Generac Holdings (GNRC) Aaron P. Jagdfeld on Q2 2016 Results - Earnings Call Transcript

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Generac Holdings, Inc. (NYSE:GNRC)

Q2 2016 Earnings Call

August 02, 2016 9:00 am ET

Executives

York A. Ragen - Chief Financial Officer

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Analysts

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker)

Brian P. Drab - William Blair & Co. LLC

Ross P. Gilardi - Bank of America Merrill Lynch

Jerry Revich - Goldman Sachs & Co.

Charles Brady - SunTrust Robinson Humphrey, Inc.

John Quealy - Canaccord Genuity, Inc.

Operator

Good morning, ladies and gentlemen, and welcome to Generac Holdings, Inc., Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host for today's conference, Mr. York Ragen, Chief Financial Officer. Sir, you may begin.

York A. Ragen - Chief Financial Officer

Thank you. Good morning, and welcome to our second quarter 2016 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, our President and Chief Executive Officer.

We will begin 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 our 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.

As announced in our earnings press release, this morning, we have changed our segment reporting structure, as a result of the recent Pramac acquisition in March of this year, which doubled our International sales mix and accelerated our strategic plan to expand our business internationally. Going forward, we'll present results under two new reporting segments, Domestic, which represents our businesses based in the U.S. and Canada, and International, which represents the Ottomotores, Tower Light and Pramac acquisitions.

With that, I'll now turn the call over to Aaron.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Thanks, York. Good morning, everyone, and thank you for joining us today. We are pleased with our overall financial results for the second quarter as residential product sales, highlighted by our organic growth in home standby generators were up solidly over the prior year and were above our expectations due to the effectiveness of our pre-season promotional programs ahead of the important summer storm season.

This performance helped to offset the continued weakness in demand for mobile products in the U.S. and Canada as a result of further reductions in oil and gas related capital spending along with lower than expected international shipments of mobile products, particularly in the United Kingdom.

Overall growth in adjusted EBITDA margins were also in line with our expectations, helping to generate a strong level of operating and free cash flow during the quarter. In addition, we also resumed activity on our share repurchase program.

On a year-over-year basis, net sales in the second quarter increased 27% to $367 million as compared to $288 million in the prior year, which includes the benefit of the Country Home Products acquisition, which closed in August of 2015, as well as the full three-month contribution from the Pramac acquisition that closed on March 1.

Shipments of home standby generators during the current year quarter improved over the prior year as field inventory levels entering the current year second quarter were lower as compared to last year. This factor, along with the improved distribution sentiment led to the improved effectiveness of our normal pre-season sales, marketing and promotional programs ahead of the summer storm season.

Regarding power outage severity, the second quarter of 2016 experienced lower outages than the second quarter last year, and are still well below the long-term average, with the baseline level of outages over the past year and a half remaining particularly low, contributing to an ongoing soft market for backup power.

While penetration rates for home standby generators continue to increase, the growth rate for the category has been slowing due to an extended period of low power outages. With 2016 representing the fourth consecutive year, since the last major event along with a very low baseline level of outages experienced during 2015 as well as the first half of 2016. The Northeast has been the primary driver of this weakness, as demand in this important region continues to soften after experiencing peak levels during 2013, following the major power outage events that took place during 2011 and 2012.

An encouraging sign of the categories continued growth potential is evident when looking at the regions outside of the Northeast. Activation rates outside the Northeast, during the first half of 2016, fared better showing solid growth in the aggregate over the prior year. While the power outage environment is obviously beyond our control, when market conditions inevitably improve, we believe we are very well positioned to fully leverage the innovative sales and marketing programs for home standby generators, which have only been implemented over the last several years.

In addition, we believe we have enhanced our competitive position for our residential backup power products, during the downturn, as our market share and retail placement are currently at all-time highs and the number of active residential dealers is near the peak levels experienced at the end of 2013. We remain focused on a number of strategic initiatives to increase the awareness, availability, and affordability for home standby generators, including specific projects and activities targeted towards generating more sales leads, improving close rates and reducing the total overall cost of these products.

In particular, we have an important new product launch coming in the fourth quarter that is specifically aimed at reducing the installation cost of a home standby generator. This launch represents the comprehensive redesign of our flagship Guardian product line, and we estimate that the changes to the product will reduce the total time it takes to install a unit by up to 25%. As we continue to focus on innovative ways to tackle the challenge of making home standby generators more affordable, we believe that additional opportunities exist in the future to further improve the speed of installation and thereby reduce the total cost of ownership.

One area of our business that remains particularly challenging is our domestic mobile products offering, primarily serving the rental markets. While average energy prices have improved in recent months from the trough levels seen in mid February, they continue to remain below levels required for a meaningful recovery in oil and gas related capital equipment spending.

Accordingly, this has had a significant impact on mobile product shipments to specialty and general rental customers during the second quarter relative to the prior year, as these customers wait for fleet utilization, rental rates and used equipment values to recover.

As a result of the significant downturn in capital spending for these products, we announced a number of restructuring actions on our last earnings call, that we made good progress on in the second quarter, including the consolidation of the Bismarck, North Dakota, facility into our Berlin, Wisconsin facility.

In addition, we continue to pursue other facility footprint reductions and numerous operating expense adjustments to better align our current cost structure with current customer demand for mobile products.

A few other comments on the remainder of our Domestic C&I products. Shipments to our telecom national account customers increased during the second quarter compared to the prior year. However, the overall soft capital spending environment that persisted in 2015 has continued thus far in 2016. As we enter the second half of the year, we're not seeing the increase in telecom related backup generator projects that we had originally expected due to the reprioritization of capital by our national account customers.

We continue to believe that telecom is an important vertical longer term for backup generators, as this critical element of the nation's infrastructure remains particularly vulnerable to the effects of an aging and underinvested power grid.

Shipments to our North American industrial distributors increased during the quarter, as we continued to see results from our multiyear effort to expand our industrial generator product line and improve our distribution through several key initiatives. However, in the second quarter, we began to see lower quotation levels, which we believe correspond with softening nonresidential construction bid spec market for generators as well as a weakening in overall business capital spending, which impacts the market for optional standby generators.

Finishing up our comments on the Domestic segment, the second quarter was our first experience with the seasonally strong peak demand quarter for the Country Home Products business. Remember that, CHP is a leading manufacturer of professional-grade engine-powered equipment sold primarily under the DR brand and used in a wide variety of property maintenance tasks. Results for the quarter were strong, and we are encouraged by the overall financial performance of CHP including solid growth in sales and earnings, and improved adjusted EBITDA margins, compared to the prior year on a pro forma basis.

The main drivers of the improvement are CHP's efforts to redesign certain products, allowing the company to offer new value-oriented price points on several flagship models. Thereby opening up additional channels for DR branded products for consumers who are more price sensitive. In addition, the company has been able to utilize its existing marketing capabilities for the new products, to better leverage its fixed operating expense infrastructure.

We continue to make encouraging progress with the integration of CHP, as we're pursuing some exciting cross-selling opportunities for our combined product lines, along with leveraging CHP's direct-to-consumer expertise in helping us further refine our targeted marketing skills as we work to broaden the awareness and appeal of home standby generators.

This acquisition has also provided additional scale to our existing offering of power equipment products, allowing us to target certain cost synergies, as we leverage our global sourcing and manufacturing capabilities.

Now, let me provide a few comments regarding the trends for our new International segment. Included in these results is the former Tower Light business, which we acquired in August of 2013. Demand for mobile equipment in the markets served by Tower Light, particularly in the United Kingdom, which represents an important market for this business, softened significantly in the second quarter. The pullback in capital spending by several large rental customers in the UK can be attributed to Brexit-related uncertainty that has developed in recent months. As we begin the important fall season for mobile lighting equipment, we remain cautious regarding our views on rental fleet spending in the second half of the year, particularly in UK markets.

Also included in the International segment are the results from the Latin American region, which experienced a year-over-year decline in sales during the second quarter. This region remains challenging as a result of volatile local currencies, lower energy prices and reduced infrastructure spending across a number of Latin American countries.

Although demand has been soft over the last several years in this area of the world, the rate of decline has slowed, and a bottom for end market demand seems evident. While we remain optimistic about the longer term prospects for our business in Latin America, macroeconomic factors in the near-term will continue to make this a challenging region for backup power providers.

Rounding out the International segment for the second quarter are our full three months of results from the Pramac acquisition, which closed on March 1. Pramac, headquartered in Siena, Italy, is a leading global manufacturer of stationary, mobile and portable generators sold in over 150 countries through a broad distribution network.

Results for the second quarter were strong, with solid growth in sales and earnings and improved adjusted EBITDA margins compared to the prior year on a pro forma basis. The improved sales volumes led to higher absorption of fixed manufacturing overhead costs and improved leverage of operating expenses, and were the primary driver of the EBITDA margin improvements.

It's relevant to note that a majority of Pramac sales are in the European region. However, the company has only minimal direct exposure to the United Kingdom. The integration of the Pramac business continues to be an important focus for us for 2016, and we have made encouraging progress in evaluating and pursuing a variety of revenue and cost synergies.

Pramac provides significant diversification benefits to Generac, as the acquisition greatly expands our geographic footprint and revenue base, essentially doubling our International sales mix outside of the U.S. and Canada, and elevating us to a major player in the global power generation market.

I'll now turn the call back over to York to discuss second quarter results in more detail. York?

York A. Ragen - Chief Financial Officer

Thanks, Aaron. Net sales for the second quarter of 2016 were $367.4 million as compared to $288.4 million in the second quarter of 2015, including $88.1 million of contribution from the recent acquisitions of Country Home Products and Pramac.

Looking at consolidated net sales by product class. Residential product sales during the second quarter of 2016, which are predominantly sold through the Domestic segment, increased 36.2% to $181.7 million as compared to $133.5 million in the prior year quarter. The increase was primarily due to the contribution from the recent Country Home Products acquisition, along with an increase in shipments of home standby generators, and to a lesser extent portable generators.

Given the second quarter represents CHP's peak demand season, this acquisition was a significant contributor to the year-over-year sales growth for residential products. The organic increase in home standby generators over the prior year, as Aaron mentioned, was impacted by improved pre-season buying activity in the current year against a relatively softer second quarter of 2015 comparison.

As discussed, home standby sales in the prior year were negatively impacted by excess field inventory levels that existed at that time, which reduced the impact of our normal pre-season sales promotions ahead of the 2015 summer storm season. In contrast, during the current year quarter, there was improved sentiment from our distribution partners to invest in additional inventory levels, as a result of a more favorable field inventory situation entering the second quarter of 2016.

Looking at our Commercial & Industrial products. Net sales for the second quarter of 2016 increased 16.5% to $156.7 million as compared to $134.6 million for the comparable period in 2015. The increase was due to a full three months of contribution from the recent Pramac acquisition, which closed on March 1, and to a lesser extent, increased domestic shipments of stationary generators through industrial distributors and telecom national account customers. These increases were partially offset by a significant reduction in shipments of mobile products, given continued softness in domestic oil and gas and general rental markets as well as Brexit-related uncertainty in the United Kingdom.

Net sales for the other products category were $28.9 million in the second quarter of 2016 as compared to $20.3 million in the prior year. The increase was primarily driven by the addition of aftermarket parts sales from the recent Country Home Products and Pramac acquisitions, and to a lesser extent, the increase was also due to additional service parts sales resulting from our growing base of stationary and mobile products in the market.

Gross profit margin for the second quarter of 2016 was 33.8% compared to 33.3% in the prior year quarter. The current year includes the impact of $3.4 million of additional cost of goods sold relating to the purchase accounting step-up in value of inventories relating to the Pramac acquisition. Excluding the impact of this adjustment, gross profit margin was 34.7%, an improvement of 140 basis points over the prior year. The increase in gross margins was driven by a variety of factors including the favorable impact of lower commodity costs, and overseas sourcing benefits from a stronger U.S. dollar in recent quarters, a favorable overall organic product mix, primarily due to a higher sales mix of residential products in the current year quarter as compared to the prior year; and the favorable impact of gross margin from the acquisition of Country Home Products. All these improvements were partially offset by the addition of Pramac sales mix.

Operating expenses for the second quarter of 2016 increased $23.6 million as compared to the second quarter of 2015. This increase was primarily driven by the additions of recurring operating expenses associated with the Country Home Products and Pramac acquisitions. As previously mentioned, the second quarter is the seasonally strong peak demand quarter for CHP's products and this acquisition carries a higher level of operating expenses, due to its direct-to-consumer business model. Also, the second quarter results include, for the first time, a full three months of contributions from the Pramac acquisition, which also carries a higher operating expense infrastructure to support its global presence, selling into over 150 countries.

In addition, a $2.2 million increase in amortization of intangibles also contributed to the year-over-year increase in operating expenses. Adjusted EBITDA attributable to the company, as defined in our earnings release, was $62.3 million in the second quarter of 2016 as compared to $52.4 million in the same period last year. Adjusted EBITDA margin before deducting for non-controlling interest was 17.4% in the second quarter of 2016 as compared to 18.2% in the prior year.

The decline in adjusted EBITDA margin compared to prior year was primarily attributable to the increase in operating expenses driven by the acquisition mix, partially offset by the improvement in gross margins as the result of the factors just discussed.

I will now briefly discuss financial results for our two new reporting segments. Domestic segment sales increased 11.1% to $286.7 million as compared to $258.1 million in the prior year quarter. The increase was primarily due to the contribution from the Country Home Products acquisition and to a lesser extent, an increase in shipments of home standby generators, partially offset by a significant reduction in shipments of mobile products into oil and gas and general rental markets.

Adjusted EBITDA for the segment increased to $57.4 million, or 20% of net sales as compared to $48.5 million in the prior year, or 18.8% of net sales. The increase in adjusted EBITDA margin as compared to the prior year was primarily due to a favorable product mix as well as the favorable impact of lower commodity costs and overseas sourcing benefits from a stronger U.S. dollar in recent quarters, partially offset by modestly higher organic operating expenses.

International segment sales, which primarily consist of C&I products, increased to $80.7 million as compared to $30.2 million in the prior year quarter. The increase was due to the contribution from the Pramac acquisition, partially offset by declines in organic shipments into the UK, given Brexit uncertainty, and into Latin American markets given continued economic softness in that region.

Adjusted EBITDA for the International segment, before deducting for non-controlling interest, increased to $6.6 million or 8.2% of net sales, as compared to $4 million or 13.1% of net sales in the prior year. The decline in adjusted EBITDA margin as compared to the prior year was primarily due to unfavorable product and customer mix, along with lower absorption of fixed manufacturing overhead costs and reduced leverage of operating expenses on the lower organic sales volumes.

Now switching back to discussing more of our financial performance in the second quarter of 2016 on a consolidated basis. GAAP net income attributable to the company for the second quarter of 2016 was $20.9 million as compared to $14.8 million for the second quarter of 2015. The current year net income includes the $3.4 million pre-tax purchase accounting inventory step-up adjustment related to Pramac, as previously discussed.

In addition, the prior year included a $3.4 million pre-tax loss on extinguishment of debt that impacted prior year GAAP net income. GAAP income taxes during the second quarter of 2016 were $11.9 million, or a 36.3% tax rate, as compared to $8.6 million, or a 36.8% tax rate for the prior year.

Adjusted net income attributable to the company, as defined in our earnings release, was $42.7 million in the current year quarter, versus $35.3 million in the prior year. The increase over the prior year is primarily the result of the previously discussed overall improvement in operating earnings as adjusted for the $1.5 million of minority non-controlling interest related to the Pramac acquisition.

Diluted net income per share attributable to the company on a GAAP basis was $0.31 in the second quarter of 2016 compared to $0.21 in the prior year. Adjusted diluted net income per share attributable to the company, as reconciled in our earnings release, was $0.64 for the current year quarter, compared to $0.50 in the prior year.

With regards to cash income taxes, the second quarter of 2016 includes the impact of a cash income tax expense of $1.5 million, as compared to $0.9 million in the prior year quarter. This year-over-year increase in cash income taxes for the quarter was primarily the result of higher pre-tax earnings in the current year quarter, as the cash tax rate of 5% was similar to the 6% rate in the prior year.

As a reminder, our favorable tax yield through annual intangible amortization or tax return, results in our expected cash income tax rate, being significantly lower than our currently projected GAAP income tax rate of approximately 36% for 2016. As we drive profitability over time, cash income taxes can be estimated by applying a projected longer term GAAP income tax rate of 36% on pre-tax profits going forward, and then deducting the approximately $50 million of annual cash tax savings from the tax yield, each year through 2021.

Cash flow from operations was $59.1 million as compared to $16.3 million in the prior year quarter. Free cash flow as defined in the accompanying reconciliation schedules was $52.2 million as compared to $8.6 million in the second quarter of 2015. The increases in cash flow were primarily driven by a large reduction in working capital during the current year quarter, as compared to a large increase in working capital in the prior year, along with an overall improvement in operating earnings.

As of June 30, 2016, we had a total of $1.08 billion of outstanding debt, net of unamortized original issue discount and deferred financing costs, and $75.6 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $1.01 billion.

Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the second quarter 2016 was 3.7 times on an as-reported basis. Additionally, at the end of the quarter, there was approximately $142 million available on our ABL revolving credit facility.

The company repurchased 935,000 shares of its common stock during the second quarter of 2016, under its existing share repurchase program announced in August of 2015. Remember that this program provides the authorization to repurchase up to $200 million of common stock over a 24-month period, and to-date, a total of 4.2 million shares of common stock have been repurchased for an approximately $135 million.

With that, I'd now like to turn the call back over to Aaron to provide comments on our outlook for 2016.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Thanks, York. As a result of current end market conditions, we are revising our prior guidance this morning for full year 2016 revenue growth and adjusted EBITDA margins. Entering the second half of the year, we've seen some additional weakening developed in several end markets, which is leading to a reduction in our full year outlook. This includes an ongoing very low power outage environment, continued weakness in oil and gas markets, lower capital spending by telecom national account customers, a softening nonresidential construction market for industrial generators and Brexit related economic concerns within Europe.

Net sales for full year 2016, are now expected to increase between 6% to 8%, with total organic sales on a constant currency basis, now anticipated to decline between 10% and 13%. This revised top-line guidance continues to assume no material changes in the current macroeconomic environment, and also assumes the power outage severity during the second half is similar to the levels experienced during the first half of 2016, which remain at very low levels relative to the recent baseline average over the last several years. As a reminder, should the power outage environment normalize, or if there is a major event in 2016, it's likely we could exceed these expectations.

Looking at our guidance by product class, on a consolidated basis, for residential products, we now expect net sales to increase in the mid-to-high single-digit range during 2016, which now assumes an organic decline in the low-to-mid single-digit range. The decline in organic net sales for residential products is due to a more conservative view of end market demand for standby generators, particularly regarding the outsized impact from greater declines than expected in activation rates within the Northeast region, as previously discussed.

With regards to our Commercial & Industrial products, we now expect net sales to increase in the low-to-mid single-digit range. Organic net sales for C&I are now expected to decline in the low 20% range, primarily due to the reasons previously discussed.

Regarding gross margins, excluding the $6.1 million of non-recurring expenses recorded during the first half, consisting of the $2.7 million first quarter restructuring charge and $3.4 million purchase accounting adjustment in the second quarter, gross margins are now expected to improve between 100 basis points to 125 basis points as compared to the prior year.

Operating expenses as a percentage of net sales excluding amortization of intangibles and the $4.4 million non-recurring restructuring charge recorded in the first quarter are now expected to increase between 225 basis points and 250 basis points as compared to 2015.

Adjusted EBITDA margins before deducting for non-controlling interest are now expected to be approximately 19.5% for the full year of 2016. Similar to the pattern experienced in the prior year, second half 2016 adjusted EBITDA margins are expected to be notably higher than the first half. The improvement in second half margins is still expected to be as a result of increasing benefit from product cost reductions, a more favorable product mix, and improving SG&A leverage on higher sales volumes through the back half of the year.

Specifically for the third quarter, we anticipate net sales to be approximately flat as compared to the prior year on an as reported basis. Adjusted EBITDA margins for the third quarter are expected to improve approximately 250 basis points, compared to the second quarter of 2016 and then further improve sequentially during the fourth quarter.

As an important reminder, we have a majority ownership position in Pramac and there will continue to be a minority non-controlling interest with this acquisition that must be deducted, when forecasting adjusted EBITDA, adjusted net income and adjusted EPS for the full year 2016, similar to the presentation reflected in the reconciliation schedules, included with our earnings release this morning.

Despite our reduction in guidance for sales growth and adjusted EBITDA margins, we still expect to generate over $100 million of free cash flow in the second half of the year. Regarding the outlook for our new reporting segments, we expect net sales during 2016 for the Domestic segment, to decline between 6% to 7% from the prior year base sales of $1.2 billion, with adjusted EBITDA margins expected to be approximately 22.5%.

For the International segment, net sales are expected to increase to approximately $280 million, primarily as a result of the Pramac acquisition, with adjusted EBITDA margins of approximately 8% before deducting for the non-controlling interest.

Lastly, regarding our outlook commentary, we are providing a summary of some guidance details, to help model the company's earnings per share and cash flows for full year 2016. We now expect interest expense to be in the range of $45.5 million to $46 million. The forecast for interest expense includes $41.5 million to $42 million of cash outflow for debt service cost, plus approximately $4 million for deferred financing costs and original issue discount amortization for our credit facility.

Cash taxes are now expected (27:00) to be approximately $7.5 million to $8 million which translates into an anticipated full year 2016 cash income tax rate of approximately 5%. Depreciation expense is still expected to be between $21 million and $21.5 million. GAAP intangible amortization expense is now expected to be between $31.5 million and $32 million. Stock compensation expense is now expected to be appropriately $10 million to $10.5 million and capital expenditures for the year are now expected to be approximately $33 million to $34 million, which is still only about 2.5% of our forecasted net sales for the year.

In closing this morning, while our revised outlook for the remainder of the year reflects further softening across several of our end markets, we remain focused on controlling costs as we continue to make strategic investments in new products and technologies. We also continue to invest in the necessary infrastructure to support the next leg of growth that we believe will occur in the future as markets improve.

As we navigate through the challenging macro demand environment in the near-term, we are focused on several important strategic initiatives to drive our Powering Ahead plan forward while remaining optimistic regarding several long-term growth opportunities that exist for our business.

This concludes our prepared remarks. At this time, we'll open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. Our first question is from Jeffrey Hammond with KeyBanc. Your line is open.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Hey. Good morning, guys.

York A. Ragen - Chief Financial Officer

Hey, Jeff. Good morning.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Hi, Jeff.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

So it sounds like most of the changes to your guidance are commercial related, because it just seems like home standby did reasonably well, and I think you've been planning for kind of low storms. I mean is that fair, are you seeing some incremental softening in quoting activity on the home standby side?

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah. I mean, Jeff, it's – we think of our guidance change this morning primarily in that context around just end markets that have softened up a bit more, oil and gas has been a very challenging area for us, impacting mobile products. We've called that out over the last four quarters or five quarters, maybe six quarters now. And unfortunately, we just don't see, I think there was a bit of optimism in the back half of this year, at least, around some seasonality that would occur. And I think that, as we look, we step back and in particular with the most recent pull back in oil prices here, we just don't feel like it's prudent to think about a recovery there, even on a seasonal basis in the back half, so that's disappointing.

You're throwing that on top of that with our European exposure now in particular in the UK, and it really is primarily the Tower Light business, the former Tower Light business and mobile products there. We've seen CapEx essentially dry up very quickly in the second quarter in the UK, where the rental market is really the most well defined in Europe. There is a larger rental customers there, and unfortunately with all of the discussions around Brexit, and some of the other macroeconomic issues in Europe that slowed down dramatically. And we've got, again that business is seasonal as well, when the days get shorter, lighting equipment generally tends to become in higher demand, but again I think we're taking an approach here that, because of the uncertainty around Brexit, we felt that reducing the outlook there was really the better call.

Telecom spending, it was interesting in the first half of the year. I think we felt better about telecom, in fact, our results in the first quarter outperformed our expectations, in the second quarter, we were in line, which was a beat year-over-year. But unfortunately, as we got to the back half of the quarter, it felt like there is a clear reprioritization of capital, in particular, amongst some of our national account customers, with some of the more recent deal activity that's been announced. We feel that could impact the what we thought would be kind of an improving schedule for power, backup power projects in the second half of the year, we're not feeling as good about that.

Non-residential construction, third quarter in a row declined, which we're starting to see as we noted in our prepared remarks. We're starting to see lower quotation activity in the second quarter for our industrial distributors, which – again, we're very pleased by the way with that C&I business. It's done very well in the face of, I think, a fairly muted growth environment, certainly here in North America. We believe we've been taking share there. We believe that the expanded product lines we've got, and the improvements in distribution and the strides we've made there are paying off, but we can't ignore the trends. And the recent trends there in the second quarter were to lower quotations, which we believe portends to a potential slowdown in the second half. So that was again something, as we started the year, we felt a lot stronger about that business than we feel today.

And then lastly to your point with residential, it's interesting. Our original guidance for the year contemplated kind of a flattish type of scenario for activations in the first half of the year. And on balance, that's kind of what we saw, but the problem was the pacing from first quarter to second quarter, the trending was negative. And in particular in the Northeast region, which has a fairly outsized impact, we saw a weakening there that we really didn't anticipate. And the other markets outside of the Northeast are up modestly for the year, which we like, and again, I think, speaks to the resilience of the category, but I think we just continue to be struck by just how large the Northeast market and how fast it had grown.

I think offsetting some of that is some encouraging signs around the fact that our distribution levels, our dealer counts are really very close to their peak levels, which were reached at the end of 2013. So I think we like where we're at there. We're just – I think we can't ignore the fact that the trends for activations were lower, second quarter outages were considerably lower than last year, which did not help at all. And we really exit the quarter here with probably a higher inventory level. So what we're kind of anticipating in the third quarter is probably a bit of a destocking event that needs to happen.

York A. Ragen - Chief Financial Officer

If outages remain low.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

So if outages remain low, to York's point, if they recover to normalized levels, or as we said, if we see a season develop that could certainly change, but that's kind of how we're playing it out. And that is, I know it's a long winded way to answer your question, but there is a lot of moving pieces, and just wanted to give you added color there. York, you might have...

York A. Ragen - Chief Financial Officer

So, Jeff – so if we're changing our guidance assumption here that we're laying out here is about a 5% change from prior guidance, I think you're right, a good three quarters of that is C&I related, and about a quarter of that is resi related, just taking a more conservative view on the second half relative to the trends we're seeing in the second quarter. So I think that's the best way to characterize our outlook.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Okay. And then just a couple of quick follow-ups. So I'm surprised how often you mentioned Brexit. Can you just quantify your UK business, because I had Tower Light is kind of $50 million business on $1.3 billion, and maybe only a portion of that UK. And then just can you tell us what your price was on your buyback? And how you're thinking about buybacks going forward? Thanks.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah, I think on the – just to mention – we did mention Brexit a couple of times, and I think it's not only the direct impact to the Tower Light business and the lockup in CapEx, I think when you look at our International – our new segment reporting here the International segment, that was a disappointment really as a result of what we saw in the pullback in CapEx spending. We attribute that to the direct exposure in the UK, those national rental accounts. But what we're a little bit concerned about is obviously the uncertainty of Brexit spreading into something, some additional malaise economically throughout Europe. So I think there's a little bit of a pins and needles kind of approach there by customers across the European Continent right now. So while our direct exposure to the UK is relatively small and your assumption for Tower Light is pretty close. Again, I think it's the broader fear of the uncertainty around that, and then, York, I think on the buyback...

York A. Ragen - Chief Financial Officer

Yeah, it's about $37 on average.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

And then I think our views on buybacks going forward again, we've got there is another $65 million call it of open-to-buy, if you will, on our authorized repurchase program. So at the current levels that we see the stock price trading at, we're buyers of our stock. Should we see a season develop and should the stock price accelerate upward, we may change our views on capital allocation priorities, but today, we see buybacks as a – it's a pretty good return on the investment.

York A. Ragen - Chief Financial Officer

Yeah. We don't have any debt principal payments on the horizon, requirements that is, we have our M&A pipeline. But, like Aaron said, we have $65 million open on our buyback, so those will all be factored into our priorities.

Jeffrey D. Hammond - KeyBanc Capital Markets, Inc.

Thanks, guys.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Great.

York A. Ragen - Chief Financial Officer

Thanks, Jeff.

Operator

Our next question is from Mike Halloran with Robert Baird. Your line is open.

Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker)

Good morning, guys.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Hey, good morning, Mike.

York A. Ragen - Chief Financial Officer

Good morning, Mike.

Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker)

Hey, Aaron, would you – great color on all those end markets, could you also touch on the rental side too. And maybe just talk about what the channel partners are saying there. How much cannibalization is still going on with some of that oil and gas weakness. Are they getting to the point where the inventory levels are bouncing out a little bit on that channel? And just some thoughts going forward.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah, I think, the big thing, Mike, as we talk to, and we have exposure to all the major rental houses here, not only domestically, but also internationally now through Pramac and through Tower Light. So I think we get a pretty full picture of what's going on there. And certainly here domestically in North America, the concern is around utilization rates of fleet. And so as utilization rates remain low, and particularly the categories of product that we play in, right, which we kind of classify as support or ancillary type products. So, lighting, tower, dewatering type products, heating products. These are products that generally maybe but for heat, but the rest of those products are generally used in a support role on the site, or in construction, or at the oil and gas frac site.

And as a result, what we've seen is that equipment is pretty fungible. So, it's easy to go back into the general rental market, when it has been coming off of rent, in the oil and gas patch. And so that kind of tidal wave of additional product going into the general rental markets has really depressed utilization rates in those markets.

So when we talk to these end channel partners about what concerns them most, it's just really the poor utilization fleet at this point. And unfortunately, because used equipment prices are low as a result of the influx of all this equipment, there's not a lot of places to put it. So taking it to auction or secondary markets, traditional secondary market channels is really a poor return, really impacts the overall return profile of the equipment in that business. So I think a lot of the fleet partners have chosen to kind of wait it out, and have the equipment age out as opposed to selling it out.

And so, I think the one thing that we hear continuously here is the fleet's not getting any younger, it continually ages, and maybe they can squeeze additional time out of it in months as we measure it. We can see a lengthening of the amount of ownership time of fleet assets, in particular in these support categories. But until utilization comes back, which also by the way gives them – equates directly to pricing power. So rental rates remain kind of stifled as well as a result of poor utilization.

Until that kind of recovers, it feels like we're bumping along the bottom though. I don't think we feel like it's going to get a lot worse, it's just unfortunately there isn't going to be a catalyst like higher oil prices, at least in the near-term, in our view, to kind of shake ourselves off of this in a faster way. So I think it's just a matter of kind of waiting it out, and letting things age out. So that's kind of the, again, long-winded answer, but kind of that's really an amalgamation of the views of our fleet partners.

Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker)

Thanks for that. And then on Country Home Products, sounds like that's performing quite well, maybe just an update on some of the cross-selling initiatives that you guys are working on, on that side. How did the end markets – or how did that unit perform for you through the first peak season? And then any change on expectations there going forward?

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah. CHP has been a great – that's a great company for us. It's very well run. It has a very good sense of its purpose in terms of the types of products that it delivers to the market, and who it delivers them to. The cross-selling opportunities, and we've talked about this on previous calls, and we've seen some very nice – we've received some nice placement of some of their products at what we would call more value-oriented price points is kind of the terminology we used in the prepared remarks, at some of our channel partners. So in the retail space, those companies carry some of the products that CHP has, and we've gotten some nice – we've had a couple of nice wins there, and those will roll here in the fall season and into next spring season as well. So we're encouraged by our thesis playing out as it relates to some of those things.

I think where the thesis maybe originally wasn't as strong, but has proven to be playing out very well for us is just what a great marketing company CHP really is. And they've been very helpful on two fronts for us. One, we launched a new inverter-style generator, portable generator last year, late last year, beginning of this year, really targeted at the recreational segment. So it goes straight up against one of the leaders in the industry there. We believe we have a superior product in terms of technology, in terms of sound level, and CHP has been wonderful in helping us orient our marketing around that product through use of infomercial and short-form media, and through campaigns to kind of get a grassroots type of demand around that product, and it's been quite successful, and we credit CHP with helping us with that.

And the other area would be, their critical analysis of our home standby marketing process and sales process. So they've been very helpful in pointing out as we kind of deconstruct the sales process, and I think we look at it more than anybody is the kind of share we have and the amount of calories that we burn around home standby, at this company, to drive that category forward. We deconstruct continuously the sales process and understanding what works, what doesn't work. But sometimes you get too close to it, forest through the trees kind of thing, and CHP helped us kind of take a fresh look at that process and identify some critical leakage out of the funnel, sales funnel as we look at it, where leads were leaking out and other areas to kind of improve close rates and improve the consumer touch points, which is really their expertise area, every touch point. They're very, very in tune with every electronic touch point, every telephonic touch point, every printed touch point, every interaction with the consumer, we want to leave them with a high-quality experience, and CHP is very in tune with that. So it's been very helpful. So it's been from my standpoint, a great company to work with so far.

Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker)

Okay. Thanks for the time.

York A. Ragen - Chief Financial Officer

Thanks, Mike.

Operating: And your next question is from Brian Drab with William Blair. Your line is open.

Brian P. Drab - William Blair & Co. LLC

Hey, Aaron. Hey, York.

York A. Ragen - Chief Financial Officer

Good morning Brian.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Good morning, Brian.

Brian P. Drab - William Blair & Co. LLC

I'm wondering if you could give us any color regarding organic revenue growth or decline in, first of all, in resi and C&I and then in the new segments Domestic and International, just any help on organic revenue growth rates would be great.

York A. Ragen - Chief Financial Officer

Yeah, Brain. Yeah, so, I think on the product class side, if you think about the Domestic, residential is basically a Domestic category. There is a little bit there in the International side, but when you think about residential it's mostly there in the Domestic side. And as we call it, residential did have some nice organic growth during the quarter for the reasons we talked about, high single-digits, from an organic growth standpoint.

On the C&I standpoint, from a C&I standpoint, globally, given the oil and gas concerns that we've had, and then the new UK, Brexit uncertainty exposure with our Tower Light business, that C&I had organic declines this quarter of around 17%, 18%, so still seeing a drag on growth from oil and gas and now a little bit in the UK there.

Brian P. Drab - William Blair & Co. LLC

Okay. So, and I'll have to sort through this after the call, I guess, further, but you're saying – I guess the International business is really primarily, or exclusively C&I...

York A. Ragen - Chief Financial Officer

Yeah, think of International, yeah, correct, think of International primarily C&I, and think of residential as more of a Domestic category.

Brian P. Drab - William Blair & Co. LLC

Okay. But it's not a clean comparison between – I guess Domestic isn't the new resi right here exactly, right?

York A. Ragen - Chief Financial Officer

There is a little bit of resi in International.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

There is some resi in International. And frankly we expect to grow the residential component internationally. That's one of the thesis is, theses, if you will, with the acquisition of Pramac is to extend our, what we do well with our residential here in the U.S., we think there is an opportunity for pockets around the world where that makes sense for the category. But right now, as it exists, it's primarily C&I in that International segment.

Brian P. Drab - William Blair & Co. LLC

Okay. So reviewing this – so resi is up high single digits organically in the quarter, C&I is down 17% to 18% and....

York A. Ragen - Chief Financial Officer

Correct.

Brian P. Drab - William Blair & Co. LLC

(46:23) those growth rates though what I see are similar growth rates or declines for Domestic and International, so like Domestic up high single digits organically in the quarter or do you have that?

York A. Ragen - Chief Financial Officer

Yeah, we haven't provided that, but I think you can get a general idea on our product, consolidated product class base, what's going on there from a regional standpoint as well.

Brian P. Drab - William Blair & Co. LLC

Okay. Thanks. And then just one more. You mentioned destocking might need to occur, as we move into the second half of the year. Did you mention where the field inventory is at the end of second quarter 2016 versus 2015?

York A. Ragen - Chief Financial Officer

Yeah. So end of second quarter – it is higher. This year end of second quarter versus last year end of second quarter. So we reflected that in our guidance statement here that we talked about third quarter being, on a consolidated basis, revenue being roughly flat with prior year. So that would – we've factored in – if outages remain low, which is what the assumption is in our guidance, you'll have a bit of a de-stock event as a result of that higher field inventory this year versus last year.

Brian P. Drab - William Blair & Co. LLC

In the past you've mentioned it's 10% higher or 5% higher, can you give us any ballpark feel for how high?

York A. Ragen - Chief Financial Officer

It's higher, but it's not dramatically higher.

Brian P. Drab - William Blair & Co. LLC

Okay. Thanks very much.

Operator

Our next question is from Ross Gilardi with Bank of America. Your line is open.

Ross P. Gilardi - Bank of America Merrill Lynch

Thank you. Good morning, guys.

York A. Ragen - Chief Financial Officer

Good morning, Ross.

Ross P. Gilardi - Bank of America Merrill Lynch

I just want to elaborate on your comments, or hoping you could elaborate on your comments on the Northeast. So I mean do you guys feel like when there is an outage even on a very local level like you're not getting the order intake that you might have gotten three years or four years ago, and you feel it all like that's a sign of any type of market saturation in that region of the country. Just curious on your thoughts on that.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

No, I mean we look at the penetration rates on not only on local level, but also in the regional level and the penetration rates are still very low, mid single-digits in the Northeast. So we think there's a lot of runway there. It's, Ross, just, I think, the overall fact that we just have not had kind of outages to even in that, particularly, in that area of the country to kind of drive the conversation around the category. So it's just become a tougher market to sell into.

Obviously it weighs on channel partners. There's inventory concerns right, because that is something that is always something we look at kind of regionally as well, but it just feels – it doesn't feel like there is a saturation point that we're hitting. I wouldn't say that. I think it's just the growth rate slowed in that region, and it slowed up faster than we thought it was going to than we were planning on it. And that's really I think the kind of the crux of the issue for us.

Ross P. Gilardi - Bank of America Merrill Lynch

In terms of like promotional activity that you focused on and you mentioned, I think, a stronger sell in, into hurricane season, part of that was tied to the stronger activations at the end of the first quarter. But are you having to promote more, lot more aggressively than you have in the past? And is that impacting your gross margin within the standby business?

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

No, I mean the promotion activity is kind of on par with what we would say as kind of the year following a non-season, a non-event season, so – or a low outage environment. So it's been the same. Roughly, I wouldn't characterize Q2 as being an outsized amount of promotion running through, in particular – definitely not impacting EBITDA margins. But it was better sentiment, better buying sentiment, because we had two things happen. One we had lower inventory levels coming into the second quarter, and because of the higher activation rates that's why that happened in Q1. But then also, I think there's been more talk this year around the potential for a season this year. This La Niña versus El Niño, and the kind of transition away from that environment that was not conducive to outages to maybe an environment, what, meteorologically there would be more conducive outages.

We're not meteorologists, so, I mean, for us, we watch the forecast, but we know that our channel partners watch the forecasts as well, and kind of mid-quarter in the second quarter, it became a little easier to sell when NOAA comes out with a stronger hurricane season prediction and others as well. So that was helpful in the second quarter, and puts people in more of a – our channel partners in particularly in more of a buying mood. So that's really what led to that in the second quarter.

Ross P. Gilardi - Bank of America Merrill Lynch

Got it. Thanks. And then just lastly, could you give us a little more color on your capital structure targets in the medium term. I mean, I think your leverage is a little bit higher than it has been in the more recent past at least as you diversified into C&I, and obviously end markets are tough right now. You guys are buying back a little bit of stock. You hadn't really bought back stock in the past. But just curious, why all the cash was not really going towards debt reduction right now, and sort of where do you think you can get, where do you want to be in sort of more on an 18-month to 24-month level in terms of net debt to EBITDA?

York A. Ragen - Chief Financial Officer

Yeah, I mean, we – hi, Ross, it's York. So we've consistently talked about leverage levels, target leverage levels of say 2 times to 3 times. At 3.7 times that does not in any way bother us, given the amount of cash, given the amount of EBITDA that we convert to cash that 3.7 times for us is different to than 3.7 times for maybe somebody that doesn't convert as much of that EBITDA to cash. So we're not worried about the 3.7 times. I think the key there is you comment about, hey, where will we be 18 months, 24 months from now, at these, what maybe characterized as trough EBITDA level, you'll grow back into that 2 times to 3 times target, relatively quickly, just as you resume that pick up in EBITDA. So, I think, we're comfortable with our leverage, and I think you see that illustrated by the fact that we are buying back stock and we're comfortable with that situation.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

I would just add Ross, that I mean, our liability structure is very cost effective, and there are no covenants. And so, we believe, we've got a very good liability structure, and to take that out at the current rate environment, it doesn't...

York A. Ragen - Chief Financial Officer

At all plus 2.75 (53:33)

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah, just doesn't feel to be a good use of capital. So we believe that buying back stock presents a better use of capital and the acquisitions we've done, and obviously the things that we focused on in terms of reprioritizing here. Now if the rate environment changes, maybe that gets us to re-think that, but at this point, we think that EBITDA growth off of these, as York characterized trough levels, I think, is a better way to de-lever than it is to pay down the debt, in our opinion.

Operator

Thank you. And our next question is from Jerry Revich with Goldman Sachs. Your line is open.

Jerry Revich - Goldman Sachs & Co.

Hi. Good morning.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Hey, Jerry.

York A. Ragen - Chief Financial Officer

Hey, Jerry.

Jerry Revich - Goldman Sachs & Co.

Can you folks talk about where you view normalized EBITDA margins for your International segment, and how long it takes to get there? I think you mentioned the target is 8% for this year, I know you're in the middle of integrating Pramac just, can you touch on where you think you could take the margin structure longer term, and talk about how the procurement integration, specifically is going and how is the opportunity set evolving from what you initially expected?

York A. Ragen - Chief Financial Officer

Yeah. Jerry, this is York. So, I think if you recall, we've said a number of times. So the International segment, if you will, is made up of the Pramac business, the Ottomotores business in Mexico that was acquired, Tower Light. And if you recall, our strategy with regards to margin expansion for our acquisitions is to take a business that's maybe mid-to-high single-digit EBITDA margins, in the case of some of these acquisitions like a Pramac or an Ottomotores, and then try to double that through revenue synergies and cost synergies.

So we've seen, we've demonstrated that we can do that in other acquisitions, Pramac just closed. So taking something that mid-to-high single-digit margin, we want to double that. And that's I guess we're in the middle of that maturation, if you will, with Ottomotores and Tower Light, which is why we're at 8%, and we believe we can take that higher as we execute on the synergies with Pramac. So I think that's probably the best way to characterize our goals there with our International EBITDA margins.

Jerry Revich - Goldman Sachs & Co.

And York, can you just touch on the timeframe and how is the purchasing integration tracking on Pramac?

York A. Ragen - Chief Financial Officer

Yeah. I mean some of it's low-hanging fruit, so you can get those costs, and they're mainly bill of material cost reductions as you leverage the scale and your supply chain. Some of it is low-hanging fruit, but inevitably some of it might be design changes, and those take a longer period of time to get that through the design cycle and then get that through the P&L. So I would say that's more of a long – 18 months.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

18 months to 24 months.

York A. Ragen - Chief Financial Officer

Yeah.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

To probably get that ultimately through on the design. The globalization of the platforms, and there is obviously, as York said, there is some of the component costs. It's easy to get some synergies right away, but some of the more, some of the deeper redesign of the product, so that we can really maximize the synergies. I think are going to take a little more time.

York A. Ragen - Chief Financial Officer

And then a part of that too is just leveraging the fixed costs on a higher top line too. That takes a little time to execute on the revenue synergies as well, and there is some product – as you expand our offerings out there can be some improved mix as well.

Operator

Thank you. And our next question is from Charley Brady with SunTrust Robinson Humphrey. Your line is open.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Hey, thanks. Good morning, guys.

York A. Ragen - Chief Financial Officer

Hey, good morning.

Charles Brady - SunTrust Robinson Humphrey, Inc.

First question is on the new presentation style. Are you going to continue presenting the resi and the C&I products as well as Domestic, International and you are going to recast the Domestic, International results historically?

York A. Ragen - Chief Financial Officer

Yeah. I think so the – yeah, the product classes that we have, those will continue. That's for the requirements that you are required to disclose your product classes, and that's why we have done that historically. With the Pramac acquisition that's the catalyst to – which expanded our International business, accelerated that strategy rapidly here, which was the catalyst to sort of introduce these new Domestic, International segments. And so the International segment was pretty small in the past, so that's sort of why you don't – we're not really going to recast anything because it was small in the past. So it's really just the catalyst of Pramac acquisition, which is causing the two segment reporting structure, but the product classes will continue as well because that's a requirement.

Charles Brady - SunTrust Robinson Humphrey, Inc.

Okay. That's helpful. Thanks. And just another one, I guess, it's going to be maybe harder to answer. But I guess, if we talk about the power outage activity in North America being well below historic levels at – we've gone through a number of quarters now where it's at that level, and I can't recall exactly what the historic database is on tracking that, but it's not something like 20 years, I don't believe. At what point does the current level of activity start to really look like maybe this is closer to normal than well-below normal? Just interested in your thoughts on that, Aaron.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah. Charley, I mean, again, our database of outage severity, which is a proprietary calculation, we've been tracking for five years to six years now. You're right, it's not 20 years of data, but what we do have is 20 years of government data, that on outages and although maybe not accumulated in the same fashion that we accumulate it, outages over the long haul have been traditionally higher, or historically higher, and in my 20 plus years here at the company, we've seen outage activity higher. This is a very, very low level.

So again, it's kind of big pattern stuff. We don't know why it happens in the multi-year cycles that it happens, but it seems to be, you'll get a couple of years of active outage environment, and then followed by several years of inactive. So it's just kind of on, off cycle that is inherent to – and a lot, again, 70% of all outages caused by weather. So I think those big patterns are weather-related, and again some of the El Niño, La Niña kind of cycles that happen here, and I think are the root cause of some of that.

So, we don't try to predict that. All we can do is say, let's look at the current environment, let's give our best, put our forecasting ability and our historical kind of perspective on this, and come up with our best view on outlook. And that's kind of what we've done. But again I think you look at where outages are at, and where they – even in that six years of data that we do have where they've been even before the major outages in 2011 and 2012. They were – the outages – the outage activity has been higher. So we just – we characterize this as kind of an ultra low level.

You can also look at one other area I would point to, we're starting to look at, we look at insurance losses, basically non-flooding insurance losses, because the flood related stuff doesn't necessary generate power outages, but wind damage related insurance losses are down and have been down in the last – I mean, it's been a decade since there has been a major event in Florida, which is really unheard of meteorologically. So again we just characterize the current period as being really below normal, well below normal.

Operator

Thank you. And our next question is from John Quealy with Canaccord. Your line is open.

John Quealy - Canaccord Genuity, Inc.

Hey guys. I appreciate you squeezing me on. Just two questions. First -

York A. Ragen - Chief Financial Officer

Hey, John.

John Quealy - Canaccord Genuity, Inc.

Hey York, can you talk about your price discipline across the businesses. I think you gave us a little bit of detail on resi standby, but talk about the whole portfolio, how is the price starts moving forward. And then second, all the acquisitions you're doing, talk about what's in your control in terms of potential future cost synergies, or how you feel comfortable that you can control your own destiny on OpEx. Thank you guys.

York A. Ragen - Chief Financial Officer

John, this is York. I mean, I think one thing to point to on the pricing side of your question about pricing dynamics is our gross margin bridge. There was really no impact, or very nominal impact on price year-over-year in the gross margin bridge. So, excluding that inventory step-up, gross margins were up 140 basis points, and there was really no pricing impact. So I think we haven't seen a degradation on the price side.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

No, but for the netting of the promotions and things that we do. But again, those are normal seasonal...

York A. Ragen - Chief Financial Officer

(1:03:03) it's normal.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Yeah. We feel that's pretty normal. But I think as we look forward to pricing, John, we think about that. I think we're in the middle of – this is the time of the year when we – as we kind of gear up for the forecasting season here for 2017, start to take a critical eye towards just where our commodity is trending, where our currency is trending, and the other impact, the other inputs, if you will, into what would drive pricing in the industry across all of our products. So we don't see though any macro kind of competitive pressures, or other undue kind of forces there that would say, we either have pricing power in an area or we need pricing to reduce.

I think we've always taken the position that we are – we want to be very competitive in price, and I believe that we do that with a very competitive cost structure that enables us to be very competitive on price. I believe that even in markets where we lead like home standby, we have the most competitive pricing position across the broad spectrum of products in the industry. And we want to – we believe that that's important, especially in that market where affordability is what we believe unlocks the next layer of demand. We don't think that that means we've got to take and reduce prices on home standby generators by a immaterial amount.

As we've said, we think that when we look at the total cost of ownership, we think there's opportunity area there to continue to bring installation costs down. So that's our focus. Penetration is still low, and there is still a lot of opportunity there. So C&I products pricing, that obviously has impacted more broadly by the input costs of steel and other things, and obviously we see steel costs up year-over-year, in a lot of cases up by 40% actually.

York A. Ragen - Chief Financial Officer

We'll evaluate that.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

So we'll evaluate that. And as we think about 2017 and then the pricing environment there that will start to come into our decision process.

On the acquisitions, I think your question was kind of around the OpEx, opportunities for OpEx there, and I think as we think of OpEx in both of the entities that we talk about on acquisitions and results at least in the second quarter around CHP and Pramac, the ability to leverage the OpEx through – again the revenue synergies that we've talked about. With CHP, I've talked about some of those. With .Pramac, there are opportunities there to take some of our mobile products and connect them with their customers and their mobile generator lines, and then conversely the ability to maybe take some of their products down into some of our markets in Latin America, where some of those products are maybe European style product, in particular in markets like Brazil. It's probably a better product than maybe the product coming from North America.

So we think there's some opportunity there. And the natural gas products across the pond here into Europe where there are markets where natural gas is starting to become a more important play for backup power. We think we'll have an opportunity. Again growing the top line though, Pramac has a large OpEx expense load relative to their sales volume today. CHP is the same, but for different reasons. Pramac is really because they've got far flung operations, 14 sales branches serving 150 countries. We really want to grow the top line there with all things I talked about. And then CHP a good chunk of their business is direct-to-consumer, so they bear a much higher expense load as it relates to all the marketing costs that they absorb on a direct basis. So the more we can expand their top line and leverage that as well is going to result in improved EBITDA margins over time. So that's kind of how we view those businesses.

Operator

I'm not showing any further questions. So I'll now turn the call back over to Aaron Jagdfeld, President and CEO, for closing remarks.

Aaron P. Jagdfeld - President, Chief Executive Officer and Director

Thank you, operator. We want to thank everyone for joining us this morning, and we look forward to our third quarter 2016 earnings release, which we anticipate will be at some point in late October or early November. That concludes our call this morning. Thank you.

Operator

Ladies and gentlemen, this does conclude the program. And you may now disconnect. Everyone have a great day.

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