Generac Holdings Inc. (NYSE:GNRC)
J.P. Morgan Diversified Industries Conference Call
June 5, 2013 08:45 AM ET
Aaron P. Jagdfeld - President and CEO
Aaron P. Jagdfeld
Good morning everyone. We are at the Generac Presentation this morning. It's our 8:45 presentation here. Want to welcome everyone. I have got with me today Michael Harris, who is our Director of Investor Relations. I am Aaron Jagdfeld, President and Chief Executive Officer at Generac. We have got about 40 minutes, so what we are going to try and do is get through a standard presentation here in about 20 to 30 minutes, and then leave you plenty of time for some Q&A, kind of this fireside chat format that the guys at JPM have been promoting here.
So just real briefly on Generac, in case you don't know why you'd want to invest in this company. We have got a slide here for you on that. So, the investment highlights in Generac, we think there is a pretty compelling case on why you'd want to own shares of this company. Our best in class organic revenue growth, 21% per year over the last 11 years organically, and we have been adding to that now with M&A as well, and I will talk about that here in a second.
We are a market leader in many of the markets that we serve, primarily also in the residential market, where we have a 70% market share. Very dominant leadership position in a very fast growing and exciting market, that is residential backup power. Superior financial profile, fantastic EBITDA margins. We have great free cash flow, it's a business that continues to generate just a tremendous amount of cash, and beyond that, last but not least, as the bullet point states here, we think we have great opportunities for additional expansion through additional products, and geographic expansion opportunities, other markets that we believe as a company, we can be successful in.
Just a real quick synopsis on the company, started back in 1959, where it was a (inaudible) based company, about 3,000 employees. About 1.6 million square feet of manufacturing space, most of that primarily located in Wisconsin. We also have facilities now in Mexico City, two there, as well as one in Brazil, as a result of our recent acquisition of Ottomotores.
On an LTM basis, our sales approaching $1.3 billion now. That is a significant step up from where we were even a few years ago, and you can see the breakout there, 61% of those revenues being residential. 34% being in what we refer to as commercial and industrial, which are the larger installed generators, as well as the construction equipment that you would find at the Magnum Company, which is another company we acquired back in October of 2011; and we have a revenue sleeve here that is listed as other, which is 5%, which is mostly aftermarket service parts.
This is a chart that we really like to show, because it's fun if you are a CEO of a company to talk about something like this, when a chart looks like this. But we have had just tremendous growth as a company. As again, organically we have grown 21% a year from 2002-2012, which is pretty remarkable and I have been at the company, I started my 20th year here now. I have seen the company grow about 20% a year for my entire career, which is a pretty phenomenal amount of growth rate, and which I can attribute that all to my doing, but I can't. It has been a company that culturally has been ingrained with growth. It's a company that focuses on growing, focuses on new opportunities, focuses on being fast to market, focuses on being flexible, and taking advantage of those opportunities, in a way that I think other companies may be struggle with, in terms of the aggressiveness of growth.
We think a lot of the underpinnings of our growth are from the innovations that we bring to market. We are a very pure play on backup power. So with that type of focus, we get to bring a lot of the innovations that are in the power gen market -- come from us. We compete with some very big companies in power generation, like Caterpillar, like Cummins. Kohler, which is more -- maybe, more well known for its bath fixtures and plumbing fixtures. But Generac is really all about power generation, and so the amount of resources we bring to bear on the category, the amount of resources we bring to bear on the industry, our knowledge our almost 60 years of history here, have really brought to bear a lot of the innovation, and we think that that underpins much of the growth that we have.
We are also the value player in the industry. So value is a, we believe, a large component of the success that we have seen in the residential market, that we believe that people, when they buy pieces of equipment, whether they be generators, whether they be power washers, whether they be construction equipment, that value does play a role. So the combination of an innovation and price is kind of the intersection of value and quality of course fits into that as well.
So great organic growth, great rates here over the past 11 years or so, and then we are augmenting this, as I said before, with M&A. So part of the reason why the bar chart is even elevated further here over the last few years is some of the things that we have done from an M&A standpoint.
Now from a product line standpoint, just real quickly. You can see on the left hand side of the graphic here, that would be the typical residential product lineup. Everything from power washers on down to portable generators and then the flagship, permanently installed residential machines; and then on the right hand side would be graphics of what you would see on our C&I product line. The first two products would actually be construction related equipment, mobile gen sets, mobile light towers, those products were acquired in the Magnum business back in October of 2011, and that has been a very good acquisition for us, actually it's October of 2010, when we acquired that company. Very good acquisition for us.
The Ottomotores products which are pictured in the center there, are much larger gen sets. That is targeted mainly in the Mexico market, but also for other parts of Latin America, and have got an extra slide here on Ottomotores here, I will give you that breakdown in a second. Then the bottom two graphics are on the right hand side, it would be representative of what you would find in installed backup power for commercial, these would be small footprint retail applications such as gas stations, convenience stores, retail bank branches, that type of thing, and then the larger machines on the bottom for waste water treatment plants, datacenters, hospitals, buildings down here in the city, oftentimes because of code, there is a lot of code-driven requirements around having backup power for egress lighting, for elevator operation for multifloor buildings, and things of that such.
Now underpinning the Generac story from a macro standpoint is power quality. This slide kind of drives that home. Power outages, whether you believe in global warming, whether you believe -- whatever you subscribe to as your theory as to why -- the weather has continued to worsen around the country, and why outages have continued to pick up. It's the intersection really for us of the underinvestment in the grid, first and foremost.
You look at the investment gap in the grid, and the grid is just a proxy for all infrastructure frankly, in the U.S. So whether it's bridges or roads, the grid is just one slice of infrastructure, and the underinvestment in that major portion of our infrastructure has resulted in outages, outage events, and these are statistics. The bar chart here really, kind of I think is the best graphic representation you can find of it.
This is the National Electric Reliability Council, so NERC, which is funded by the Federal Government, is a watchdog agency in terms of power quality over the utility companies around the nation. They track major outages, and so major outages are defined by those outages impacting more than 50,000 people at a time for more than four hours at a time. And you can see that, in 2011 we had 132 such outages, and that's going up -- obviously that's pretty dramatic and elevated based on some of the magnitude on some of the more recent events that we have had, but that has been on a very dramatic march upward over the last -- really last decade that we are showing here, but even before that, you can go back. It's two decades, three decades worth of increases in major outages. We think this is highly correlated to that investment gap that I mentioned in the grid.
So underpinning the Generac thesis here and the investment in Generac is, if you believe the infrastructure of the country, not just the grid, but other parts of infrastructure are underinvested in, and how do you want to play that going forward, we believe that this is one area to look at, in backup power, that is a very direct way to take advantage of the underinvestment in the grid, as an investment.
So I think that's really the underpinning of both the residential side of our business, as well as the C&I part of our business. But residentially, I think the other important graphic here is this chart on the right hand side, difficult to see if you are out in the audience, but what that is, is what we are calling a North American penetration opportunity.
Residential installed backup generators today are in only 3% of U.S. households, and that addressable market, as we define it, is 50 million homes. Single family, unattached housing stock, greater than 100,000 in value. And so 3% -- its actually a little bit less than 3% of those homes have installed backup power system.
So, where do we think that could go in the future? And by the way, I think the exciting part about the math there at least for us in our shoes is that, every 1% of penetration is a $2 billion market opportunity, and we are 70% market share in that market. So obviously, the math gets you there pretty quickly, and the numbers get very large, very fast. So from an opportunistic standpoint, we see just tremendous opportunity. But we look at proxies for other installed home products, and what could this category be over time.
Well the large line, the orange line, is representative of central air conditioning, which is approaching 80% of all U.S. households; and that's a market that started back in the kind of mid to late 1940s, and so it has got a very long run of history on it, more than 60 years of history in terms of how that penetration rate is built out. Clearly, that's accelerated here, coming from like the 1970s, 1980s, but up until that point, the penetration curve, frankly looked a lot like the penetration curve that we got today, even in its infancy in residential installed backup power.
Now I don't know if home generators are going to be in 80% of homes 60 years from now. I'd love to know that, I don't think I will be around to see that unfortunately, but maybe I will, I don't know. But certainly, I think one of the proxies that we like to call out is, portable generators. These are the petrol powered or gasoline powered portables, it's actually what Generac was founded on, in 1959, as a portable generator manufacturer. So these products have been around a long time, and it's the typical way that people combat the power outage, and it has been the historical kind of way that people deal with outages. They run out to your local retailer, in the middle of an event, and you try and buy a portable generator, then you try and take your gas cans and try and find a gas station that's open to fill those up. You then find extension cords, hopefully you have enough of those in your house, to plug things in. Then you realize very quickly that you can't plug in things like your furnace, or your air conditioner. Those things are hardwired in your home's electrical system.
So there are limitations that portable generators have with them, but that has been the classic way to solve power outages. So the residential install, the permanently installed products are a relatively new category. It's really only been around about 12 to 15 years. We have been doing it really since the beginning. We have kind of invented, commercialized the category by taking a small commercial set, and we had homeowners who were saying, we'd like to have something like that on our home, and they turned into a market, and we helped them turn it into a market, by reducing the cost of the product, by expanding the distribution, and by turning it into a more of a consumer type product for -- directly aimed at the residential market.
So, when we look at portable generators, portable generators are there in the 12% of U.S. households, and we know, that if our buyers of home standby generators, 50% of the people who buy a permanently installed system, either a one-time own or owned a portable generator. So it's clearly, in our minds, a step-up product, right? So it's even merchandized, when you go into Home Depot, you go into Lowe's, the home standby generators are merchandised in the same aisle, next to portable generators as a step-up product.
So that is a phenomenon, that's only picked up in the last 10 years, and as people come back in, the replacement cycle in portable generators is about 12 to 15 years. So the residential installed category was not as large, back when you would have been out buying that portable generator 12 or 15 years ago. Today, you go out in the market to replace that product, and you've used it now a few times, right, over your ownership period, you know the limitations of the product. You see this permanently installed product as an available option, and that so oftentimes, what is the trigger point for people stepping into the category.
So, clearly, we look at the opportunity of that 12% of households and we say you know, those 12% of households, there is a conversion opportunity there. Is it 100%, may be not, may be because of the price points of the product which are higher and I will get to that in a second. The installation cost might be more difficult to absorb for some people. But at the end of the day, we think that a certain large percentage of that 12%, maybe its 50% of that 12% could be converted.
Okay, well that's a starting point. That gets to 6% penetration. And that 6% number, by the way, of all U.S. households, and our 3% is a subset. So it's actually greater than 6%. If you look at it, just on the 50 million homes that we got. So it's something greater, but every 1% being $2 billion, we think there is a real opportunity there to grow the company very quickly, and continue to grow at that -- those growth rates that we have been experiencing, we think that even, as numbers get larger, there is a lot of opportunity in the residential segment to grow even faster.
So underpinning just real quickly, not to lose sight of the C&I opportunity as well. There are some macro thesis that are playing out there, that are also very beneficial to Generac and how we position the company. Chief to that is the switch to natural gas. Backup power in the commercial and industrial market historically has been solved -- those needs have been met by a diesel powered engine driven gen sets, and that has just been the historical -- take a truck engine, a Class A truck, you put it into a large generator, that makes 500, 600 kilowatts, so you can put it on -- in series, you can put them on hospitals or retail or distribution centers, something in those commercial and industrial type applications, and that has been the way that power issues have been solved for a long-long time.
Similar to portable generators, diesel powered gen sets have their own limitations. You have to refuel. Again, the refueling component is actually a fairly large limitation. When you get a widespread outage, and this was demonstrated back in Katrina, back in 2005. One of the major issues that ran into in Katrina, was not that they didn't have backup power. They actually had quite a bit of backup power. If it wasn't flooded out, which obviously was the issue we dealt with here with Sandy and some of the other storms we have had recently here, is flooding concerns. But if you had the generator almost dry, and it was running, you ran out of fuel, and the fuel depots, and the fuel logistics became very problematic. So actually diesel gen sets on hospitals in Katrina were shutting down, not because they were failing, not because they were flooded, but because they were without fuel.
When you hook a generator up to natural gas, the pipeline gas. In major types of catastrophes, like what happened in Sandy or what happened in some of these other events, and Katrina, the natural gas infrastructure is generally undisturbed. And so, you have this situation where you have pipeline gas that's available. It's a readily available fuel, and so you take the refueling component completely out of the equation.
Natural gas gen sets are also less expensive than diesel sets today. That wasn't always the case. You go back eight or 10 years ago, and a diesel set was really on par or better than a gas set. But diesel engines have been highly regulated over the last seven or eight years. The EPA has taken things from Tier 0 to Tier 1 to Tier 2 to 3 to 4; and there is an order of magnitude cost increase to the engine in every one of those tier levels. Just going to Tier 4 from Tier 3 is a 2X in the engine cost. So that's going into trucks, that's going into other construction equipment, 2X the engine cost over Tier 3, with the new regulations.
The engine in a gen set is the largest cost component. It's not like putting it in a truck, where you got transmission, and you have got the balance of the vehicle, which is also a pretty costly thing. The generator is, primarily it's an engine with an alternator and some controls. So it's not as sophisticated a machine and therefore, the largest cost component is the diesel engine. The diesel engine has been highly regulated, costs have gone up, therefore gas sets. If you get into 200 KW and below, which is the sweet spot for gas stations, convenience stores, kind of the small retail outlets of gas set, an equivalent sized set to a diesel set, can be about 35% less in acquisition costs. Which obviously if you are a business, and you are looking at this from a return on investment perspective, your acquisition cost is a huge part of that. Because the fuel that you use to run it, it's not something that's going to run every day. So that's not necessarily the driver in your decision process. It's really your acquisition costs and your ROI on that acquisition cost.
So by being 35% less, that is a huge opportunity there. And we have seen a movement, that's what the chart on the left shows you, is we have seen a huge movement in a shift from diesel and going to gas. It's now predicted to be about 35% of the market in 2017, moving up from about a little less than 30% in 2010, and that was really less than 20% 10 years ago. So that market is shifting to gas, it's shifting pretty quickly, because obviously natural gas has become pretty stable in terms of supply, in terms of price. There is a lot of focus on gas. We think we are in the sweet spot of that, because it has been our niche category for 30 years. Why, because we don't make diesel engines. I am not Caterpillar, I am not Cummins. So gas engines for us is where the technology -- where we have been spending our time in terms of resources for R&D and making engines operate in this type of application on natural gas.
Also in our C&I business, we believe there is a secular shift going on in rental versus buying, buy versus rent. And this was -- actually this graphic is something we lifted from URI's acquisition of RSC. So number one in the rental industry bought number two last year. This was a graphic they used in their deck, and that's something that we believe in as well, as there is this massive shift that has been going on to construction companies, renting equipment as opposed to buying it. Why, because during the downturn in -- the different downturns we had, they have learned over the years that you cannot match your revenues with your expenses if you don't have any revenues. So as the projects dry up, and they dried up very severely in 2008-2009, a lot of these construction companies were stuck with the equipment not being utilized, but they still have a note from the bank on the equipment. So that created obviously a problem, and there were lot of repossessions in 2008-2009 in that type of the equipment.
Move fast forward to today and the rental agencies, rental yards, the big ones like United Rentals and RSC, Hertz, Sunbelt, these types of companies have been very successful in deploying a business model that is -- better matches the expenses of operating that equipment through a rental contract with the revenues that these contracting firms have from project to project. So it's a better match for them, they turn the equipment back over. They are constantly getting in their minds, a refreshed piece of equipment, it takes the maintenance component out of it as well. So there is some headaches and things that go away with that. The logistics of it, the equipment is oftentimes delivered right to the site from the United Rentals of the world. So that's something secularly that we believe in, and that was really one of the underpinnings of our purchase of Magnum.
Now moving ahead, I think this slide is probably one of the more important slides in the deck, is our distribution philosophy of the company, and it's a very different approach to distribution than what you would see out of a traditional industrial equipment company, or products company like an HVAC company per se, who might sell through a distributor, who then sells through dealer channel.
We sell, on the left hand side here, is represented at those boxes, are representative of how we go to market with our residential products; and it's a very open philosophy. We sell to retailers, we sell to the likes of the wholesalers, we sell to 5,000 electrical contractors on a direct basis. We sell to the online space, so we have got a bunch of online partners that are out there, Amazon.com and others that we sell those products through; and it's a very open philosophy. Why is it open; because, we have only 3% penetration. We need to build awareness for the category, and so we need to have that product introduced to people in the manner in which they shop. Some people are very comfortable shopping online, others like shopping through the big DIY boxes, other people want a turnkey solution from the dealer, okay. It depends on how you as a consumer shop, and who am I as a manufacturer to tell you, how you should buy a product. So the distribution philosophy on residential is very open.
On the right hand side of this graphic is our C&I distribution which looks a lot more like a classic two-step model. We sell to about 35 industrial distributors around the U.S., they cover about 90 locations, and they in turn sell to electrical contractors, for projects like supermarkets, convenience stores, gas stations, hospitals and those things.
We also sell on a national account basis. We are the number one provider to the wireless telecommunication space. So all of the large wireless telecommunication providers are buyers of Generac products or backup, what they refer to as outside plant or the cell towers. There is 280,000 cell towers in the U.S., about 30% of them today have some amount of backup on them. Represents a huge opportunity, especially when the FCC is looking at potentially regulating backup power on cell sites here at some point perhaps going forward.
Also sell to the large rental houses, as I mentioned before, through our magnum business, and we have got some exposure in C&I through our Magnum business. I think the biggest take away from this chart that you should come away with is that residential products distribution philosophy being very open, and being very centered around those 5,000 dealers that are mostly electrical contractors. A network that we built painstakingly over the last 10 years, we spent millions of dollars finding these dealers, introducing them to the category, training them on how to sell, training them on how to install, training them on how to service the customer and service the product, and support the product on a going forward basis.
We think it represents a very large competitive barrier to entry, because somebody else would have to come in and create that primary channel, it's a wraparound channel for all the other ways that we go to market in residential, by selling to Home Depot or through Home Depot. So they still to have them installed. If I sell through an online e-tailer, it still has to be installed. The dealer has to support that product and install that product down the line. So it's a very important cornerstone of our distribution philosophy.
Now strategically, I've talked a lot about what we have done here historically going forward, and strategically we have a strapline that we call power in your head. I am not a marketing guy, I'm a finance guy, so I came up with a name, so if you don't like it, I apologize. But power in your head, I thought made a lot of sense for a generator company, and it really is very simple; because I have to keep things pretty simple, because we know, a lot of things (inaudible) out the company. But the strategy, and that's the same strategy we talk to employees about, the same strategy we talk to customers, we talk to suppliers, we talk to investors about, and its powering ahead.
There is four core tenets of powering ahead, four strategic objectives. The first is to grow that residential market. It's a market growth challenge, that's not about going about and taking share, because we are 70% share, it's about growing that market. How do we get that next 1% of penetration that equals $2 billion of market opportunity? We think it's around affordability, we think it's around availability and we think it's around awareness, and I have got a few details now here in a second I will go into.
On the C&I side, very different challenge. We are only 15% share. We are the number four player in the U.S. market, so we are a much more humble share position there on C&I and that frankly is a -- that's a different challenge. That's about growing our share in the C&I space. And that is going to happen a number of ways. One is, to expand our product offering. We have a very short product offering in C&I. We realized that to compete on level footing with some of the larger players in that industry, we need to have a fuller product line, a broader product line, and that's something we are working on very diligently today, from an R&D standpoint.
We also need to improve our distribution, which I think every company could probably stand up here and say that. If they don't, they are not telling you the truth, because you could always improve on your distribution model. But we also can increase awareness for the option standby market. This is the commercial market I talked about. Those kind of gas driven commercial sets that today are 35% less than cost in diesel sets, being an ROI decision for businesses, most businesses don't realize, that the payback on the commercial set is very quick, sometimes as soon as four hours.
If you are in a restaurant and power goes out on a Friday night, that's right in your sweet spot. You are going to lose a lot of money that week, if you can't operate on a Friday night for four or five hours. You could have paid for that generator set, in outage, maybe two. I mean, it's that dramatic for some businesses, it's not just the lost revenue that you have in a restaurant, it's a spoilage of the inventory. You have to throw out everything in the kitchen, after an extended outage, it's gone. So you have the loss of your inventory, you have a loss of the revenue, you also have the lost opportunity, if you are the only restaurant in the street, and you guys saw this first hand out here.
If you are the only restaurant in the street with the lights on, how long for that line to get in, during Sandy? I mean, it was tough to find a seat at a restaurant for the ones that were operating, during those types of major events. So there is a lost opportunity cost as well for businesses, you have to put it in their map, on the ROI. So C&I, we think there is a lot of exciting things that can happen there going forward.
The last two pieces of the strategy, diversification. We love being a power-generation only company. We also understand that sometimes things are out of our control in terms of demand cycles, in particular, on the residential side of our business. So broadening the business, getting into things like light towers with the Magnum acquisition and to construction equipment. Things that we think are engine driven, and that we can do well. Power washers, a market we recently reentered here, is another example of the diversification of this company into other areas, that we think we have, we could extend our brand, we can extend our distribution advantage, we can extend our cost advantages and our technical prowess into some of these other products, and into some of these other markets.
Then last but not least, expanding into other geographies. 98% of our sales are in U.S. and Canada. Now we took a major step forward with the purchase of Ottomotores, which is a Mexican gen set company that I got a slide on here in a second. We closed that in December of last year, in December of 2012, and that was really kind of a watershed event for us in terms of getting outside of North America.
Now how are we going to do this on the residential side, in terms of growing that market, because a lot of people want to know, okay? How do you get that next 1%? What is the magic to find the next 1%? And the key word is find, because we can't wait for it to come to us, that's not how you grow 21% a year organically, it's waiting for the market to come to you. You have to go out and actively develop a market. And in this case, there is a lot of research and a lot of science and a lot of math actually that goes into that. We know where every single home standby generator is, today. When it gets installed, it goes through a process that we refer to as activation. It's a process that we put in place three years ago. It's not unlike what you used to have to do, when you installed a piece of software from Microsoft or somebody else, you put this cryptic 16 digit code in, you open the jewel case on that CD, and I am [dating] myself now, because everybody could just download from the app store today, but we used to install software at a PC, and my kids don't even know what a PC is anymore. But you have to install that and put this cryptic code in there one time, and you registered that software.
So we got the idea from the software companies, we said hey, if they can do it, and they get a lot of demographic information, a great wealth of knowledge knowing who you are, through that process. We said, in a category that's very underpenetrated, wouldn't it be great, if we knew where the generator was. Registration cards, we had done for years, the bounce rate on those about 20%, right? Because we are all great Americans, we send in for our refrigerators and TVs and nobody fills up that card. You don't even go online to worry about that, you buy a product, you install it, you use it. We only knew where 20% of the products were.
If you think of these things as pushpins on a map, and if I know where every pushpin is, every gen set, and you draw a concentric circle around that pushpin, it's likely that the buyers, the potential market around that pushpin, one mile, two mile, five mile, ten mile radius, is pretty vast. Demographically, its going very similar from the household incomes, home values. They are also going to have the same needs, right? Because why did that pushpin light up on an activation, because somebody had an outage oust likely, or they have a fear of an outage, or what can happen when an outage happens. So there is a rich stream of data around that. So we combine that activation data with third party household data that we buy, and we paint a picture of who is buying the sets today, and then who are the potential prospects for those sets in the future.
So we have actually turned it into, you guys have heard this big data thing, that's what we have been working on for a couple of years now, in terms of how do we a bring lot of science to this, and we create basically leadless that we can get the dealers, that we can get to our telemarketing people, that we can get to others knock on doors, to put door hangers. Do mailbox stuffers and things like that to get people introduced to the category.
We give existing owners yard signs, to say I am the proud owner of a Generac generators. But it's great, the best advertising again is when they are the only lights on in an outage, but it's great that that's yard sign is up all the time. People say hey, what is that all about. It's a very viral marketing type of approach, when a product category is only 3% of households, and so we are working through that, and that's a big part of how we are going to grow that market. This really is the process, and really turning that into a sales process is more standardized and modernized.
We have an iPad application we have developed to help our dealers, who are mostly electricians, actually sell the product. We actually have a standardized sales pitch, where they come to your home, and they look clean, they look neat, they look professional, they are using an iPad to pitch the product. That's all new stuff, we just rolled it out in the fourth quarter, we call it PowerPlay. Here we are, this manufacturer and the rest out of the U.S., and we are developing iPad applications. It's not something that I thought 20 years ago we would be involved with, but it's something that I think is an important part of being an in-home selling products company.
Now in the C&I side, a little bit different as I mentioned before, and I kind of went through these, it's about expanding that product offering, it's about getting that awareness level up, in terms of the optional standby market, and then its improving our specification rate as well in the eyes of the engineering community. If we are named in a specification for a bid for a new hospital or a datacenter, our close rate goes up immeasurably, if we are named in a spec. If you are not named in a specification, that's Cat, Cummins and other, it's very difficult for us to even get an opportunity for our distribution, and you get an opportunity to bid that job, if you are not named in the spec. The general contractor and the subcontractors don't know who to call, if you are the other, that's if you are not listed in the spec, that's the problem.
So those are the things that we are working on, and the expansion of the product offering, I would say is probably one of the larger components of that.
Now just shifting gears, Ottomotores, this was a Mexican gen set manufacturer that we purchased. Great company, gives us access to markets outside the U.S., it's really an area that we are very excited about in terms of actually getting outside the U.S., let me get to the slide real quick for you, so you can see that, there it is. The acquisition of Ottomotores was closed in December of 2012. Now we bought it at a very righteous price, it was owned by a U.K. holding company that needs quite a bit of investment. We are very excited about it from the standpoint of having a footprint. Now outside the U.S., we are manufacturing for ourselves, as well as the Ottomotores products, there is the potential for that down the line. But having distribution outside the U.S., having the opportunity to get focused on the Latin American market in a much bigger way, we believe Ottomotores puts us in a completely different classification there.
Last but not least, I think kind of important here is the financial summary, which is, again, I mentioned one of the strong -- the strong financial profile of this company. You can see it demonstrated here in this fore block of financial stats. Sales growth, we have doubled the company in two year's time. We held the margins, the gross margins, got them in that 37% to 38% range here over the last three years. EBITDA has grown dramatically alongside. Sales growth, now at $323 million on an LTM basis through Q1, and our EBITDA margins have been -- we have been leveraging our op expenses positively, seeing some growth in EBITDA margins, but probably not as much growth as you might see out of a couple of years growing as quickly, because we are making a tremendous amount of investment back in the company.
This is a very much a step function company. And again, I have been around in a long time, and I have seen that, when you have an up step, you have to make a lot of investment. You got to take the windfalls, the excesses of that step-up and pour them back into the company in new products, in distribution, in employee, management bandwidth for a company that's double the size that was two years ago. You have got to make those investments, and you got to make them pretty hard and heavy, and that's what we have been doing, over the last several years.
From a debt standpoint and free cash flow, you can see those graphics there. Free cash flow, unlevered free cash flow is fantastic, at $254 million. So there is high EBITDA margins. We have a very low CapEx business model, and we have a great tax shield, that is a fantastic thing for this company in terms of how it attributes to our free cash flow, and we can talk more. There is actually in the appendix of the deck, there is a schedule out there. But up to 2021, we have a great tax shield that is a big part of this cash flow story.
Then on a debt basis, and you may have heard, we just closed on our latest round of financing here. We refinanced our existing debt, which is the $758 million on a net basis that's shown at the end of Q1, and actually we are going to be paying out a special dividend, going forward here, $5 to all shareholders. We made that announcement, that record date, Mike, was the 12th of June. We go ex-dividend on the 10th, and the payment date is estimated to be June 21st, I think is what we listed in our release. So as a consequence to that, we will have $1.2 billion in debt. Our leverage ratio will be about 3.7 times. Once that dividend is paid out, obviously, we are showing the net impacts here, so we saw the cash on the balance sheet, so we paid that out. But that is where we are at.
And then, just a peer group companies, the business outlook which you guys can read on and then financial policy, which hasn't changed and the other highlights. And I think with that, we have a few minutes for questions.
In the last six months or so, I researched getting a residential generator installed, and I chose yours and it was a very happy experience for me. The question that I have was that, the only purchase option was full price purchase, and to me, given the high price of the one that I bought, for example, the $10,000 model, it seemed an inhibitor to expanding the market. So have you considered providing any financing options for people?
Aaron P. Jagdfeld
It's a great question. So I don't know if that's on. We just want to make sure we get everything on the record, but yeah, the installation costs, let's just talk about that for a second. We have done a lot as a manufacturer to work the costs down of the actual machine. We are diligently and tirelessly, to get the cost down on the machine, so that we can make it a more affordable product. The installation costs are -- they vary widely. Houses vary widely, from a 100-year old farmhouse in Connecticut, to something that's new construction out in the suburbs, two-three years old, it's a very different installation cost. You could have bought that product at Home Depot or online. You could have project managed it yourself, and that could have saved you some money, but that is, who has got time for that, frankly, nobody does.
So the turnkey solution is becoming the more popular. Our largest distribution channel is the dealer channel. But I think there is a lot of opportunity left in installation costs.
Financing, actually yes provided, and this is -- it probably wasn't pitched to you as an option, which is part of the challenge of having independent distribution. It is getting them to use all the tools that we give them, to be successful in the market. When the market and the demand is high in the market, they tend to not use all the tools at their disposal, because they don't have to. They tend not to be as competitive on total turnkey costs, because they don't have to. They don't have to be as competitive on installation costs, because we haven't addressed that with them directly.
Now let me talk about -- a great part of this iPad application that I talked about, and you probably didn't have -- didn't have the PowerPlay iPad pitch either, because that's something that was brand new here. We just launched in late Q4. The PowerPlay application is -- really it's a standardized selling process, a selling tool. We call it the kitchen table sell, because that's where these products are sold. They are sold at the kitchen table. Usually, the family is sitting there, the husband and wife, and the decision is made there. The options are presented there. The dialog around, what do you want to back up, how big of a generator do you need. Is it the whole home, certain circuits, that's all discussed there.
A proposal, we want it to be generated right there at the kitchen table. The iPad application PowerPlay allows the dealer to walk all the way through that process, to tailor a system or a set of options, and I will get to that here in a second, for the homeowner, different turnkey options, breaking out all the elements of the cost, including the machine and the installation cost, and that's something that up until this point, we didn't have a lot of visibility too. We sold the machine through the distribution.
The next time that dealer hits a Wi-Fi spot, that proposal that he generated, comes right back to us. So we are now getting, as of the end of Q4, a wealth of knowledge around the installation costs, and that includes permitting, it includes gas line installation, if there is a meter upgrade that had to be done with Con Ed or whoever, or CP&L, those types of things. We are not getting all that information. That's information that's really important, because over time, the next breakthrough with this category is going to be reducing the installation costs. There is a lot of things that we can learn from that, but we need the data first. So our mission here this year is to collect that, and then to turn that data into action. Maybe if we start bidding, we are driving leads back to us today, and we are now parceling those leads out to dealers through this iPad application. Maybe on a go forward basis, those leads are put out there to dealers on and hey, why don't you go ahead and bid on it.
Sears actually perfected this in the water heater business a number of years ago. That was this big room, and it's one of the things that Sears actually does quite well in installed home products. That's something that -- I think there is a tremendous amount of opportunity to still do that, and using the iPad application, you would have seen the financing options. There is the standardization of the sales process, I think is a big part of driving, A, better close rate, first and foremost. But I think more value for the end user over the long run. Yes?
Just two questions, the first is, can you help us understand in may be a little bit more detailed level, in the guidance you have given, how you have tried to account obviously for the extreme events of last year. Just really clean that out of the sales base, so the numbers you put out there are achievable? I imagine if these are on the portable side, maybe a little harder to do on the standby side, so that's kind of what I am getting at? The second is if there are any rules of thumb you can give us to help us to think about how you might benefit from an upturn in residential and non-residential construction, just help try and do that math?
Aaron P. Jagdfeld
So let me answer the first question. In terms of the cleaning out, as you say, out of the sales number, the impacts. Portable is much easier. The initial guidance was a 5% headwind on prior year sales for portables, related to portables, as it relates to not having, in event of that, of any magnitude in 2013. Our guidance by the way has provided X events, that's how we provide guidance, because we are doing our job and any events that happen should be upside, that's basically how we approach this. But that would be about a $55 million number. We actually had a very good quarter in Q1 on portables. The demand still remained above levels that we had seen post events, normally, the power comes back on, the demand dries up very-very quickly. The inventory is all gone. Replenishment is really where we get the demand. The replenishment for then was still selling through in Q1. We compressed that down to about a 3% headwind and we updated guidance again in Q1.
Cleaning up the residential standby, we said over time, since the 12 months after a major event, is what the tails look like for a residential standby. So if this is your baseline level, and its one level, its X plus some number much greater for six to 12 months, and then it relaxes into a new pattern, that's a new baseline level that's higher, after that 12 month period. Just because we have added distribution, we have increased awareness, there is -- it's very topical, this viral marketing, one neighbor gets it and six other homes in the neighborhood see it for the first time, ask questions about it, and get introduced to it.
That is a very important part of this baseline growth. So in terms of how we guided to that, it's very difficult for us to pull that out and say, with any degree of certainty, what that really is, okay. Just fast forwarding here, because we are running out of time to the C&I question, and the non-residential construction, residential construction question. Obviously, no longer headwinds, we think, on residential. Commercial construction still a headwind. I mean, commercial is still suffering. I think the bigger play for us is infrastructure. Roads and bridges with our magnum business, that was really all about -- that's an infrastructure play, as well as that rent-buy play that I talked about before. On the residential construction side, about 15% of our sales of residential installs and standbys, go into new construction. So you do the math, if you go from about 400,000 starts to something greater, not all of those starts are going to be at the same level, some of it's a lot of track housing, and stuff that's going to get a generator per se, but it's going to have an uplift effect. And so that's certainly something that's positive and on the commercial construction side, that is -- we are still all waiting for that to happen. That's something that should follow-on with the residential build out, build more homes. You are going to need more target stores and gas stations and Walgreens. So that's going to come.
All right. I think we are out of time. So I apologize for the gravity of the questions. So thank you very much.
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