 31, 2018, we had a total of $924 million of outstanding debt, net of unamortized, original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the fourth quarter was 2.2x on an as reported basis a healthy decline for the 3.0x at the end of 2017. Given our strong earnings and cash flow generation, we have demonstrated the rapid deleveraging capabilities of the company. Additionally, at the end of the year, we had $224 million of cash on hand and there was approximately $277 million available on our ABL revolving credit facility. Both our term loan and ABL now mature in the year 2023. Uses of cash during 2018 including $48 million for capital expenditures, $65 million for M&A, $24 million for the repayment of debt and approximate $26 million from stock repurchases. With that, I'd now like to turn the call back over to Aaron to provide comments on our outlook for 2019.

Thank you, York. As we have previously discussed this morning, end market demand for our products has continued to be strong as we enter 2019. As such we expect net sales in the first half of the year to grow approximately 10% to 12% on an as reported basis and 8% to 10% on a core basis with higher growth rates in the first quarter compared to the second quarter. This assumes an average baseline level of power outages during the period. Looking at the second half of 2019, net sales could range from low single-digit declines to low single-digit increases depending on the severity of power outages during the year. The low-end of the range would assume no major power outages and an average baseline outage environment while the high-end of the range would assume more elevated outage activity which could include a major power outage event during the year. Overall for the year, given these assumptions net sales are expected to increase between 3% to 7% compared to the prior year on an as reported basis and 2% to 6% on a core growth basis. Net income margins before deducting for non-controlling interests are expected to be between 11% to 12% for the full year 2019, with adjusted EBITDA margins also before deducting for non-controlling interest expected to be between 20% to 21% for the year. The low-end of the range would assume no major power outages and an average baseline outage environment and the high-end of the range would assume more elevated power outage conditions. Furthermore, mixed operating leverage and our level of promotion and marketing spend will all vary depending on the severity of power outages during the year. 2019 margins are also expected to be impacted by a number of other factors. Realization of higher input costs coming into the year along with the impact of regulatory tariffs are expected to be largely offset by price increases, favorable trends with respect to commodities, currencies and logistics costs and benefits from our profitability enhancement program throughout the year. Consistent with historical seasonality, we expect adjusted EBITDA margins in the second half of the year to be higher relative to the first half, with the sequential improvement being approximately 350 to 500 basis points depending on the power outage environment experienced during the year. This 2019 outlook does not reflect potential business acquisitions or stock buybacks given our strong balance sheet and free cash flow generation, we have significant resources to drive further shareholder value as we execute on our long-term strategic priorities. I'd now like to turn the call back over to York to walk through some additional guidance details for 2019. York?

Thanks Aaron. For 2019, our GAAP effective tax rate is expected to increase to between 25% to 27% as compared to the 22.5% full year rate for 2018. Based on our guidance provided for 2019, our cash income tax expense for the year is expected to be approximately $50 million to $60 million depending on the outage environment which translates into an anticipated full year 2019 cash income tax rate of approximately 17% to 18%. That compares to the 15% cash income tax rate for full year 2018. The expected increase in our GAAP and cash tax rates compared to 2018 relates to certain favorable deductions that were accelerated and reflected in the 2018 rates in response to the Tax Reform Act that aren't expected to repeat in 2019. As a reminder, we still have a favorable tax shield as a result of a significant intangible amortization deduction in our corporate tax return that results in our cash income tax rate being notably lower than our GAAP income tax rate. With the passage of the Tax Reform Act, the tax affected annual value of this tax shield is expected to be approximately $30 million per year and expires fully in 2021. In 2019, we expect interest expense to be approximate $41 million to $42 million assuming no additional principal payments during the year and one expected rate increase in 2019. Our capital expenditures for 2019 reflect continued investments in expanding capacity and our forecast to be approximate 2.5% of our forecasted net sales for the year. Depreciation expense is forecast to be approximate $30 million in 2019 given our assumed CapEx guidance. GAAP intangible amortization expenses in 2019 is expected to be similar to 2018 levels at approximately $21 million to $22 million during the year. Stock compensation expense is also expected to be similar to 2018 at $14 million to $15 million per year. For full year 2019, operating a free cash flow generation is once again expected to be strong and follow historical seasonality benefiting from the solid conversion of adjusted net income to free cash flow expected to be over 90% in 2019. This concludes our prepared remarks at this time. We'd like to open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from Ross Gilardi of Merrill Lynch. You may proceed with your question.

Hey, thanks. Good morning guys.

Good morning, Ross.

Hey, Aaron, I was wondering if you could kick it off just talking a little bit more about your balance sheet. I mean at the midpoint of your guidance for EBITDA and free cash flow, and I think your net debt to EBITDA is going to be like 1.1x by the end of '19, if you hit the numbers, I mean easily, I think the lowest since the IPO. So what's the plan, obviously, you had a lot of options like how you're thinking about dividends, buybacks, versus M&A?

Yes. I think Ross -- it's a great question and one that obviously internally as a company we -- given the position we're in and given the prospects for the company going forward there's -- we look at that and we say okay, how can we best create an environment for not only our future growth here at the company, but obviously for our shareholders and all stakeholders. And there's a – there’s a number of things you can do, and we step through our priority uses of cash every time. We've been very consistent even since the IPO on that. And the first thing we want to do is grow, continue to grow organically. And now thankfully, it doesn't take a tremendous amount of capital to do that, so we're pretty efficient that way. But that being said, we do have -- there's a number of CapEx things that we continue to look at in terms of scaling the company right through some capacity expansion, things that we're focused on this year, you'll notice the CapEx guide that we gave here this morning is a little bit higher than maybe historically we've been around the 2% of net sales this morning, closer to 2.5. And there's some capacity type of expansion things in there. You can imagine growing -- we grew 15% the year before, 20% last year. And when you do that, there's a lot of things that you need to do to get your capacity up. So that's one thing. Beyond that, we've said that there are some very interesting things to accelerate our strategy through acquisitions through M&A activity, and we've done 12 acquisitions over the last six or seven years, and we have a pipeline that would indicate that additional acquisition activity in the future is something that could happen if we find the right asset at the right price that fits our strategy, and we think it can accelerate things and help us grow. That's certainly something we're looking to. And there's the universe of potential acquisition targets for us, it is pretty big. There's a lot of things I think we could do there not only from an international standpoint where some of things have been focused like the Selmec acquisition last year and the Captiva acquisition announced early this year. But also, I think around some of these other potential business models and other opportunities we've been talking about as I mentioned in my prepared remarks. After you step through those things, then you start talking about return of capital to shareholders, and you can do that in a number of different ways, we've done some special dividends in the past. I think we've done some buybacks in the past, both of those are vehicles to do that. Paying down debt, I think we look at that and we've got a really cost effective liability structure. It doesn't mature until 2023. We really think we've got it. We wouldn't get a great return honestly from taking out a lot of debt. So we think putting the capital to work or returning it to shareholders is a better way to go, but we'll evaluate those priorities as we kind of have in the past and we'll have to figure out where we go from here. But I really like the setup. We've got a lot of -- we got a lot of dry powder here and we've got a lot of cool things that we're looking at that I'm pretty excited about.

Okay. So you mentioned regular quarterly dividend. I mean does that still feel like something and you're not that interested in doing and that obviously [indiscernible] special in the past?

Yes. I would say that is about a quarterly dividend. I mean, it's something we've talked about and we've discussed dividends, and that's certainly one possibility. But I think at this stage, the way I think about the company as a growth company, the kind of growth we've experienced here. I think of regular dividend, I don't know that we're in the right part of the cycle yet to be thinking about that, and there are far too many opportunities for us to I think get a -- to continue to grow the company and get an overall longer term better return with investing – in whether again -- whether it's organic or whether it's through M&A activity. I just see too many potential areas where we can invest and use that capital for the benefit of all of our stakeholders. And so, I'm not ready to say that we don't have enough opportunities there, and I think that we've been -- we've been pretty clear on this point since our IPO. And maybe there's a point in the cycle where that's going to make sense, and we'll talk about that as a Board. But today, I'm just too excited about the future to say we should be thinking about deploying our capital that way versus through growth.

Okay. Then [indiscernible] topic and I will hand it over. This Captiva transaction with Pramac, I mean can you talk a little bit more about the mechanics of that. And Aaron, you seem sort of interested in the Indian market for a long time and this gives you a foot in the door. I mean do you potentially use this to create a much bigger platform in a market like India or is this at this point we think of it as kind of exploratory or learn about the market and just sort of see what happens for the next three to five years?

Yes. It's a great question, Ross. We kind of look at it as a -- giving us a toehold in a part of the world in India that we haven't really had any operations. We've done some sourcing there, but really no commercial activity. And it's a huge generator market. There's a couple of markets like that around the world where we think we need to participate. And we could've went in, could have kind of pushed all the chips into the middle and gone all in with a much larger acquisition if we wanted to go that route. But, I think given our limited knowledge of the market, we felt it better to try this first and if it works, I think it could be a springboard for something bigger. I think we're looking at it from this standpoint. There's -- as we've been talking in our prepared remarks this morning, the substitution of natural gas generators for diesel gensets is something that's been going on for the last 20 or 30 years here in the United States. We're starting to see that pattern repeat in other parts of the world. India eventually will do that as well. The economics of natural gas infrastructure and the usage of natural gas for heating and cooking and other base load power needs and things of that nature. The economic arguments are far too compelling in favor of natural gas. It got lower emissions profiles and many of the fuels that are burned in many other parts of the world. And we're going to need natural gas for a long time for base load power production everywhere in the world. India is starting to realize this and they've got a lot of projects on the drawing board for natural gas pipeline infrastructure. As that infrastructure gets deployed, the opportunity to connect a backup power system like a generator to that pipeline becomes a reality. And we think that being there and having a footprint in India to begin to push on that is an important part of our overall lead gas strategic pillar. And so that's really where we want to start out in India, it could be bigger for us long-term. But I think it's a way for us to cut our teeth there.

Got it. Thanks very much.

You bet.

Thank you. And our next question comes from Charlie Brady of SunTrust Robinson. You may proceed with your question.

Hey thanks. Good morning guys. I was wondering -- obviously, on the M&A, this new - the Powering Our Future and [indiscernible] time adding in there. I'm wondering does that add sort of an additional pipeline to M&A. And can you maybe talk about what would be potential ideas of you branching out beyond, when you rack into that area.

Yes. It's a great question, Charlie. Any time we've only made a few adjustments to strategy over the last 10 years. And any time you do that you have to evaluate, again we use M&A to help us accelerate our strategy. So I think we've been very consistent on that point. And as we add this new pillar of connect to our strategy and kind of rebranding the strategy, Powering Our Future. Absolutely, the M&A funnel now is starting to fill up with different ideas. Some of them technology oriented. Some of them, when you talk about other kind of monitoring type of opportunities it's actually for our business development teams, your corporate development teams, it's been interesting because we find that we've had to kind of interface with different parties and different people than we've been traditionally doing in the kind of -- I'll call it traditional equipment spaces, right. So many of these business models are more around services, the business models can be -- vary as I've mentioned for technology oriented, we're not ready to discuss details about the pipeline itself. But I think what you're going to see from us over the next several years is interesting and again this is what -- I've been here a long time, 25 years and I can't remember a time I've been more excited about the future of the company and what's going on in the industry. I think the utilities, the energy markets, there is going to be a tremendous amount of change coming in the next decade. The next 10 years is going to present just some amazing changes to all of that. And we think we should have an opportunity to participate in how that market develops. I don't know that anybody knows exactly how it's going to develop or what's going to happen, but people have ideas. I think that the traditional model of delivering power by utility to your home or your business. I think that's going to change radically here in the next few years and whether that's because of the addition of renewables or storage or decentralization of the grid, onsite power generation, distributed generation. There's a lot of different formats that this is going to take. But I think that the focus that we have on natural gas gensets and the focus that we're now putting on connectivity. I think a really important parts of putting ourselves in the middle of many of those conversations down the line.

Great. I don't know if I missed it. But can you talk about the Florida Nursing Home Assisted Living Facility situation that's going on there providing the generators; is that bleeding into 2019 as you kind of alluded to in prior calls?

Yes. There was about a third of the facilities in Florida that were granted waivers for the end of the year deadline to get a backup power system in place. And so that will undoubtedly lead to some spill over here into 2019, the first half most likely. And each of those waiver is a little different depending on the situation, the size of the facility. But, it's been a nice -- Florida has been a great market as you can imagine not only for the residential markets that we serve, but also in the C&I space and not just for healthcare. I mean we've seen a marked increase in a number of other kind of commercial and industrial type applications for backup power there as you know it was a state that went what 10, 11 years without any kind of major disruptions in the grid there. And then, we've had a number of different things happen in the last few years. So it's back on the radar screen. Florida is doing well and there will be some spillover I don't think it's going be -- it's not going to be major. But our guidance does contemplate some amount of spillover.

All right. Thanks. Just one more for me. On the price cost, you talked about I guess neutralizing that, but I'm just trying to get a little more color on -- can you put through price increases, obviously particularly on the home standby market development pricing is a sensitive issue to that whole dynamic of the growth there. Are you going to be fully neutral for the year and is a ramp or are you fully neutral now today? Thanks.

Charlie, this is York. So, yes, I think there are input costs headwinds and it's not just tariffs. The realization of just higher steel costs and aluminum and copper and logistics costs have really spiked up in Q4, labor costs. The realization of all tariffs costs are going to spill into the front half of 2019. So, you're probably going to have some headwinds on the price cost side in the front half of 2019. But, what we see though is today as those input costs are starting to moderate, if you look at steel, copper, aluminum and if you look at our currencies with the euro and the RMB. And then, logistics costs we see moderating. And then, you layer on the price increases relative to the tariff situation. And then, also combine that with all of these profitability enhancement initiatives that we have collectively. We think that's going to flip around in the back half of '19 to neutralize that fully for the full year. So we are cognizant of the price increase side of -- relative to home standby and price elasticity. But I think with relative to tariffs, it's just something that the market will bear, should the tariffs come to fruition or at least at the 25% level on March 1.

Thanks.

Thank you. And our next question comes from Jerry Revich from Goldman Sachs. You may proceed with your question.

Hi, good morning, everyone.

Jerry, good morning.

You folks have really focused on the analytics and one interesting element that I'm wondering if you could talk about is, if you're starting to see in your residential standby business, any replacement demand of units that were installed 15 to 20 years ago just to give us a sense for what the replacement market could look like once we get to the sweet spot of the units that were installed, then I call it mid 2000s plus when the business really started to ramp for you. Any analytics that you can share with us in terms of the contribution from replacement or the ramp in replacement at all for that business would be helpful?

Yes. Jerry it's a -- we've been talking about it much because the market's only 20, 25 years old. And it is interesting and we do track all that information. And it's a very reliable steady march up in terms of the percentage of products that we sell today that go into a replacement as a replacement. And so today we're sitting at about 5%, 6% of our volume there on the residential side is for replacement. But I think you may have hit an interesting nail on the head there, which is there are because of the nature of the way that market is grown, there's faster points in the penetration curve that happened over the last 10 to 20 years. And when you hit one of those patches and you hit that kind of replacement cycle, you should see this, similar kind of offset increase in the replacement cycle in terms of that growth and we're seeing that. So as an example, with Florida, again, it was 10, 11 years ago, but there was -- prior to that there were some pretty interesting up cycles around Katrina back in 2005. You had the big power outages in the Northeast in 2003. We're starting to get into those kind of timeframes. Generators should last you between 15 to 20 years, if well cared for. It's typical -- like a typical piece of your home's infrastructure like an HVAC system something like that, very similar. But we do see that it's starting to show up and we're kind of excited about that long-term because as we build this market out now, we've got our installed bases is well over 1.5 million machines actually getting closer to 2 million here and there's a nice opportunity there, longer term for replacement.

Appreciate the disclosures. You mentioned really the 6000 dealer network now. Can you just talk about your efforts to continue to drive high engagement in some of the newer dealers where after the post-storm enthusiasm might potentially fade as you laid out, call it into the back half of '19? What are you folks doing to drive continued engagement to make sure those 6000 dealers some of the newer ones stay green for you?

Yes. It's a challenge every time, right, because you had dealers. They generally come on board. As the market is -- market demand cycle is higher. And then, when demand relaxes you've got to effectively train the dealers on how to market. And many of these dealers are in the electrical trades or HVAC trades and marketing maybe for an electrician doesn't come as kind of a standard part of your business practices, right. So it's a new skill set that has to be learned. And we have a progression for dealers. We do a lot of training. I think one of the things that is just an amazing part of this business and I don't know that whether it's investors or others that maybe don't get it is that distribution that we've built that 6000 dealers we've built that over 20 years. And we have poured countless dollars, time, blood, sweat and tears into building that out and to making these dealers our representatives out in the market for a new product categories like home standby generators. And that just takes -- we burn a lot of calories. It's an ongoing effort. You can't relax at all. You have to constantly be coming up with new programs. I would say that one element of that we talked about this in our prepared remarks, but with our connectivity initiatives now this new platform that we're introducing called Fleet. It's a software platform that our team has been working on here. We just rolled that out. We had our annual dealer conference a couple of weeks ago in Las Vegas, 2,500 people there. It was a massive event. And we talk about new programs, Fleet being one of them. But Fleet is, you can kind of think of that as -- obviously by its name, you can see all of the generators under a dealer's care right, there, their customers products. But and they can get a lot of diagnostic information things like that. But the way we think about Fleet longer term is a really important way to engage with dealers. It could potentially be a totally different platform, many of these dealers; their "ERP" system is a spiral notebook on the dashboard of their van or truck. And you could think of Fleet as being a potential platform for dispatch, for billing, for other things that we could -- inventory control things of that nature. We see it as a really interesting way to interact with our dealers on a go forward basis. So it's things like that that help us keep the engagement up even after the initial surge of excitement and demand passes after an event.

Thank you. I appreciate the discussion.

Thanks Jerry.

Thank you. Our next question comes from Jeff Hammond from KeyBanc Capital. Please proceed with your question.

Hey, good morning guys.

Good morning, Jeff.

Good morning, Jeff.

So just on the 2% to 6% core, is there any way to parse it out between commercial and residential?

Yes. The 2% to 6% core is collective. So, on the C&I business I think our prepared remarks talked about the strong end market demand we're seeing both domestically and internationally there's a number of verticals that are turned on. And we see those continuing that strong demand into 2019 and pretty consistent throughout the year. So for C&I purposes, we're seeing that that high single-digit, low double-digit growth really consistently throughout the year. At least that's our -- what our guide shows. And it's really consistent across domestic and international. So I think that the theme there is broad based, strong demand for C&I. On the resi side, what that would mean is probably flat to down slightly, but down slightly is mainly due to headwinds with regards to portables. So still seeing resi flat to slightly down with portables being the headwind there for the full year.

Okay. And then, does that inform some of the margin dynamic where commercial would be lower mix?

Yes. So if you look at -- I talked a little bit about price costs on the mix side, that probably be -- there would be a slight negative mix hit on the margin side relative to -- from '18 to '19.

Okay. And then, last question, inventories moved up quite a bit and was a big drag on working capital. Can you just speak to how much of that is, some of this pre-buy ahead of tariffs, what is your finish good inventory look like? And then, just separately how are you feeling about channel inventories? Thanks.

Yes. I mean the way I think about inventory levels because they did increase during the year. So when you think about portable generators. So last year at this time, we had just lived through hurricanes Harvey, Irma, Maria, our inventory, portable inventory level was wiped out there. So throughout 2018 here, we've actually been investing in replenishment in our warehouses of our portable inventory levels. So just sort of everyday portable replenishment thing with that way. On the tariff side, so we saw -- as we were ending the year, there was the threat of tariffs going to 25% -- from 10% to 25% relative to Chinese imported goods on January 1. So as a management team, we said look, it would be smart to bring in some extra components across the board, across our product lines at least those impacted by that could be impacted by those tariffs. And we decided to invest in pre-buy of that inventory prior to that potential tariff change. And then, the third piece of the puzzle is, really just our strong 20% growth. We're going to be in just investing in more inventory to facilitate our growth. So I think that may one-third, one-third, one-third, when you think of those categories that are driving that inventory increase. On the field inventory side, on the portable side, I think -- book field inventory stock ready to go, ready for a storm, on the home standby side, I think it's actually seasonally appropriate, seasonally consistent with where we should be very manageable where we're at this point of the curve coming into 2019. So what we're feeling okay on where our field inventories are for home standby.

Okay. Thanks guys.

Thanks.

Thanks Jeff.

Thank you. And our next question comes from Mike Halloran from Baird. You may proceed with your question.

Hey. Good morning guys.

Good morning, Mike.

Good morning, Mike.

So first just clarifying on the guidance to make sure, I'm thinking about it right in terms of assumptions on outage activity. I think about the first half, it feels like you're essentially saying momentum from the back half of '18 plus an average underlying outage environment. And then, when you think about the back half of the year, it's an average underlying environment. And then, the range of outcomes is based on nominal larger opportunities versus the high-end being more significant opportunities. Is that how you guys are breaking that out front to back?

Yes. That's exactly it, Mike.

Okay. Perfect. And then, regional variances obviously you said Southeast, Northeast are doing very well on the areas that aren't seeing as much impact from the larger scale things over the last couple of years. Maybe track how awareness in those areas and what growth looks like dealer distribution penetration and things like that?

Yes. So I mean, it is interesting because you see those oscillation that will happen where you get events like we had down in the southeast and we had the nor'easters that were in the beginning of 2018 or in March 2018 consecutive nor'easters that have been, I think kind of turning the Northeast to -- has been. If you think of the U.S. as a heat map, it's actually very interesting. We watch just even all the way down to individual states, but even actually more granular than that of course. But, it is interesting that the Midwest was a really good market for us a year ago and this year, there were quite a few storms and events in Michigan, in Ohio, Illinois and that didn't repeat this year to the same level and so that cooled off, as an example. But, it is interesting because what's going through like -- if you look at it right now today there's actually been quite a bit more activity out West. So the West and the Northwest, the recency of a lot of the storms that are going on out there, I was just looking at outages this morning we tracked them everywhere and there was 130,000 people in California without power this morning from the latest event that was rolling through. And so that's just one state, one area and very predictably and we now have this, you can imagine from a data perspective we have a fair amount of data and there's a fair level of predictability around some of this that we could say reliably net -- at this point over the next 12 months in California, we're going to have, it's going to be -- it's going to be the growth rate will be better than it's been. Same will happen in the northwest as well. So but it's -- it does, it does move in. Puerto Rico was really hot couple of years ago. Now, it's not. I mean there's -- it really does cycle and oscillate, but it's interesting that that being said, they grow -- this is a step function growth that we've talked about. You get to this baseline level of growth you kind of grow rapidly, and then, it tops out at a kind of baseline level or bottoms out, if you want to call it that. And then it stays there but it's materially higher than where it was prior to the event. And then, you get another event successively after that and it grows again. And so it's really quite amazing mathematically speaking how you can start to model that out.

No. It makes sense. And then, I know it's early days, just customer and dealer receptivity to the connectivity solutions you're putting it out there. And then, thoughts on that resi versus the C&I side and how implementation could phase variably between the two areas?

Yes. Now, it's a good question. Right now a good chunk of our focus has been on the residential side. So I'll start there. Our receptivity has been good. We have a -- the challenge in that, if there's a challenge is like anything we roll out to our distribution partners, there's an adoption rate, right. They have to adopt that. There's a learning curve. It's not like anything else in life that are unlike anything else in life it's the same. And again, we're talking about mainly electrical contractors here. They're not used to working with customers with their Wi-Fi networks and passwords. And so there's been a bit of learning that's going on there. There's a lot of learning cycles run in the market. But we have tens of thousands of units connected already in a very short period of time. And the data that it's giving us is amazing. It's great. The interaction level the way we're able to increase the interaction with our customers. We can look at customers; products. We can understand what's going on. We can now -- this is a really cool thing. We can deliver over the air firmware updates to our machines. So as new features get developed in the products we can deliver those features to customers. So there's additional future benefit potential coming from that. It also then leads right into that Fleet comment I made previously. It allows for our dealers to have a much better view of all of the products under their care to effect repairs a lot quicker and more accurately. And that's been a really good upside. The C&I piece is the next piece for us. And we've got our control platforms there. We've introduced a brand new control platform on our industrial products that are -- that's going to roll into products here over the next 12 to 24 months as we kind of cycle through it. It's a lot of product to get the new platform in. We call it our Power Zone Control platform, but it's state-of-the-art. And it's by far and away the coolest generator controlled platform in the industry and it was all developed internally. And again, this is I think one of the great benefits of the focus we bring to the market is we do a lot of this stuff internally. And it's the same with the remote monitoring; we're doing it all internally. We're not leaving that to some other third party. We feel that as the OEM we want to have that direct conversation with our customers and our distribution partners.

Thanks for the time. I appreciate it.

Thanks Mike.

Thanks Mike.

Thank you. [Operator Instructions] Our next question comes from Chip Moore of Canaccord. You may proceed with your question.

Thanks. Hey, guys.

Hi, Chip.

On the 8% to 10% core in the first half. Can you talk a bit more on visibility I think you said it was more Q1 weighted, so some of the puts and takes there? And then, maybe just remind us on baseline outage activity expectations. Does events of the past couple years is that push that up or are you thinking, how do we think about that? Thanks.

Yes. I think our prepared remarks that the assumption there at least for the first half is that we're assuming just sort of long-term average levels which if you -- actually if you do the math that would actually be lower than what we experienced in 2018. So that 8% to 10% core growth that we were talking about in the first half it actually, it spreads across resi and C&I relatively consistently so we're seeing strength both in resi and C&I as I mentioned. And then, as we said in the prepared remarks, Q1 given the strength that we're seeing coming into the year, we expect those Q1 growth rates to be higher than the second quarter. So I think that was the level of commentary we were providing on that.

Got it. That's helpful. York thanks. And good to hear you talking a lot more on this new connect strategy obviously it's a robust ecosystem a lot of things you could go after. Can you talk about your appetite for partnerships and the organic development versus the M&A which you can clearly use to accelerate it? Thanks.

Yes. It's a great question. I think that, again, I think about my time here at the company and just all the things that we've done over the years. And I don't think I'd be more excited about a potential area of growth in a way for us to really explore some of the great things that we've done here in terms of distribution I talked about that before, the build out of distribution, our brand, and the position we got in the marketplace. And take that in concert with our technical expertise around electrical systems and this unique opportunity we have -- every one of our machines, these backup generators is connected to a home or businesses electrical panel in their electrical system. There are very few companies that can probably claim that space other than the panel manufacturers themselves and certainly they do claim that space. But I think that the opportunity there to do something with that and our distribution and our brand and this connectivity layer is really exciting. So to your question about organic versus M&A. M&A certainly can help us do some of those things faster and there may be some technical skill sets and the people in particular that we might need to be successful in that could come to us through M&A. But make note -- make no mistake, we're putting a lot of effort organically with the current system that we've rolled out. The Fleet system, the Wi-Fi connectivity systems that act as this gateway that was all built internally. We didn't partner. We have a team of people here in Waukesha, Wisconsin. We're doubling the size of that team this year. And it's not a small team. It's a big team and we're going to double that because we believe in the future of this being a really critical part of the future and moving Generac into more of a -- I'll call it more of a solutions based provider as opposed to just a products based company, more around services. The subscription models like we're already selling through our mobile link subscription which is a monitoring subscription for generators. The amount of potential business models and things that we could do with this are just -- they're almost -- where we've got too many things, we have to prioritize what exactly we want to go after and how we want to do it. But we're going to be in the middle of that conversation and I think it's going to have a profound impact on this company over the next decade.

That's great. Thanks a lot Aaron.

Thanks Chip.

Thank you. And our next question comes from Brian Drab of William Blair. You may proceed with your question.

Nobody home?

We lost him.

Maybe on mute.

That's my bad, my bad. Good morning.

He was on mute. Very good. Hey, Brian, how are you doing?

I was wondering why you didn't say good morning back, usually they say good morning back. Sorry. So can we just zoom back out and can you talk about -- did something change in terms of how you were viewing the first half of '19, where we stand today versus where we were at the -- on the third quarter call? Do you feel a little -- if they've seen more demand then you would have expected in the first half slightly. And what are the -- can you kind of rank order the factors that drove that storm activity recently et cetera.

Yes, Brian. I think for sure that as we get to another 90 days plus away from that third quarter call and that has galvanized our view on the first half because we're closer to it and in fact we're almost two months into it here and we came into the year feeling good about 2019. It's playing out at this point as you indicate maybe even a little bit stronger. And I think our guidance reflects that. And over what we were kind of maybe talking about on the third quarter even though we weren't really giving full year guidance, I think we said the next -- we felt pretty good about the next three to six months for sure and that definitely is how we feel about this. And I think maybe more importantly what we really like is, what we're seeing in the C&I space. C&I markets for us have been -- have remained strong both stationary and mobile. Some of our large accounts in the rental markets, some of our large accounts in the telecom market, we've got some customer concentration, the buying signals there and the -- there are kind of plans as they roll them out for the full year. And some of these companies are public companies really kind of fit well with how we were thinking about the year playing out. And so we're pleased to see that CapEx spending for these customers is going to continue the hardening of their networks, if it's a telecom customer is going to continue. And the overall C&I business has just been -- it's felt very strong. And I think that our guidance reflects how we're feeling about that. And then, resi of course as we said activations were just at amazing levels in Q4. And what we look at in that particular business we look at the leading indicators, we call them IHCs, in-home consultations. In-home consultations have been up dramatically over the prior year's run rate in the first 45 days of the year here. So we're very excited about that because we think that that portends to a stronger, again, it's all reflected in the guidance, but it portends to a pretty good first half.

Got it. You mentioned telecom in there too. Have you seen any signs of a pause there's some companies that supply into that market, have said they've seen a pause, someone obviously AT&T is having some issues and some other issues going on in the industry?

Yes. It's certainly customer specific, I think, the ones that where you're hearing pauses and seeing pauses. And I think that -- in that, it is interesting how that tends to rotate from one customer to another for us. One year might be one customer is doing a lot of build out in a network and maybe another customer that was doing a lot of build out the year before has pulled back, for whatever reason. Sometimes it's M&A on their part. Sometimes there are other business factors or economic factors that drive that. But we have -- I think we feel pretty good about remaining at some of the same levels that we saw in 2018 as it relates to telecom. And it was strong in 2018. Nothing at this point gives us pause now that can change as we said before, but I think that the realization from all of these providers that the uptime of their networks is just absolutely critical right. I mean most people are paying now by the bit and the byte that goes across those networks. And so if the network is down, it's not just an inconvenience for customers. There's an economic impact to the carrier as well. And then, you couple that with just the critical nature of the communications and things that are going on across these networks, it has become a vital part of our infrastructure as a country. And we're also seeing that around the world. I mean we've got some great things from a telecom perspective going on in Brazil. We've got some great things going on in Mexico. We've got some really interesting possibilities going on in mainland Europe around telecom. And we see the opportunity to take our expertise here in the U.S. and telecom and extend that based on our expanded geographical footprint through all these acquisitions. That was always part of the original strategy and we're starting to see some of that come to fruition.

Thanks. And the last one for me is, just -- how far away are we from seeing maybe a certain to see a material impact from the implementation of your strategy with Motortech and getting more into continuous power and some of these things that you laid out at the Analyst Day? And are you seeing that now or is that still coming?

We're actually starting to see some of that, Brian. We have, in fact, we have a dedicated commercial resources here now at the company that are focused on building that market out alongside Motortech and alongside some of our partners in the rest of the world markets where you will see more of those applications frankly. But it is really interesting because we're seeing some really neat opportunities even in places like Canada, time of use programs from utility providers are taking natural gas generators -- customers are taking natural gas generators and using them where they would have normally had a backup system anyway. They're using that generator to reduce their utility bills. And this is some of the things that we talked about at our Investor Day, 1.5 years ago and we see that market developing. But as we said at that Investor Day, that's a long play, right. We know that it's going to take time to build out an important part of our future success there is continue to roll our products and programs and the support structures needed to be successful in that market. We also have to grow our brand in other parts of the world where we're quite well known here in the U.S. market and maybe in Latin America as well. But maybe not so much in other places in China or India or the African continent or even the European continent. So, we've got some brand building to do, some awareness to do. But we like the prospects for that long-term and it will be long-term but we're seeing some really interesting things starting out some really good interest around that.

So is it more an international opportunity than it is a U.S. opportunity?

I think initially that's probably right. I think it's -- the U.S. power markets as they evolve those opportunities will become more evident here as well. But I think they will become more evident in other parts of the world quicker. There is a lot of factors that drive that some of it is stability of grid where you have, again, like in India where you have a lot of outrage events and a natural gas generator because when you have a lot of outage events and a generator is going to run a lot or if you're talking 8 to 10 hours a day, the input costs meaning the fuel matters and natural gas costs are roughly half the cost of diesel fuel. And so that really adds into the total return of the machine and the way that a customer would view that and that has a stronger payback our ROI outside the U.S. today than it does inside the U.S. That may change as the energy markets develop here. But, again, over the long haul, but as we go out the gas market even further, but that's kind of how we think it's going to play out.

Okay. Perfect. Thanks a lot.

You bet. Thanks Brian.

Thank you. And I'm not showing any further questions at this time. I would not like to turn the call back over to Aaron Jagdfeld for any further remarks.

Thanks operator. We want to thank everybody for joining us this morning. We look forward to reporting on our first quarter 2019 earnings results, which we anticipate will be at some point in early May. With that, we'll leave you here today. Thank you very much.

Thank you, ladies and gentlemen. Thank you for participating in today's conference. This does conclude today's program and you may all just disconnect. Everyone have a wonderful day.