Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Generac Holdings Incorporation's Earnings Call. [Operator Instructions] I would now like to hand the call over to Mr. York Ragen, Chief Financial Officer. Sir, the floor is yours.

Good morning, and welcome to our third quarter 2019 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 will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time by Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we'll make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call back over to Aaron.

Thank you, York. Good morning everyone, and thank you for joining us today. Our third quarter results represent a continuation to the strong start we experienced this year in the first half and are the best quarterly numbers we've ever had as a company. Strong domestic sales growth of 9.2% was driven by our residential and industrial stationary power generation markets again during the quarter with overall net sales increasing approximately 7% compared to the prior year. EBITDA margins remained strong at 21% as we have been largely successful mitigating the impact of regulatory tariffs. Increases in power outage activity over the last several years together with the threat of potential outages in California drove continued penetration gains in home standby generators during the quarter. Shipments of stationary C&I products were also significantly higher year-over-year as demand for natural gas generators and telecom-related backup power more than offset softer shipments of mobile products as a number of our larger rental customers continue to defer certain fleet purchases. Once again, demand for home standby generators remained very strong during the quarter. Activations and in-home consultations were again robust with proposal close rates, which have been trending higher for the last several years at all-time highs as we continue to refine our sales and marketing processes. Additionally, we added approximately 200 new dealers during the quarter as we stayed intensely focused on developing this important channel to increase the sales, installation and service bandwidth needed to further expand penetration rates for the category. Over the last two decades, we have invested heavily to create the home standby generator market as our efforts to develop distribution, create targeted marketing and deploy in-home selling processes have dramatically increased the overall awareness and growth of the category. We estimate the market today is more than…

Thanks, Aaron. Before discussing third quarter results in more detail, recall that effective January 1, 2018, Generac adopted the new GAAP revenue recognition standard. Upon finalizing our accounting under the new standard, at the end of 2018, we made certain immaterial prior-quarter reclassifications to our 2018 consolidated statements of comprehensive income related to extended warranties. Therefore, the prior period in our earnings release has been updated accordingly. See our press release for more information related to these reclassifications. Now looking at our third quarter 2019 results in more detail. Net sales for the quarter increased 6.9% to $601.1 million as compared to $562.4 million in the third quarter of 2018. Excluding the $4.8 million of contribution from the Captiva, Neurio and Pika acquisitions, and the almost $4 million negative impact from foreign currency, core growth rate during the quarter was still approximately 7%. Looking at our consolidated net sales by product class, residential product sales during the third quarter increased 7.4% to $335 million as compared to $311.9 million in the prior-year quarter, with core growth being approximately 7% when excluding the M&A contributions from Neurio and Pika and the slightly unfavorable impact from foreign currency. As Aaron mentioned, home standby generator sales experienced significant year-over-year growth as we continue to drive penetration of the product category. With power outages on the rise and interest in home standby generators at an all-time high, we have ramped-up our efforts to increase awareness, distribution and close rates for these products with particular focus in California. In addition, shipments of portable generators were similar to prior year aided by the impact of Hurricane Dorian which made a brief U.S. landfall in early September of this year. Recall that the prior-year period included the impact of Hurricane Florence, which also resulted in significant portable…

Thanks, York. As we have discussed end market conditions for our residential products remains strong and better than expected, as a result of recent elevated power outage activity. Conversely, our C&I mobile products and International businesses have softened in recent months, partially offsetting the gains we're seeing with our residential products. However, based on the strength of residential products, we're raising our guidance for revenue growth for full-year 2019. As we now expect overall net sales to improve approximately 8% to 9% versus prior year, which compares to the previous guidance of 6% to 7% growth. On a core basis, full-year 2019 net sales growth is now expected to be approximately 7%, which compares to the previous guidance of 4% to 5%. These growth rates assume normal baseline power outage activity for the remainder of the year. As a result of a more favorable sales mix and improved operating leverage compared to previous guidance, we are also raising our margin expectations for the full-year 2019. Net income margins before deducting for non-controlling interests are now expected to be approximately 11.5% versus 11% previous guidance. The corresponding adjusted EBITDA margins are now expected to be approximately 20.5% for the year, as compared to the previous guidance of 20%. Operating and free cash flow generation for the full-year 2019 is expected to remain strong with the conversion of adjusted net income to free cash flow anticipated to be approximately 80%, as we work to further monetize our working capital in the fourth quarter. The remaining guidance items provided in previous earnings calls are not expected to change. This concludes our prepared remarks. At this time, I'd like to open up the call for questions. Operator?

Thank you, sir. At this time, we would like to take any questions. [Operator Instructions] Our first question comes from the line of Tom Hayes of Northcoast Research. Your line is open.

Good morning, guys.

Good morning, Tom.

I was just wondering, as you build out your California network with the growth in activity out there, are you guys currently able to kind of keep up with the demand for the in-home consultations and maybe are you kind of facing any backlog in that right now?

So it's a great question, Tom. So obviously things are incredibly busy out in California. IHC -- our IHC numbers are kind of off the charts now off of its fairly small base from last year, but up 500%, 600% over the prior year. So we're seeing -- and that's a tremendous leading indicator for us and we look at that and we look at our close rates and that translates really well to strong demand in the -- over the next several quarters. This is not going to be a one quarter event, this is going to be -- we think a long tail event, similar to other kind of major events that we would see, generally you see a tail that is in some cases multi-year as opposed to even multi-quarter. So that's kind of how things are shaping up. To answer the question on whether we're able to keep up, the actual answer is no, we are inundated right now, we're adding distribution, we're actually doing some pretty unique things around sharing those leads with other channel partners outside of our traditional dealer channel simply because our dealer counts, which are growing in the state, we're now at about 300 dealers in the State of California, we started the year at about 100, so we've added a fair number of dealers in California in a very short period of time. But yet, just on-boarding those dealers and developing them it takes time. And so we had to take those leads and we're doing other things with those leads so that obviously we don't want people to have to wait to talk to somebody about these products. So there is a backlog in some cases, depending on which region you're in, which zip-code, actually it's down to the zip-code level that you're in, it could be a backlog of a couple of weeks. We hope it doesn't get longer than that. We know that we need to stay focused on turning around IHCs very quickly and maintain the quality of the IHCs as well, that's also incredibly important. So that goes hand-in-hand with our success rate in closing those deals. So it's a challenge right now, but it's not unlike what we see in other parts of the U.S. when we get outages, but California is particularly -- things are particularly acute because we're relatively underdeveloped there.

I appreciate the color. Maybe if I could just ask one more related to California. I think you called out you expect about $50 million in contribution in this year and maybe growing to almost $200 million in the near future. Is that primarily the residential applications because I know if you're looking at the news and everything, you're also saying that light commercial grocery stores, [indiscernible] out, maybe talk about kind of how you're focusing on that commercial application opportunity as well?

We are -- Tom, the $200 million would be representative of both residential and commercial backup power. It does not include the clean energy opportunities that we've spoken to. So I think that's important is that -- that will largely be a California story as well. So, California is a state for us. In totality, in the next few years, we anticipate it's going to be a really important market for us. But back to your question, the $200 million -- obviously the penetration rates for backup power are relatively low, both on the residential side and C&I side in the state. But the larger opportunity is still going to be residential for us, we just, we feel that -- C&I will be very interesting as well, but I think a good chunk of that $200 million we anticipate is going to come through the residential channel, which obviously from a margin perspective is going to be mixed positive. On the C&I side. I think we may actually see next year or this is kind of my premonition based on our experience and seeing this in the past. I think the telecom companies are going to be evaluating their networks in California in a much deeper way. I think they're going to provide a lot of scrutiny on just how much backup power they have. We know that again penetration rates even in California for telecom gensets are less than 30%. So that means that two-thirds, more than two-thirds of all the sites -- these wireless sites in California do not have long range backup power. And so that's a problem. And if this is going to be the kind of situation in terms of the shut-off it's going to extend years as people have said it well -- it's going to be absolutely critical those wireless networks are backed up. You can imagine, just the combination of having the power out and then the threat of these fires to be completely cut off from a communication standpoint is really an untenable position to be in. And so I think the communication companies -- the telecommunication companies are going to focus very heavily on that. And that could being the number one provider to those markets, that could be an upside potential for us next year. We're going to put together our guidance for 2020 and we'll bring that out with more clarity here in the quarter ahead. But my premonition would be that there is some decent some decent potential at least around that vertical within the State of California.

Thanks, I appreciate the color. I'll get back in the queue.

Thanks.

Thank you. Next question comes from the line of Ross Gilardi of Bank of America. Your line is open.

Hey, good morning guys.

Hey, Ross.

Yes. I just wanted to make sure I understood your guidance because you're sticking with this base case scenario of no material outages, but you've just had four fairly material outages in California. So are you -- I don't know if you would characterize them all as major. So are you including the revenue benefit from what's happened in the last two weeks in the outlook or no?

So here's -- I think the way to think about [indiscernible] this, Ross, there's a couple of moving pieces here. One is on the residential side, portable generators. We had a really solid quarter in Q3 and actually port gens were flat in Q3 and we thought we were going to have a really tough comp, but with Dorian, that kind of stirred it up the coast, the Eastern seaboard, we were able to ship a lot of product -- that was -- we had a lot of visibility of that storm coming and everybody thought -- Florida was going to take a direct hit. So we put a lot of product into the State of Florida and kind of in the Carolinas. That never materialized, so the sell-through was poor. And so what we've got is, we've got an inventory -- field inventory kind of situation that has to be worked through. We think that will happen in the fourth quarter, but it's going to probably manifest in lower portable generator shipments in Q4. So kind of think of Q4, there was some pull ahead in the Q3 on port gens. Then you've got our industrial businesses, and our international businesses. Specifically in the industrial business is the mobile component that continues to slow down. That's been disappointing for us, it's beyond our expectations actually, it slowed down. And you've heard many of the large national rental accounts come out and say just they are cutting back on CapEx spending. We see it kind of as a momentary pause in their buying cycles, but it's a pause nonetheless. And it's probably a deeper pause than we had originally projected. So there is that component. And then internationally, we just continue to see things like Brexit, some of the things…

Okay. So it sounds like the home standby business, you had two scenarios last quarter, sounds like the home standby business went to the upper end if not above the high end of the previous assumption, but it's offset by the mobile products business, international and the field inventory situation and portable. Is that a fair way to think about it?

Yes, that's exactly it Ross.

Okay. And then could you comment on your solar storage products coming in double your initial projections. In your 3-year outlook, you had suggested that these products would add 200 basis points annually of growth for the next 3 years. I mean I know that was a little bit back-end loaded. But based on that comment, can we assume that you at least do actually get to 200 basis points next year? Or are you actually saying you're going to add 400 basis points of growth next year from Pika and Neurio etc?

No, I think what we're saying is we get to that long-term kind of target quicker and which means we will get more of that next year. I don't -- I wouldn't double the 200 basis points to 400 basis points, but that 150-basis point to 200-basis point improvement, that could happen quicker. And I mean-I went to the SPI show in Salt Lake City and I'll be -- perfect honestly here on the record, I'm not a fan of trade shows, I just never have been, but it was an amazing reception to our entry into this market. I think it caught us -- I don't want to say it caught by surprise, but we were generally pleased with the receptivity to our entrance here. And this is not going to be a demand side problem. That much I think -- most times when you enter a new market, I think going after demand is always kind of one of your concerns, your chief concerns. My chief concern here supply chain constraints. It's going to be around battery, it's going to be around power electronic components, it's going to be around our ability to produce. We're going to have to on-board distribution of course to do installations. We have a lot of work to do to make this happen, but we're basically taking -- as we think about the acquisition targets when we put those together, we put a model together for what we thought the acquisitions could do for us in year one, year two, year three and out, we're basically -- essentially doubling what we had on the page for year two, more than doubling to be honest, and I'm -- if we could probably if we could get more capacity if somehow we can come through on that, maybe there's even further upside. I think we're limiting that because we're just -- the capacity thing is kind of a wildcard here, right? I think we fairly sized it with what our comments represent today, but this is going to be a supply side constraint more than it will be a demand side constraint, at least in the early innings here.

Next question comes from the line of very Jerry Revich of Goldman Sachs. Your line is open.

Hi, good morning everyone.

Hey, Jerry.

Good morning, Jerry.

I'm wondering if you could talk about how your in-home consultations have been tracking outside of California and it looks like your dealer count grew by a 100 outside of California as well in the quarter, if I triangulated the numbers right. Are you seeing that dynamic that you've seen during prior major power outage events where you get a nationwide halos. Is that playing out?

It is two-degree, I mean I would say this Jerry, whether I say it's a halo because of what's going on in California or I think it's more -- we keep looking at this -- this home standby category is -- it's amazing. I have to tell you the resiliency of this category, the potential upside here in terms of just overall penetration opportunity, IHCs have been very strong this year. They were strong, obviously the Dorian situation drove a lot of interest in the category for a period of time, that didn't materialize in terms of outages, but it did materialize for us in terms of home standby interest. It got people thinking about outages again. Certainly, the California outages from a national perspective -- I think California is a little unique when it comes to national coverage. I don't know why that is, I think it's just is a little bit like that. What happens in California is a little bit more bubble than it is maybe in other -- than things that happen in other regions. I can't explain that, but it just is. So maybe there is a little bit of tempering of that in terms of a halo effect, but I would say overall, IHCs have been just amazingly strong this year. And the home standby business is just -- it's a great business and there is so much runway left in that that every time I look at that business, I mean for us -- I think it's really important to point this out, we're at the point now with that product line in terms of capacity, production, we're looking at alternate sites where we can build that product, building out other supply chains, it's become so big that we need to expand our kind of thinking around how big it can be in totality. I think the home standby generator category is something that is going to become the kind of part of your homes infrastructure like central HVAC has become, I think it's going to, especially as homes become more connected. One of the things that's a really interesting observation out in California in particular is as people buy home standby generators, we're seeing a much higher connectivity rate with our Mobile Link. So this is our monitoring system, our WiFi-enabled monitoring system, we're seeing a 4x to 5x number of connectivities in terms of percentage of connected generators over the kind of national average which tells me just California is always ahead of the curve on kind of IoT and connected homes and things like that, but I think it's just a sign of where things are going to go and we're just -- we're really bullish on home standby.

The last time you folks were supply constraint in home standby, there was a material carryover effect into the seasonally weak first quarter. Is that playing out now? I'm just trying to put that into context with your comments about inventories coming down, that was probably a portables comment, but can you just comment on those two items please?

Jerry, so right now, our home standby production levels are relatively high. They can go higher. In fact, we've made some provisions here to take them higher here throughout the fourth quarter, and we're going to keep them higher going into the first quarter. Couple of reasons for that. One, obviously, we're watching very closely how quickly home standby demand can develop. Again it's -- a home standby generator project is a home improvement project, it just takes time. I can't underestimate under kind of -- put those in words just how -- how long it does take to do a project. It's just months in the making. You have to -- you start out, you find a dealer, you go through the process of getting a proposal, you have to make arrangements from a project standpoint for other subcontractors with gas and electric and there's landscaping involved, there is permitting involved. It's a process. And like any home improvement process, it generally always takes longer than you think it should. So that will develop over time. And so one of the unique things about California, we see this when we get hurricanes down south and things like that is you can install generators year around in California. This is something you can't do it in the Northeast or in the Midwest. So typically we get seasonal slowdowns in Q1 because of the slowdown in installation of home standbys in the Northeast and the Midwest. We think, because the California is a new element here, installation should remain fairly robust through the first quarter. So that's a cool new dynamic for us and I think it should have a positive impact. And we want to maintain really high levels or decent levels of flow in terms of production on home standby because if this does develop more quickly, Q1 could potentially represent a decent quarter because of that install type of capacity that can happen. We're not making a call on that. No, we're not talking about Q1 guidance, but at the same time, those are the realities of things that we've seen in the past and how we think this might develop.

Okay. And then given those moving pieces, it does sound like you're embedding a significant production cut in C&I in the fourth quarter. Can you just expand on your production outlook by line of business within C&I please?

Yes, so on the -- actually on the C&I stationary side what's interesting is, we've been in a deeper backlog there than we normally get into. Our lead times have been extended, demand has been high, particularly around telecom and in the back half year of the year what we hit is we kind of hit a telecom air pocket, in terms of installs. You've got some unique things going on out there in the marketplace with a couple of our Tier 1 wireless carriers, both T-Mobile with the Sprint acquisition and then you've got AT&T doing some things around capital optimization and some things there that have been in the news recently. And that slowed down some of the CapEx spending on networks here in the back half of the year. Again, we think that's kind of a momentary pause, some of it is T-Mobile just absorbing quite a bit of purchasing earlier in the year, but that -- where we're slowing production if we're slowing it at all is in those areas, but frankly our C&I factories are very busy and will remain so. They were just incredibly busy for the first half of the year and now they're just going to be somewhat busy in the back half of the year. I would say, mobile products is a little bit different that continues to slow down. And I would say our factories that produce mobile products were probably going to see those kind of slowdown, especially as we exit the lighting tower season, which is kind of Q3 and into early Q4. We generally see lighting tower business is somewhat seasonal that way and so as that slows down, we'll probably see our mobile products factories slow a bit.

Okay, thank you.

Thank you. Next question comes from the line of Christopher Glynn of Oppenheimer. Your line is open.

Thank you. Good morning. Hey, I had a couple of questions on the acquisition. So curious on the relative emphasis on the Pika ESS solution versus combined solution with the Neurio home energy management systems. And secondly, the view around the installed cost to the customer and where that is in the process, how that trends to more affordable over time?

Yes, so just so I'm clear Chris to your question -- your first part of your question on the combination of Pika and Neurio, you're curious as to how that's going or how it's progressing or was that --

Just where's the first couple of years run rate more pronounced on the combined BEM HEMS or more on the BEMS Pika stand-alone solution.

Got it. So good question. And there are some different views even internally here on that, but I'll give you, since I'm the CEO, I can do this. I'll give you my view. And I think what's going to happen is the combined solution was really well received at SPI. This idea of an intelligent storage solution and really being the first one on the market that it's going to have kind of end-to-end energy management, energy monitoring and storage in a single package by a single supplier. This is the other thing, most of the packages on the market today if they have any bit of intelligence to them, they're generally cobbled together pieces from other suppliers. We're going to provide the end-to-end solution here at Generac, all the way through. Now it's a combination, admittedly of the Pika Technologies and of the Neurio Technologies and actually some of the Generac Technologies, but it will come together, be supported and it will come together under one brand of the Generac brand.That was really well received at the show. Now I personally think the HEMS-only solution, which we're actually going to start shipping in the fourth quarter, our HEMS-only solution with bundled with our transfer switches for backup power for home standby, so in the future starting here in the fourth quarter, roughly December time frame, you can buy a home standby generator that could have a transfer switch option, which includes the Neurio technology, which is pretty cool. Today, you can install it as a separate stand-alone device, but it will be embedded technology. We're actually looking at that as potentially being a standard feature down the line, we have to get the cost structure right to do that, but we really think that that's a potential differentiator --…

Thanks for the color.

You bet.

Thank you. Next question comes from the line of Joe Aiken of William Blair. Your line is open.

Hi. I'm on for Brian Drab today. Good morning guys.

Good morning Joe.

I just wanted to circle back on California for a second. Has your work in terms of the longer term revenue potential there, has that changed at all since the Analyst Day?

So I would say that -- we laid out at the Analyst Day was home standby only is what we kind of talked to, we talked to $100 million potential in home standby by I think we said 2022, if memory serves me correct. I would say -- at that point in time when we put that together, I don't think we saw perhaps the shut-offs being as large in scale or as numerous in frequency as maybe they've turned out to be here.

They hadn't started yet.

They hadn't started yet, so I don't think we have a frame of reference other than what. We knew that when there are red flag days that would be the likely trigger and we looked at historical red flag days but we weren't sure that PG&E would do this and I think also tempering our enthusiasm and maybe even still so just how long will this go on? I mean, the CEO of PG&E came out and said it could be as much as 10 years. A decade of darkness for the people in California. I mean -- that really kind of -- after we heard that, we really started to think about this may be a little bit differently. And I can tell you, internally we've really -- we're burning a lot of calories right now across the business and it's interesting, it's not just in the residential side of the business, which is what we've been talking about, it's as we mentioned on this call the C&I opportunity with telecom. There is a mobile opportunity for mobile generators and lighting towers, right, when the lights go out, it's dark. So there's lighting tower opportunity. There's water pump opportunity. Sometimes utilities fail -- water utilities fail. We don't have power. So there is our mobile business has some opportunities. We've got our chores business, oddly enough, our chores business, they manufacture -- one of their number one product lines is brush cutting equipment. There is a lot of brush in California that needs to be cleared to be successful. So we're actually seeing an uptick in brush cutting equipment, in stump grinding equipment, some of the forestry management equipment that we manufacture for that business, which is really interesting. And then you've got the clean energy side of that. And I think that's probably the side and again, I wish I could tell you we were this smart when we did our acquisitions earlier this year and we kind of looked at the battery -- the storage market and the energy management and monitoring markets to know that this was going to happen. We did not have this on our kind of in our math or in our model. So to answer your question directly, yes, I think we have a lot more optimism regarding the importance of California to the business going forward than what we were probably talking about during the Investor Day.

Okay. That's really helpful color. Thanks. And then just switching gears a little bit more of a quick modeling question, are you able to provide any guidance in terms of expectations for gross margin, EBITDA just directionally in 2020 versus 2019?

2020, we're not giving any 2020 guidance I guess if that's your question.

No, I mean, Joe, we're going to -- our normal process for that would be, we'll finish out the year here and we were obviously in the middle of that, we're working on that, where like any company, we've got an AOP process and we're kind of grinding through that and obviously what's pretty unique in our business, and this is always the case, and maybe thanks for a different year-end or different cycle or something. But we always have in the fall we have -- this is a seasonal business, so -- and you kind of don't know what you're going to get in terms of seasonal demand, right? So it could be hurricane season if you have a strong hurricane season or if it's early winter season with Nor'easters or in this case, the wildfire season, which has played out for us in terms of the blackouts out in California. Those always add a new dimension in terms of trying to calibrate what do you think you're going to do next year. And as those seasons develop, we're right always in the middle of our AOP, we end up redoing our AOP, I don't know how many times York. It becomes an incredibly iterative process which is -- it's just, it's not very efficient, but it is the nature of the beast. And so we're in the middle of that and we're recalibrating again based on my comments here just a second ago to you regarding how we're thinking about California, in particular, but we'll put all that together and then it's something that we'll do in Q1, we do that call for the Q4 call, we'll give our 2020 guidance there in more detail.

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

Hey, good morning guys.

Hey, Jeff.

Hey, Jeff.

Just on the margins. I mean, the mix was better on home standby than like the lower margin commercial and portables, yet there wasn't a lot of leverage. Just want to understand like investment costs and how that impacted the margins in the quarter? And how to think about that going forward?

Yes, I think we are -- I mean, if you're talking, gross margins, we did see that mix improvement, which drove gross margins higher. I think -- we were pleased actually that we saw that increased gross margins in light of the tariff environment. I know we've done a lot of work with pricing actions and our profitability enhancement programs collectively around the company to mitigate the impact of tariffs. So, and I think we were able to successfully do that. And then on top of that, we were able to, with the higher mix, drive gross margins higher. I think collectively, the price cost overhead -- improved overhead absorption is embedded in there.

No leverage -- not having the leverage, I think just --

Are we talking gross margin or OpEx --

No, Op margins, yes -- Op margins.

Operating margins, yes, so that's the gross margin side, then on the OpEx side, you're right -- if you just look at our fixed OpEx costs, there was obviously a nice leverage on our fixed operating costs.

From a variable standpoint, we made some pretty big investments, one, you've got the clean energy OpEx run in through there now, right? And so those are -- we said that were those start-ups, right? Those are money-losing businesses at least initially here. We hope to get to break-even even quicker based on our optimism for that business going forward, but we made some pretty big investments around clean. We've got some big investments continuing to go on around connectivity. That's a big place that we've made investments, lead gas -- we -- our lead gas initiatives are -- there is a lot of missionary work that's going into that to build that out, those our global initiatives too, because obviously we got to do a lot of work there. So we felt that the right thing to do for the long term for this business is to make those investments. I think the easy thing to do would have been to put that in our pocket and not invest. I'm a big believer in continuing to invest not only in the R&D side of the business, but really in the market growth areas. We're also spending pretty heavily in California. So as you can imagine to build that market we're running infomercials now, we're running a lot of digital advertising out there, we've got a lot of awareness building to do and so that won't necessarily materialize maybe as dramatically as the spend would indicate like if we spent that kind of money in terms of efficiency of spend in other parts of the country we'd probably get a bigger lift. But knowing what we know around just how it's going to take to develop, California, that's an investment in the future. So those things are really why you didn't see the leverage on EBITDA margins the way you might have expected. I think York's exactly right on the gross margin line. We're pretty happy with that. I mean we've been fighting off the tariff stuff all year long, and I think we're pretty happy that we're able to do that, and we've had some pretty good leverage in the factories, just being able to run things as utilization rates as high as they've been, but on the OpEx side, we've been making some pretty big investments for next year. For that whole step function change as a company, we got to go and fill in on the OpEx side that next level of -- to get that next level of growth, we got to fill in the infrastructure to be able to achieve that.

Okay, that's helpful. Just -- If you can -- I know you don't want to give 2020 guidance. But if you can just level set us on how to think about clean energy growth from a baseline level in 2020. Just, I mean it sounds like you're feeling you got very good reception, but you got supply constraints. I'm just trying to think how to model that.

Yes, I think the prepared remark was well in excess of 100 megawatt hours of storage, that we would deploy next year and that is more than double what our original kind of plan on a page was for year two of these businesses. And so, I mean calibrate around that -- I'm going to stop short of probably giving you an exact sales number, because there are some moving pieces in that. We talked a little bit on this call about the individual HEMS devices. So you've got that, that's not really in the 100 megawatt hours obviously, 100 megawatt hours is really storage. But everything else kind of goes along that. We've got what we refer to as [PV] links which are the modules that go on the rooftop, that go hand in hand with the solar systems that are components of the overall solar plus storage. So there's other components outside of just the storage systems themselves. But I would say this, Jeff, the overall point is that if you go back to our Investor Day and you kind of look at where we were calibrating kind of out to 2022, there is a really good chance. So we're going to get there are a lot quicker, that's really the comment today. How far we can go next year? I think again I'm tempering that by talking about supply chain, there could be some upside in that even further if supply chain can go further. This is not a demand side problem year one or year two, there is a lot of demand. And California is going to drive the demand even higher. I think that's the piece, maybe the change even from the Investor Day is just the level of interest around storage. What you've got…

Thank you. Next question comes from the line of Chip Moore of Canaccord. Your line is open.

Yes, good morning. Thanks. Hey, guys. Wondering if you could go back to the [$50] million in California, just given some of the emissions regulations. Can you talk about how much of that is portables versus standby? And then as we look forward, anything to consider on the regulatory side on the automatic standby?

Yes, I think -- from a mix standpoint, the majority is standby because we can't get as many portables, excuse me -- into that market. Again, it's really kind of -- it's conundrum because we have a lot of portable product because we're planned for season, Dorian did take a fair amount of product that we still had product leftover we're prepared for the winter season as you would see normally in the Midwest and the Northeast but those products are what we refer to in our business as 49 state product, so they're EPA compliant, but the California Resource Board has a higher level of standard for tail pipe emissions and so we have a special SKU for California. We call it a CARB SKU, we don't plan year in and year out, California traditionally has not been a huge portable generator market. So when we did our planning cycle this year, we just didn't plan for a lot of CARB units. Now we've tried to add more, but we have long supply chain there and we're bringing more in toward the end of the year, but we have a lot of product we could put in California today and we have retailers that are begging for but we can't ship it there legally. So we're working with California and the regulators to see if we can get a temporary waiver to help people. I think this is a really critical thing. These are incredibly limited use products over their entire lifetime. So in terms of overall tail pipe emissions, they're never going to approach what you might see in a different kind of engine powered piece of equipment. So I think probably the regulation shouldn't even deal with these types of products, but they do, that's just the nature of the beast and we have to comply with all the regulations. Going forward, if we can -- we're obviously going to take a bigger bet on CARB-related portables going forward, we'll plan differently for next season. And we'll have more of those products. So the mix is probably going to be, I don't want to say it's more evenly balanced, but it's certainly going to have more portable gen mix toward in years ahead if we have the same situation develop. So I think that today it's going to be very heavily skewed toward home standby, which is -- by the way very margin positive in terms of just overall mix.

Right, that's helpful. And anything to consider on this standby side in terms of CARB-related products?

All of our home standbys are what we refer to as 50-state compliant products. So it's the same product everywhere in the U.S. So, no constraints on home standby at all.

Perfect. And then just one more on the clean energy side looking to potentially double that original plan of 100 megawatts, can you talk about some of the key components and as you mentioned the supply chain constraints, just your confidence that you have those and any price pressures.

So I think -- my confidence would be sized appropriately for my comments today, it's double the original plan we had. But if we were to satisfy all the demand that is potential there for next year, it could be higher. And I think we've appropriately sized the constraints and the constraints are everywhere, Chip, I mean they're on batteries, they're on the power electronic components going to the inverters, there is some capacity constraints on even assembling the systems themselves. We're looking at -- our factories here today we have -- Pika had third parties doing that.They're not a manufacturer. So they had third parties doing that. We're going to likely bring by the end of next year, we'll be going to bring that in-house to do more of that if we can, or at least help maybe as a second source to the existing sources, so that we can increase capacity, but it's basically -- it's a capacity constraint along basically all the components. And then in terms of cost pressures, we're having some good success early on here taking costs out of the system. We think we are on our original trajectory. So I won't tell you that that trajectory has quickened, I wouldn't -- the demand has quickened the trajectory of cost out. So we have -- it's going to happen over the course of next year. So the margins starting out are going to be on the lower side as we had projected and will grow to be kind of -- think of kind of our overall corporate margins by the time we hit the end of next year. That's kind of our target. And so today, they are less than that. And by the end of next year, we hope to be kind of in that kind of overall corporate margin range.

Great, thanks a lot.

Thanks.

Thank you. Next question comes from the line of Philip Shen of ROTH Capital. Your line is open.

Hey guys, thanks for the questions. You talked a lot about constraints on the supply side. Can you address the constraints you may be seeing if any on the installation side and how that might play out? I think labor for solar and storage installations, certainly solar is quite tight and in California, others in the industry have talked about that. So as you guys are generating these leads through your infomercials, what kind of bottleneck or lag are you seeing potentially with your contractors and how do you expect to address that over time if that is a problem?

Yes, it's a great question, Phil, and it is part of -- we've been focused on the supply chain side constraints. But there is that -- the same issue we run into with home standby frankly. So we're actually, we're pretty experienced at how to help on-board installation bandwidth. It's a problem we face anytime we get a major surge in demand for our home standby products, we have similar constraints. So the way we deal with that and the way we're dealing with this in particular around clean energy, a couple of things I'll talk in general to how we deal with it at home standby and how that applies to clean energy and then maybe something that's a little more specific to clean energy. So on -- what we would normally do as we on-board dealers. We have almost 6,200, 6,300 dealers nationwide here today, and those are mostly electrical contractors. Now we only have a 100, we started the year with 100 in California, we're up to 300, but we're adding dealers very quickly out in California. We spend a ton of time training them on installs and training them on efficiency of install. We're very focused, we want them to take a pit crew mentality on installs because we know that if they can double the number of installs that they can do, that has a material impact on insulation bandwidth without having to add a ton of additional installers. That being said, installation bandwidth is going to be in short supply for the near-term future. So there will be constraints across the board as we add dealers, but I think the unique thing about Generac and what we bring to this clean energy space is the fact that we can bring these dealers on and…

Great. Aaron, that's great color. Thank you. One quick follow-up. As it relates to -- you're talking about potentially some of your existing contractor switching over to clean energy -- in solar, certainly have to get on a roof to do the install, to what degree do you think your contractor base has that skill set -- how realistic is it for them to be comfortable working on a roof and developing that the safety and other training programs to actually be able to switch over to -- be able to do solar and storage? Or do you think those contractors would just focus on the clean energy kind of battery side of the skill set and less so on solar?

It's another good question, Phil. And so -- as we kind of pulled our existing distribution, right, so these are again these 6,200 electrical contractors, there is a percentage of them that are comfortable with the additional duties that are required to install panels and some of them do actually today already, some of them have panel installation businesses and solar components in their business. It is a smaller percentage. I'll admit that. And there are others who have said, hey, with the storage component and the other power electronics components, they are very interested in that, because that's obviously, I'll call it high spec labor right for them and you need an electrician making many of those connections, when you talk about connecting the actual inverter, connecting the circuits, connecting -- making all the interconnects to the solar system itself. They may choose to focus on that side and higher out-labor or add labor that can take care of some of what needs to happen on the rooftops. There are some guys that are getting creative with that in terms of creating partnerships with roofing companies that they believe that have already some of those skill sets and the safety orientation that's necessary to affect that kind of work up on a rooftop. I think it's going to develop and I think you're right that that could end up manifesting itself to be a new dynamic for our existing distribution that we'll have to help them solve for, and it's something we're learning too, we're going through a lot of learning cycles in this business in a very short period of time and learning about the requirements of being on the rooftop, how those panels go down, what the safety requirements are which is absolutely paramount obviously for everybody.…

Great, thanks again. I'll pass it on.

Thanks, Phil.

Thank you. There are no further question. I would now like to turn the call back over to Aaron Jagdfeld for closing remarks.

And we want to thank everybody for joining us this Halloween Morning. We look forward to discussing our fourth quarter earnings results with you at some point in mid-February of 2020. Thanks again this morning and goodbye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, you may now disconnect, have great day.