Generac Holdings' CEO Hosts Investor Day (Transcript)

| About: Generac Holdings (GNRC)

Generac Holdings, Inc. (NYSE:GNRC)

Investor Day

November 08, 2012, 10:30 a.m. ET


Mike Harris - Director, Finance and IR

Aaron Jagdfeld - President and CEO

Russ Minick - EVP, Residential Products

Terry Dolan - EVP, Industrial Products

York Ragen - CFO


Jeff Hammond - Keybanc Capital Markets

Steven Hill - First Investors

Mike Halloran - Robert W. Baird

Brian Drab - William Blair

John Quealy - Canaccord Genuity

Mike Harris

Good morning everyone my name is Mike Harris, Director of Finance and Investor Relations here at Generac. I’d like to welcome everyone to our Investor Day. We like to take this opportunity to thank everyone for taking time out of their very business schedule, be with us here today as well as both people who are login on to our webcast via the internet. We certainly have a lot to cover here today in our presentation, so I will quickly give an overview of the agenda for today.

Aaron Jagdfeld, our President and CEO will start off by giving a high level overview of Generac, discuss recent accomplishments as well as give an overview of the company’s growth strategy powering ahead. Russ Minick, Executive Vice President of Residential Products will discuss our plans to grow the residential market. Terry Dolan, Executive Vice President, Industrial Products will then give an overview of our initiatives to gain share in the industrial market. Aaron will then discuss the last two components of our growth strategy which (inaudible) the company’s end markets and expand our business internationally. York Ragen, our Chief Financial Officer will wrap up the presentation by discussing financial growth targets over the next three years. We will then open up the presentation for the Q&A session.

I want to make everyone aware that we have posted to the Investor Relations section of our website the actual slides for today’s presentation and that is located under the investor presentations link. We will begin our presentation and webcast today by commenting on certain 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 these forward-looking statements. Please review the forward-looking statements slide within the presentation or Generac’s SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition we will make reference to certain non-GAAP measures during today’s presentation; additional information regarding these measures is available in our SEC filings.

So, with that I will now turn the podium over to Aaron Jagdfeld, our President and Chief Executive Officer. Aaron?

Aaron Jagdfeld

We got little bit of light attendance here at the plant today, obviously we have any going on, you can travel with a bit of a nightmare. We can target some people. They are going to end up going us here midstream, so apologize for that. But for those of you who are able to join us this morning this is a brand new building we just opened it on Monday. So, welcome to what we think is a big part of this is kind of the physical manifestation of the growth of Generac over the last four, five years, but we think that what you are going to see today is for those of you who are familiar with the company, you are going to see kind of a layer deeper on the initiatives that are going to drive our growth going forward.

And so as Mike said, the goal here today is for me I’m going to go through and give a little bit of just background for those of you who maybe not or not as familiar with the company and certainly we have quite a few people that this is being webcast so have quite a few people on the phone that may also not be as familiar with the company. So, I apologize if you have been through. So many IR presentations we have done in the past and these slides on the front here are going to look a little bit the same. But though we are going to do is very quickly send the bulk of the day really digging into on the residential side of our business as well as the industrial side of our business. Kind of the underlying initiatives that we feel for the next several years that are going to continue our growth going forward.

So, let’s start with this Slide 5, the investment highlights. Again for those of you who know the company, best in class organic revenue growth. We have been growing at about 15% compound annual growth rate over the last decade and we will go through some of that growth and how we think that that is going to continue going forward.

We are the market leader in many of our end markets and we have built significant barriers to entry in many of those markets, we will also cover that. We have a fantastic or as we refer to here superior financial profile. Generac is a highly profitable company with great free cash flow characteristic and we will talk through that as well.

Very strong product market and geographic expansion opportunities, and that’s really what we are going to focus the bulk of the day on today, is what are those opportunities and how are we going to go after them.

So, little bit about Generac, if you don't know we started in 1959 by an engineer (inaudible) really about 2 miles west of the plant here in a barn in Waukesha, Wisconsin. That’s where this business was started, the classic American tale, the founder of the business started it, actually started the precursor to that the Generac business. A few years earlier that failed but in classic entrepreneurial fashion he continue to persevere and started Generac, founded in 1959. We’re an engine and power generation company and you can see on the LTM basis there with the pie chart about $1.1 billion in sales on an LTM basis through our third quarter. Now that’s significant because if you wind the clock back at the end of 2007 that was about 550 million. So, we doubled the company since 2007 which I think is a pretty amazing feet. So less than five year's we have been able to do that.

60% of our business from a revenue standpoint comes from residential, the balance of the business comes from commercial and industrial and in the other category would be service parts and we have got the (inaudible) engine that we sell to other OEMs out there. We distribute our products with a very broad multilayer distribution network and I will cover that as well. We have about 2200 employees and we now have about 1.4 million square feet of manufacturing and distribution and some of that yes you are going to get a chance to visit here a little bit later today as we tour the Whitewater factory. All of that distribution and that manufacturing capacity is located year-end. The same Wisconsin now in five plants.

This chart here on Slide 7, our organic growth record, most of it's being organic and I will explain here in a second. But from 2000 and 2011 as I mentioned 15% CAGR, all of that through last year was organic. Last year in October, about 2011 we closed on the first acquisition the company had ever actually embarked on which is the Magnum product business which we will cover here in a second and that obviously has been a very good business for us and is a part why we are able to achieve some of the growth that we have seen currently in the current year.

Our history of innovation, our culture of innovation we believe is a huge part of why this growth looks the way that it looks. But again a lot of this was organic; it's not all of it up until last year. And I think it's very unique to see a company that has this kind of growth trajectory strictly from organic growth.

Products that we manufacture and distribute you can see on the left hand side of this graphic on Slide 8, the residential product. Starting with our power market and portable generators all the way down through air-cooled and liquid-cooled home standby or serving the residential market and then on the right hand graphic here, our industrial products.

The first three products pictured on the right will be products required in the Magnum products deal a year ago. Rest it's going to be light towers, mobile generators and mobile phones. And the bottom two pictures there would be what a classic commercial or industrial stationary generator looks like (inaudible) so those are the products you are going to see.

Today over here on the left hand side, you are going to see these products on the residential side with the factory visit in Whitewater. That’s the product, that’s the factory that manufactures the bulk of those products. And you can see those being today later on.

Now I think it's important when we talk about Generac, that we step back when we talk about the macro growth drivers for power generation. And the power generation industry which of course right now are very topical and very top of mind given the kind of issues that we have seen around the country. Certainly more prevalent (inaudible). And that all starts with the aging infrastructure. The grid has been holistically under [resident] and it continues to grow older every year. That has led to a situation where the grid is incredibly susceptible to major events.

It doesn’t matter what your position is on global warming or what’s your position is on, are we going to have a more storms, are they more severe storms. The fact of the matter is that the infrastructure continues to be susceptible and become even more susceptible every year. And so the susceptible of the infrastructure that I what causes an outage. It's that infrastructure that continues to fail with the country. And that under investment has gone on for two or three decades now. It's starting to rear what we had.

We are really manifesting itself is in this bar chart here. You see that the number major outage and these are outages tat impact more than 50,000 people on an annual basis. This is the North American Electrical Reliability Council or NAERC as it's known, these are federal statistics. You can see the inflect point here in the number of outages, major outages that occur year-after-year. This is highly co-related to the investment gap in terms of the transmission and distribution of power generation asset in the country. So as power outages continue to grow and under investment that gap continues to grow. We see that we are in the right space at the right time being a backup power generation company primarily.

Now, compounding that, when we look at our residential side of our business in particular is the fact that we have an aging population. So, not only is the grid infrastructure aging will aging. As the population of the society we can feel the age. What we want to do when we age. We want to stay in our own homes, the concept is known as aging in place. Today everybody wants to stay in their home as long as they possibly can. The fact of the matter is, staying in that home after you retire until you can’t stay there any longer, you can prolong the amount of time you can stay in your home if you do some things in the house, maybe it's reducing the size of the tower top or lowering accounts (inaudible) switching on the wall, you got that certain security systems maybe you add to the home.

Putting a backup generator on a home for somebody who plans to be there for the next 15 or 20 years during retirement is absolutely becoming a necessity. Not only just from basic climate control, air conditioning, your furnace that type of thing, general lighting, those how all the things that make a lot of sense. But think of the other things that are going on as you are aging your home, you need refrigeration ,you maybe have medicine, insulin or other medicines that need to be refrigerated, without power you don't have refrigeration, you have a lot of home medical devices that are making their way into the home. Oxygenation is a big one, a lot of that oxygenation equipment runs off your power grid, so you have things like; you have basic services like phone. It used to be a number of years ago; we all had no [mobile phones] that 5 volt of electricity that came through that top of wire, so when you pick up that phone even if your power is out your house you still had a dial tone. You could still dial 911 if you had a problem.

Today rolling the triple play, we rolled out cable phone and internet being provided to a Comcast or Time Warner or whoever your provider is. When you don't have power today you don't have a phone. So if you are elderly, or if you are young and you don't have a phone, if you maybe have a mobile phone, business that phone going in the last one the battery last, you are going to recharge it. So, really you start getting into a serious issue of light safety and so light safety is driving in particular the demographics for the buyer of our product. Over 80% of the buyers of our home standby generator is over age 50. So, it definitely skews quite a bit older because of some of those light safety concerns and also because of property protection concerns.

If generator protect your [sunk pump] in your basement, right. When does your [sunk pump] not run when the power is out, right? When your basement flood when it's raining, when is the power generally out when it's raining. So, you have a bad conflict events there, so a backup generator can help protect your investment what is mostly the largest investment which is their home.

So, that confluence of event of characteristics is what’s driving we believe the penetration, the increased penetration and adoption of home standby generators. On the right hand side of this graph we got a penetration curve analysis. So, we got some additional in-home product that are up here as a proxy for these products. Today, home standby generators, the automatic home standby generators are only in 2.5% of U.S. households. That record as we define is 15 million homes. In single family our attached homes greater than $100,000 in value. Only 2.5% of those 15 million home tab an automatic home standby generator installed. Every 1% of penetration is a $2 billion market opportunity. $2 billion for 1%. So, we are not trading with the needle from 2.5% to 20%, that will be great, but it will take a long time, the installed home product and to see the maturity in any kind of those installed product.

What we do is we got a graphic here on the right that shows you a little bit of some other proxies maybe some installed home alarm systems. Look at central air conditioning that’s the orange line here. That orange line started out Generac for 60 years, but it was expensive, it was holistically unavailable, but it was mainly for is a very small niche market back in the 40s and 50s and 60s and what you saw is an acceleration point. What you got there in 1970s and 1980s and 90s, where today air conditioning is in over 70% of U.S. household central air conditioning.

Now can backup be 2.5% to 70% I don't know, we found the way that we all have to have central air conditioning on our home, right. That’s a necessity today. You wouldn’t build a new home without central air conditioning. We think that there are lot of characteristic and lot of parallels to be draw between those types of installed home product. I don't know if you look at the 70% but I do know this, portable generators, (inaudible) one that you pour gasoline into, we sell them, 10 to 12% of all U.S. households have a portable generator and that’s not a subset market that’s all of the 82 million homes or households that are out there, 10 to 12% of those households have a portable generator. What we also know that when we look at the buyers of home standby generators, 50% of those buyers either own or owned a portable generator one time.

So, clearly it's a step up product, you automatically standby as clearly a step up product from portable generators. So, we think there is a huge opportunity as people come back into the market to replace portable generator which have a life cycle of about 10 years. it replace the cycle of portable generators about 10 year's long. The home standby generator category is only about 12 years old. So, as people come back into the market to replace those portable generators, they are going to find a more sophisticated solution that’s available in a fully automatic. Home standby generator up a natural gas you don't have to be home. It's hard wired into your home electrical system. It's a great product. You have one on a home. The other thing we find it's an incredibly high attachment rate. If you move from a home that standby generator, the attachment rate is over 90% for people who that they want to have home standby generator on their new home.

So, think about that, you now got news to this piece of mind that you have in your house because of backed up. The incredibly important concept that we something that we see is going to help us drive this category going forward. Now on the commercial and industrial side of our business some of the macro drivers there, there are really two secular shift that we believe are going to drive our (inaudible) business. The first is a shift from diesel generator such as in the classic historical way, traditional way to solve backup power problem, is using a traditional diesel generator. But what people are finding is that natural gas power generators are both more cost effective both in the initial capital cost, and in some cases up to 35% less in class, but also less costly to operate. They don't have the same fueling issues, what you are hearing about right now are in east coast. You have a diesel generator on a building one of the biggest issues you are facing is fuel delivery.

How do you get fuel to add generators while continues to operator. Pipeline natural gas is plentiful. It's plentiful during events like what we experienced (inaudible) become even more plentiful because of the fracing and the things that we are doing to find natural gas in this country. So, natural gas is taking its place is not only just a very available fuel a very cost effective fuel, but a very green solution and a green alternative to diesel fuel generators. That’s a secular trend, it's been happening. Terry is going to cover more of that in his presentation.

The other secular shift that we see, we are seeing is in the switch from buying equipment to renting equipment. And this benefits our Magnum product business mostly. So, you got a lot of small contractors, road contractors, construction contractors, who during the downturn, in the last economic downturn when they found that they owned that equipment and the projects dried up, their revenue streams dried up, they saw the bank note on that equipment, they saw that with their payments but they had no revenue to match against that expense.

So, we have seen a shift and this actually is a graphic we listed from United Rentals purchase of RSC, because part of their investment thesis in buying RSC was exactly that, but there is a secular shift going on in the market towards rental and away from buying equipment, because contractors and construction from when a better match, their senses with their revenues. So, it's a little bit more expensive obviously for a contractor sometime to rent that piece of equipment but you can pass that cost along as long as you got a project and active projects working on.

So, those are the two major secular shifts on P&I. Now I will also talk real quickly here about the distribution model at Generac. I think this is a major point of differentiation between ourselves and our competitors. We go to market through a multi layered distribution strategy. We have a different philosophy holistically than most equipment manufacturers in terms of distribution. That philosophy spans from the fact or comes from the fact that we have a market that we are trying to create in home standby. So, it's only 2.5% penetration as I said before. We take a point of light strategy with many points of light versus few point of light is a better strategy to drive the adoption rate for home standby generators. As such we offer those products direct to contractors both electrical contractors and (inaudible) contractors. We offer direct to retailers. So, big box retailers, regional chains, all across the country. We also offer to electrical wholesalers, (inaudible) those that serve the 70,000 electrical contractors that are here in the U.S. market. The one had access to that product. We sell our product online. We sell them to catalogue companies. We sell them Northern Tool to Grainger, industrial supply houses. We also have some private label partnerships as well that we sell these products too. So, again a very multi layered point to like strategy in the residential side of our business.

Commercial and industrial side of our business over here on the right hand side looks a lot more like a traditional industrial equipment distribution model. We have 35 industrial dealers in the U.S. with 90 locations across the country. Those distributors who have a very important role for us in the local relationship with engineering firms, with contractors and with owners and operators. So, that’s one primary channel for us on the industrial side. The other one is we sell on a direct to national account basis.

So, our national account business which today is primarily focused in telecom. Generac is the number one provider with a primary providers to all the wireless telecommunications companies. So, we will provide the backup power for the majority of the cell powers that are out there in the U.S. And we do that on a direct basis with those. The industrial dealers are the wrap around support for those customers, but we sell on a direct basis. We also sell direct to the equipment rail yards to (inaudible) the United Rail and Roads in our Magnum business. And we also have some exposure to government military as well.

Now just real quickly on manufacturing footprint, here in this building here at Waukesha, the further building as I said as been completely (inaudible) the entire building going through a massive renovation right now. You can see the original building that’s built in 1965, expanded 9 times.

We have our Eagle facility which is 15 minutes west of here, where most of our commercial and industrial products are manufactured.

The facility you are going to visit today is the Whitewater factory which has a total footprint of almost 0.5 million square feet including the distribution center. That’s 200,000 square foot distribution center behind that plant. So, we are going to visit that plan today, where we manufacture most of our residential product.

And then just north of here about hour and half up in Berlin, Wisconsin is a Magnum product business. A building of about 200,000 square feet. Actually when we bought that business a year ago, the first thing we did was expanded. We added over 25,000 square feet to that footprint because their business has been growing very quickly.

Now what you are not going to see today a new building that we have added here, a building that we bought in September, kind of a head of the run up here, is a building up in Jefferson, Wisconsin. The factory we actually built in mid 1990, was part of our at the time something we hold our portable products business, a business that we sold in 1998. It produced portable generators, power washers and other engine powered equipment. That business we were number one in North America in portable generators and power washers at the time of the sale in ’98 to private equity. Private equity in turn sold it to Briggs & Stratton, Briggs & Stratton closed this facility about three years ago, consolidated its production down south and overseas and this building was available for sale so we went it and bought it.

We were going to use it more in warehousing operation, raw material type of operations and we decided that we are going to bring this facility online and add it to our manufacturing capacity here in the first of the year. This will add about 20% of an increase to our manufacturing footprint in the U.S. in terms of capacity. And we are going to need, we are going to be pretty busy in 2013 and beyond as you are going to see today.

Now powering ahead, this we are going to focus the bulk of our efforts today as I said before. For those of you who have heard me give this (inaudible) we have been on the power ahead strategy now just about two years and it's working out we believe very, very well. There are four main strategic objective of the powering ahead. First, is the grow that residential standby market. How do we take that 2.5% penetration to something greater? And Russ Minick who is our Executive VP of Residential Products is going to take you through that in just a second.

Gaining industrial market share. As we are on the residential side we have 70% share of the residential market. But here on the C&I side on North America we only have 15% share. And we feel there is a lot of opportunity by focusing on improving distribution, by focusing on improving our access to customers and expanding our product offering we feel our great opportunity there is to take that market share to something what’s higher here over the next several years.

The last component of our strategy, diversification of end markets of new products and service and also entry in new geographies, I’ll go deeper into those in my part of the presentation after Russ and after Terry.

So, with that I’m going to keep things moving along here. I’m going to introduce, Russ Minick, our Executive VP of Residential Products. Russ.

Russ Minick

Good morning everybody. I’m going to talk you little bit as Aaron said about growing the resident market and it's really a great challenge to do that, it's clear what we point out here is the mission here is not to grow share per se business the mission really is to grow to the market. We got a really strong market share in this position already, and the best thing we can possibly do is actually lift the market up through greater penetration of these products.

We have made progress, I’d point out that in 2009 we were about 2%. As of 2011 we were at 2.5% and that’s really a good gain. Every percent that we gain is really worth about 2 billion in the market going up and at about 70% market share you can see it's really exciting stake for us to be successful in doing that. Because of that we want to go faster and the desire to go faster is let us to do a really good study late in the second half of 2011. And we are really excited about what some of the insights and things we unearthed in that study around consumer particularly and been able to target that consumer and speak to that consumer effectively.

It's important I think when we have a low penetration category to have the ability to target just from an efficiency and an effectiveness standpoint. And what we found is a couple of really interesting things. One is we are really able to pinpoint who are the most likely buyers of home standby generators, not only from a demographic standpoint which is where a lot of companies are today, but also s psychographically what are sort of the emotional triggers and the reasons they buy. Why does the person on a block, why does one person and a person two house is down dozen. There is obviously a difference there. So, we are able to and we think to crack to code on the consumer a little bit and I will talk more about that in a minute.

Next round that also is, is where are they. So, it's one thing to have a great profile on what this consumer is but the ability then to specifically find that person is really important from a marketing standpoint. At 2.5% penetration our super bowl ad doesn’t work a lot. You got 97% plus of waste that way. So, a precision is really important again. So, findabililty is a critical question you are able to answer here.

Lastly, one of the things that came out in our study is looking at other products that have made this pioneering journey through their life cycle is. This whole push approach, in other words not only do you need that precision marketing ability and the ability to talk to that consumer and the compelling way the way they want to be communicated with, but you also need really strong aligned focused (inaudible) distribution in the local markets. So, then do something with those leads and to be the face of your company and away. And that’s been a challenge when you got mostly in electrical contractor base out there. They got a lot of strengths but there is also some areas that we need to provide some tools to strengthen that. So, we will talk more about that as well.

So, we came up with a process called AMP, and AMP is an acronym that really stands for the overlaying of three important pieces of data that we got. First being the activation data, and I think Aaron has talked to most of you about activation data before, but our home standby generators require an activation codes to go into motion and work automatically. With that activation code process, we are able to obtain consumer data, names, address, emails, all that kind of stuff. So, we’ve got really good profiles on existing owners.

The second part of this is market opportunity index. Market opportunity index, we track every power outage in the U.S. and I will get into a little bit more detail on that in the next few slides. But that really allows us to pinpoint hot zones and markets where our products are most desired.

The third part and one of the more newer parts of this is prizm segmentation. And prizm segmentation we are using that and many of you may be familiar with prizm segmentation. And I will get into that a little bit more as well. But it's a Neilsen product; it's frankly scare everyone of us or in a prizm segment, and our names and data are in one of 66 prizm segments. And but what it allows us to do then is to create profiles and then move them to our prizm delta which gives us perfect findability and that’s bull’s-eye in the middle. And I will get into some detail on this in a second.

So, to startup with some market opportunity index. As I’ve said we track all power outages in the U.S. but all power outages aren’t treated equal. So, we look at how many people were affected, the duration of the power outage as well. We subtract out mostly family housing so we are looking at single family houses. We then also do a slice across the household income in the nature of $100,000 or more. So, when we look at this map, the heap map, the red parts represent there has been a lot of power outages. Lot of people affected not a lot of; there is lot of single family homes and decent ability to obtain the product.

We update this all the time and this is really an important document. It's also I’d like to point out to its aged. So, a power outage today is worth more than a power outage three years ago. So, for example, if you look at Florida. It's kind of bluish down there. If you were to look at this map, say two years ago, Florida would have been bright red because they haven’t had major outages sometimes. It's a living document. It's also interesting it's not just hurricanes and things like that. You will see things like Houston and Oklahoma City. This is where you see the 50 year old grid and unreliable grid areas. You look at Michigan, really red hot, again lot of that is grid related not necessarily just that’s one related.

So, then we lay the activations over that and while it looks impressive not super use alright, I mean so our market is half of the U.S. So, what we can do is we can drill down, we can do much better. So, let’s take a look at Richmond, Virginia for example. We can see those areas in Richmond that are blue; it means there hasn’t been a lot of outages. We see areas that are red lot of outages. We also see clusters of activation scenarios where you can look at the yellow circle there isn’t clusters of activations.

So, that help us with something as far as dealer development or you can drive us in other direction, but clearly we got clusters of people that buy our products in these top markets. So, what do we do with that? Well we can go deeper. We can take this down to the block level now. So, we can go street by street and we can start seeing where clusters start emerging and we know if you look at this clusters overtime, where clusters begin they grow. And on streets where people start getting these products more people do. So, you can see areas that have lots of these units and other get down, but what we can do is really start pin pointing down. We are getting tighter and tighter. Still not good enough, when we can do better. So, as we look at these streets that have users, we are able to take these users and put them into the prizm tool I’m talking about. They will fall into one of 66 segments and by doing the data and things we found that there is about 5 to 8 segments that almost every buyer of our products fall within of the 66. And what that does is gives us both a demographic and psychographic tool and more important gives us perfect findability.

And so we are able to then basically take a look at the market, identify specifically who are the most likely customers, we also get their preferred media consumptions, so we look at in a market, identify these likely users and we can also with this tool we can identify do they watch Fox News or do they watch CNN, do they read Wall Street Journal, are they yellow page user. We are able to take down media consumption into the store as well. And then it gives us literally at the push of a button it creates customer list for us to market again.

So, this all it just came together recently and what it does and really what it does is a dollar spent a year ago versus a dollar spent in this new process, we see a return on investment five times greater, because of this target capabilities.

It's a proprietary process, it was really hard to put together, it's highly automated, we really got really excited about it and this kind of really (inaudible) so very exciting stuff. So, we have the ability now to create this really valuable highly targeted leads. What do we do with them? Well I will tell you, coal power play, that’s a really exciting process as well. And previously what we did we create leads and we would educate consumers and tell them about Generac and then we contact the dealer or retailer or hardware store something near you and electrical contractor near you. We are not going to do that moving forward. What we are going to do is we are going to do is we are going to put these really valuable leads into a sales process. A simple yet what we believe would be a very effective sales process.

And it's called power play. And so we talk about the AMP target marketing up here. We talked about the AMP target marketing up here already; we talked about the leads that generate. What we are going to do in the future now is we are going to drive all these leads to one or few places, either or 888-Generac.

From there we are going to go into the power play reset product. And the way the product is going to work is, we put together a Generac lead team. And they are going to engage that consumer either on web or on phone either way and they are going to qualify that customer, engage that customer, educate that customer and even go so far is to schedule (inaudible). So, scheduling (inaudible) for similar to what you would see for example with open table or even airline software. We have got dealer capacity laid out and we are able to schedule against that and I will show you some of that in a minute.

So, we are actually, the goal of the step one then is really to is to get the customer engaged and to schedule and in-home appointment. These are installed products and in-home appointment is where the magic happens. We then take that lead and we automatically push to an align dealer, not any dealer but a dealer responsive training, that’s aligned with us, discuss the tools to take this lead. We push it, this is an iPad based system and I will show you that in a minute. So, we are [picking] our dealers with iPad. They will open their iPad up and they will have this lead there. Those allowed through the (inaudible), you will see the tools that we have provided which are really going to help in electrical contract who come across this is professional and we are able to do much, much more at home now, and you will see that in a moment.

The in-home consultation will take place either that sale will be closed on the spot or if not they will go into step three where the Generac lead team will follow-up within $40 of that in-home appointment, ask questions, attempt another close, we may offer finance options, we may offer other different easy to buy options to try and get this sale closed. And if for some reason we cannot close that sale it will go into a follow-up process. And this is critical in-home standby generators. We know through our research, usually it takes more than one bad experience for data to pull the trigger on this. So, it's not the first storm or the second storm, sometimes the third and fourth storm. So, we know that many of our customers they have been considering this product for three years and in some cases. So, a long-term buckle of process is really an important addition to our sale process and we believe it will bear fruit.

If they did close in the step two, we are going to go into a really simple yet consistent customer satisfaction process, and we will be able to really kind of talk to the customer about how the experience was and we are going to be creating our distribution partners on this customer satisfaction moving forward as well. So, some really nice simple process to take place.

So, let’s take a look at kind of what the in-home tool looks like. So, at the top here this is the opening screen of the iPad, so the electrical contractor who is on this program would open it up in the morning room, hey I got a lead for Mr. Burt Jensen in this case. On the side here is all of the information that we took in step one with the Generac lead team. So, it will be everything from the size of the house to the things he wants us to cover and all of this life balance information.

If you will go out to do that in-home process and you will have a really nice interactive presentation for the first time. So, again these electrical contractors really smart guys, very technical guys, but just by nature not the greatest sales guys. So, providing a really good simple, interactive presentations critical. So, with time provided by the end of the day, I’m going to actually do a live demo if we have time.

The next step then actually go to the presentation is the consultative backup power plan and this is really where the magic happens (inaudible) home. This is an iPad, it's a cutaway house in the consumer, the husband and wife, they can start touching on the things they want to backup, light up and it's animated and they can turn them on and off and talk about what’s important in their life and as I get through all of that and then when they are done then the electrical contractor would be like, I did notice you are in a well here, you didn’t hit the well pump. Thanks I forgot. So, he hits the well pump.

So, they will be working back and for the with the consumer to create a customer plan base there. That will feed into NEC approved size, and this is national electrical code is document that’s several hundreds of ages that. We take it all of that and put a really nice user interface on it, it's super simple and it all feeds into it and it creates, and I think all the guess work has a sizing. It creates the exact power solution they need. But let’s say that power solution then takes them into a really expensive unit. We got the ability to do something called load shedding here which stages at the startup of heavy electrical usage of a client, where we can need and push load shedding and take them down and find a solution with their budget here. So, it's great.

From their benefit, populate automatically, a custom proposal for that customer, however this is an iPad, so we are taking photos and where the generators are going to be and where the electric panels are going to be. That all populates into the proposal as well. Pictures of the product, the whole thing. So, this proposal is goes through from something that’s exactly what the consumers customize backup power solution is, prices it, signature pad, push it, email directly to customer or print in-house at that point. It's a huge step change improvement over where the electrical contractor world is today, and a huge step change improvement over anything out there. We have benchmarked age track companies, we benchmarked siding companies, window replacement companies, this is absolutely best in class, and it's very, very exciting I think. And we expect to have great results from it.

So, what’s the timeline around this? We are just finishing up a beta in more or less now, we have over 200 dealers that we have engaged in this process already, they are giving us really interesting and great feedback and we are making live changes. We are going live in December. We have 800 to 900 of our dealers at a dealer meeting in January, we expect to have most of those guys signed up then and ultimately we expect in over the next 12 to 18 months to have really a high percentage of our line partners on this program.

So, kind of a summary there. We got this precision marketing capability to target the consumers, we are going to take those valuable leads, we are going to push them through this new sales infrastructure that we have got in place this power play through this engaged dealers of our. We are going to work with the consumer and a consultative way finally, in a professional way with the iPad, we are going to track close those sales, if we don't we are going to have a follow-up process, we are going to have a customer sat process which are all great improvement as well. And what’s great thing about this too is our dealers are absolutely aesthetic about this, because they get up in the morning now and there is not only a lead but qualified presold appointment. And so all they really got to do is go out, use these tools to close that sales on (inaudible).

So, our dealers are really sticky to us, now they are very appreciative of this. We are putting money in their pocket and the loyalty is running deep which is fantastic. So, not only do we have 4500 residential dealers out there, they are getting super excited as well. And remember we started all this up with pull and push and that’s what it's coming from both sides. So, that’s a little overview of what we are doing from a resi standpoint.


Terry Dolan

My name is Terry Dolan, I’m the Executive Vice President of our industrial Products business. I will take the next 15 or 20 minutes to walk you through some of the growth strategies we have on the industrial side.

Industrial business is the much different business, it's the business that’s driven by regulation by code and mission critical applications. And you are going to see Generac industrial product in many of these sets of applications. And you look at the markets that we serve today. As Aaron talked about before absolutely a leader in the telecom market. So, they are supporting a lot of a wireless companies to [sell] power etcetera. But also in datacenters, commercial applications, government, industrial, and then with the addition of Magnum power products going into special events, construction, more into oil and gas etcetera.

When you look at Generac, we really have focused and have broad breadth of product of gaseous and diesel generators, a single set of 600 KW, and then with some technology that Generac created about 12 years ago with MPS to scalable up to 9 megawatts. So, we can handle from the smallest job to the most of the most of the largest jobs and applications that our customers require. The other thing is our products are designed for emergency duty standby. So, for backup power. So, if power goes out they rely on this to bring the power back up.

With the acquisition of Magnum products, we are also then able to take the mobile generators, rebrand those under the Generac mobile power brand, offer them to our dealer network and our customers which is a different channel than [Magnum] and support and create again a broader offering to them to support them in their temporary need for power. And then also we have a full line of automatic transfer switches.

When you think about Generac and Generac industrial business, what are some of the unique differentiators for us? Aaron alluded to we are North American largest manufacturer of gaseous generators. And we believe we have an expertise in this and with the growing in the secular shift that you stand from diesel to gas, we really believe we are uniquely positioned to grow in this area.

An access through our strategic global sourcing growth, our manufacturing capabilities, we are able to provide shorter lead times to our customers. So, instead of having to wait months for products, they are talking weeks for product. So, in short-term need especially what just happened here with the hurricane out east and people who are looking for how do I get emergency standby into my business. We can help those customer much quicker than a lot of the other businesses out there. The mobile inventory available. This goes in the Magnum business as well as the Generac mobile power brand. We keep of a fairly large inventory of product available for our dealers, our counter partners and customers. Just in case you have something that happened with the catastrophe of this last storm, it caused significant power outages and the lot of business we did not have power generation as part of the business continuity plan. We are able to get a products, we are shipping products all week out into the affected areas to get people power that they need to help support their businesses.

And then through product innovation. Power generation is all we do, this is where our focus is. How do we make sure that we provide the best backup power generation for this industry and by being totally focused in this area and enables us to provide that innovation to our customers. And the last piece here is the return on investment for standby. A lot of business is required by code by and installed backup power. There’s also lot of businesses out there who are not required. And they have to look at how do I invest my dollar. How do I make sure I’m getting strong return on investments for backup power as part of the business continuity plan. And we believe with natural gas and gaseous backup generators, that we can provide a stronger return on investments for lot of businesses.

According to Frost & Sullivan this is a report that they published recently. You look at the power generation market in North America about $2.6 billion in 2010. And at the end of 2017 forecast nearly about $3.5 billion. It's only a 4% growth rate year-over-year. How do we grow in this marketplace?

When you look at 80% of this market it is really around standby power, again the market that Generac, the market that we participate in. But what we look at and we look at how does Generac growing this. One is the market experience the shift from diesel to gaseous generator and again Generac being uniquely position to capitalize on this. But also with the major power outages events that you have experienced over the past 15, 18 months where hurricane Irene, hurricane Sandy with the storms that ran through Indianapolis down to Washington DC but also with the age and infrastructure grid, the need for backup power and optional standby marketing growing this market we believe again Generac is poised for a significant growth.

Aaron talked about the shift from diesel to gaseous generators. I will talk about the 29% installations today and backup power. I guess be this natural gas or liquid propane versus diesel. And we see that growing to about 35% 2017, but where you see the growth is really in its under 300 KW and up to 1 megawatts. Significant growth and this is really in a (inaudible) the area that Generac participate strongly.

So, when you look at that market, you look at a market that doesn’t have significant growth but it has a secular shift from diesel to gas. It really takes a strategic focus on how we are going to go and gain share and grow our business here. And we look at Generac industrial power being recognized as the trusted expert and a go to source in standby power solutions by providing industry leading product and services. And the three prong approach is around customer access, how do we gain stronger acceptance, and increase to specification rate of Generac diesel and gaseous generators to drive a higher closing rate. Also how do we increase the optional standby market taking unique post to end users and bringing them into the state where they are not required by code.

The next is channel optimization. We can go out and we can create the strongest connection to customer where we need to make sure that we have the strongest dealer channel that’s there. So, through a performance metrics, helping and drive recurring revenue, the profitability of their business through a lot of training and operating of these dealers we both drive a significant improvement in our channel.

And then lastly the expanded offering. By taking a customer first approach, understanding the market, different segments that we are going after, we believe we can drive an expansion of our products and other offerings for services that will provide unique value proposition for Generac.

So, let me walk you through a little bit about the customer access. The traditional market that we participate in the industrial space is this fact where negotiated market, but again it's driven by code or other mission critical application. Any end user whether it's manufacturing company or data center etcetera has been working on a new facility, expansion of their facility, their higher end architect and an engineer. And the engineer is going to come in and design the electrical system and a components they need to support their business. And in their will be a backup power. And what we need to ensure is that those specifying engineers are accepting and specifying Generac power systems as one of those sources.

There has been higher general contractor who bid out for a number of different electrical contractors and 80 other subs doing a job. That electrical contract that builds the entire electrical job and in their concludes the power generation. So, our dealer electrical contractors have to have a strong connection. Most of the time, the electrical contractors the first buyer of that product before you saw at the end user. So, we do to drive the acceptance of special (inaudible) rate which we know drives our sales as we take little three approach, three piece approach.

Training education, we developed the professional development seminar series but we have a series of programs that we can deliver and we train over thousands of engineers on an annual basis on what’s happening in trends in new market. How do they specify power generation. As again these electrical engineers specify engineers power generation is now all they do. It might only be 5% of their time, 10% of their time. So, they need that constant updating.

The other is by providing industry leading tools. Let’s talk about power play which is a very unique pool to Generac and our residential business and imparting that in home sales process. We designed a tool called power design pro, designed by the engineers for the engineers. This is a tool that they use when they are working on a job to help them determine what the power needs are going to be. How do they spec out that whole unit for the day.

This is a product that through consulting specifying engineer survey that was recently done about 40 to 43% of the engineers in the U.S. are legalizing this tool. We do webcast and we are doing constant training in it to get more and more adapted into that product.

And the last is experienced plus points. Every week we are flying engineers, electrical contractors, end users into our facility to see our product. As Aaron talked about plant here in Waukesha and a plant in Eagle are really geared towards much of the commercial and industrial business. They can see live products working, they can see the products being built, they see the vertical integration that Generac has developed again a very unique post in the marketplace. But we also have the power (inaudible) where we take it to the market. And this truck the 53 foot (inaudible) has a live MPS system working at it to 250 KW units working in it, it has a classroom. It has cutaways of products that they can get the speed, the feel, the touch to understand more about Generac’s capabilities.

The next is again narrowing down our approach, not trying to take a short-term approach on how we work with specifying engineers. We work with McGraw-Hill, and through data resources they have been able to gather. We can identify down to specific markets who the top engineering firms are. We can identify the types of markets, they are specifying a product for and we can also see if they are specifying Generac or if they are not specifying Generac.

And between Generac and our dealer network we can then create a very strategic approach on how we work with engineers that to educate them and what Generac can do the innovations, the technologies that we have again driving stronger acceptance and prove necessitation rate again driving increase in sales.

The other is when you got a market that’s growing at a relatively flat or 4% growth. Like the massive growth we are talking about market share gains in the previous couple of slides. The next is how do we go out and create market. How do we bring more people into this optional standby market? it's a research done back in 2004 by Berkley and talked about how interruptions cost U.S. businesses about $80 billion annually in revenue loss.

This other studies out there that more up-to-date, let’s talk about 120 to $160 billion. A lot of the folks in here from the Northeast, think about what hurricane Sandy just did last week. For businesses that were not benefited the buildings were not damaged by the storm, but because they handle power for 3, 5, 7 day storm, how much does this cost their business. And for those businesses that do have backup power, think about the unique value propositions caused, it helped them in their marketplace. So, it's convenience store that now families can generally get milk and bread and gas and things like that, what a much difference value proposition that they are looked at for that community.

So, what we will do is we will take higher as 14 million commercial businesses range from one person businesses that operate internet and company have their basement to retail stores, the hospitality, gas stations, restaurants, etcetera. And we will put this to a filtering process to really hone down on what other markets that we should go after and then how do we develop units of utilizing the power outage as Russ talked about with our markets severity index and using the startup capacity with home standby where home standby is a business is also a power. We can drive a very unique approach on how to direct marketing campaign with that and then by going through segments we can develop a unique return on investments proposition for those businesses.

So, think about gas stations, so that national petroleum survey has got about 159,000 gas stations across U.S. They are not coal regulated to have to have backup power. Over 3500 gas stations in New Jersey. With the hurricane that just happened here, you imagine the life that we were going on reminded of 1970s when we had the short to fuel. It wasn’t that there wasn’t fuel and they had inabilities to pump, because they had no power. So, by developing a proposition we can go to these gas stations and create a backup power plant so that think of the business that they would have been able to maintain. Think about that would help in serving that marketplace.

So, again where Generac is very unique with position in this, is this is natural gas. All of these businesses have natural gas to their facility. The natural gas typically the lows will be less than 200 KW. Aaron talked about the capital investment we have the 35% less than what the diesel is. And with the diesel you have a lot of other cleaning of the fuel etcetera, and have the fueling are too long. This is a constant flow of fuel to that with the natural gas line. You are not worrying about and power outage of how they are going to get diesel fuel to my facility, because you have that natural gas line (inaudible).

So, if you look at the future state, you are really going to have two sales approach; we will continue to drive improve on this traditional sales process, the end users are focused on end users understanding how Generac works in different applications and provide the unique experience. Working with engineers to make sure they understand and excess drive a higher specification rate for Generac and then working with the electrical contracts to understand the easy installation to support so we can provide them. Again it's their brand that’s on the line we are working on job, we are going to make sure we support everybody in that site. But we also create this commercial market and it's really that where Generac is the trusted expert working down with the end users. Making sure they understand about optional standby that is not hundreds of thousands of dollars there might be tens of thousands of dollars that they have to invest, creating unique financing programs to help support them to get into this business not tied into a larger cap on investment.

The premiums greater awareness in direct contact will increase our penetration and the optional standby market. So, this helps you kind of understand what we do in the customer access piece where we talked about our channel. Channel optimization in the residential channel we have over four thousand dealers. In the industrial channel we have about 35 dealers with little over 90 locations across the U.S. and Canada. We have to make sure that these business are optimized for strong performance that didn’t take care of the customers nee today and what those customers needs are in the marketplace.

And when we look at the performance over dealers we had over the number of years, this has been an evolution we are living on. We kind of mixed performance, inconsistent in the sale process, some dealer turnover, capital constraints to drive to really to support this business to take this to capitalized business to really operate and perform here. The other one is there is a limited set of capable independent dealer network out there to add. There is not a lot of businesses referenced and I want to get into the industrial standby marketplace. But one of the advantages that we have with Generac is we have little over 4,000 residential dealers. Some of those businesses will continue to surface up in their capabilities. And their capability to get into the larger business.

But by us developing a future business model, teaching to investors and entrepreneurial we will be able to turnover some of the dealers, improve those dealers, rebuild or replace the current dealers that we had and drive to what we believe the future state of Generac industrial be. With the Generac industrial dealership contract will be the most coveted contract in the industry. Other business or entrepreneurs are looking to get into this marketplace and want to be align with Generac.

Where the Generac dealership becomes a destination point for a backup power in the marketplace. There is seen as the trusted expert whether it's in Atlanta or it's in New Jersey or it's in New York or Houston any place else. And this will help us to drive to continue align with our dealers building trusted partnership in that marketplace.

And then lastly as the expanded product offering. So, as we start to hone in on those markets and we do better job and bringing people into the optional standby and natural gas, we sort of taking a look to segmentation of the business and we are really trying to access the targeted customers with the customer who buy this also buy ultra-quite enclosures or special tanks, larger kW units, this is helping us to drive white space in our category.

What are those additional products and services that we need to offer and to better understand that. And you will see that drive future product innovations in new markets. So, for curtailments demand response where the utility is asking a business to go off run and run the power used to generator to their power needs to two hours or four hours.

Extended run and offering green so more natural gas and bi-fuel a number we talked about. Generac has a unique product called bi-fuel, we take diesel generator, we actually start doing put natural gas into it and then can extent the run time from a diesel fuel up to four times the original tank.

The other thing I spoke before that will help us drive in our product line for future, whether we decide to make, design and build something to ourselves, we decide through M&A that’s it's quicker for us and more focused for us to buy or it's a brand decision. So, we go and source a products and somebody else to rebrand it for Generac. So, one of the things we did with Eaton last year or year before, was we noted we had a gap in our switch gear offering. So, we looked at should we make something, where should we buy our brand. And what we found for the number of applications and for the uniqueness of the product. We will better partner with Eaton to provide a Generac brand at switch. So, now we have that complete package with the generator and switch under Generac brand that can be sold through one channel.

But also then as you look at the uniqueness of all of these jobs, a product we got of this plant, every product is different. It specify by that engineer specifically for that job and application and it may require special tanks or special enclosures, we look at and it's okay to optimize our business and we are better off doing it ourselves more from unique cases identifying potential partners that our dealers can be aligned with. So, we can go and again supply with our customer needs.

So, for the Generac industrial power it's about market share gain, and it's about market development. It's about coming to trusted expert and it go to the source with the engineers, the end users and electrical contractors. As we talked about we do this because we believe we think we are in position to grow our share to expanding customer base both on a direct and indirect basis, by having laser focus on the customer are going after. By stronger dealer network that can support the value proposition and support the brand and our customers that are in the marketplace. And then by expanding our product offering to support the current market but also as this trend continues to move from diesel to gaseous product and beyond. We will continue to work on that expansion.

So, with that I’d like to turn it back over to Aaron Jagdfeld to talk a little bit about our diversify demand.

Aaron Jagdfeld

We appreciate time from Russ and Terry in terms of sharing some of the plans through the more the deeper plan if you will on we are going to achieve some of the growth rates. What I want to talk to you about now is the other two components of the strategic objective, both Terry and Russ are involved in these two but we thought just to kind of keep the presentation slide here. I will go through this with you.

But first one is the strategic objective of diversifying our demand. And so this is that diversification can come by the way in a lot of different forms. The diversification can come in different end markets, can come in different products, it can come in operating services versus offering product. So, just to be clear we got pretty big opportunity space out there, Terry talked about white space just in the industrial markets. We got a lot of white space really across all of our markets both residential and industrial.

And some great example of the type of diversification we are talking about though is the purchase of the Magnum product business a year ago. I mentioned that as a top of the presentation with my comment. Just a couple of take backs, it's the business that was founded back in 1988. It's headquarter they said about mile and half north of here. They got about 330 employees actually more than that today. They are the leading manufacturer of light tower and the picture of the light tower is right over here in the far right.

Light towers are basically fixed application generators, so you open the hood on that, it looks like an engine, looks like an alternator, but it's got a fixed light extension on it and it's used mainly primarily for road construction, commercial construction, it's also used heavily in oil and gas, both exploration and extraction. Whatever permanent power or permanent lighting is not found. You will bring in these types of pieces of equipment, generally sold to the rental markets or rented through the rental markets. We sell them to the rental yards.

Magnum is the number one market share leader in the North American space in light towers. They (inaudible) in mobile GenSet that’s the graphic right up here. I’m again on Slide 44 for those following along on the webcast. The Magnum mobile generators, they only entered about five years ago, obviously it's very, very well with our products. As terry said we got a lot of customers that in the past there are great example of the telecommunications customer who needs a both a mobile solution as well as a stationary solution. In the past they have been able to participate in the mobile components of those large bids. Now with our Magnum offering we can. And so entirely incremental to our existing customer base, we will offer those types of products to our dealers and our end customers.

They also are (inaudible) pumps which really I don't think most people knew what a pump was until unfortunately prior to Sandy, now really to talk about product right now, a lot of those products have been used to take the water away to dewater as the industry refers to it, take water away from the areas where it shouldn’t be. So, often times you will see those types of pumps used in construction sites or in flooding after math of flooding to dewater those particular areas. But Magnum has a full complement of product there.

Great example of diversification. None of these today are related to our primarily if you look back at the historical Generac or the organic Generac, markets we didn’t serve, road construction, commercial construction and oil and gas. We were not serving those markets. We don't have the customers in the rental yards. We are not customers at Generac. Products with wheels, everything we made up until our acquisition of Magnum was stationary. So, really great strategic fit for the company and a great example I think of diversification. To a lesser degree and the company we closed this transaction in February of this year, small company down in Alpharetta, Georgia providing manual transfer switches. These are products that are permanently bounded in home or small business and to which a portable generator is connected through a big extension cord. You can see this cord here, there is box which is the switch mechanism if you will. It contains the load center with circuits are going to be backed up by the portable generator. Portable generators connected to an inlet box which sits outside the building through that cord and provide power to the backup circuit. It's kind of a half step between a portable generator with extension cords and a fully automatic home standby generator.

So, we saw there is a bridge product. And with the bridge product you said before since 50% of the owners are on standby generators either owned or own portable where this is a great step up opportunity if we can control the entire chain here. So, maybe we have consumers today, households today where the budget is quite a bit lower, then maybe one of home standby fully automatic system would be, (inaudible) by a portable generator.

They can have this as an option to connect that portable generator permanently to home through the electrical system. Our goal is to take these manual switches and to give consumers that conversion option at some point to convert that manual infrastructure that’s already been installed to an automatic solution. And then to put down on the ground a fully automatic home standby. So, we see there is a nice bridge product offering, there is about 60 SKUs that came with this business. (inaudible) why not just go out there and start engineering these things is not that complex and the fact of the matter is they are not. But you have to get dual approval for every single electrical items that you engineer and put in a home in the U.S.

Consumers won’t buy, retailers won’t sell items that are not you all listed. That your listing process is both expensive and time consuming. This is an ability for us to pick up those SKUs 100% you listed right away out of the gate. Again great example of diversifications of our product line.

So, when we look forward to the continuing to diversify Generac product offering and our end markets and other services that we think about offering. We also look at what we do really well. What are the company’s current key capabilities to what can we leverage into other spaces. So, when we look at ourselves if I ask ourselves pretty deep question, this is before Magnum, before GenTran, when we started to think about acquisition and we started to think about going into new product categories, we wanted to evaluated internally kind of a swat analysis. What do we do very well.

It's the strength of the company. Lean cost structure and continuous improvement culture. Generac of 1959 started by an engineer, if you guys know any engineers it's a very cost effective, very cost focused individuals generally and I found there was no different. And as a founder of the business very cost conscious is a great way to put that. Very continuous improvement focused. So, driving low cost and driving continuous improvement, the combination of two things, in our D&A today as a company. The other thing it's in our D&A is strategic global sourcing. We have been overseas for over 30 year's sourcing component. We have got very deep supply chain relationships overseas, something we have worked on for a long time. Some of those relationships go back 10, 15, 20 years in terms of total relationship. We have engine expertise and an engine heritage of the company. We manufacture what you will see today our Whitewater. We manufacture our own air-cooled engines. We are deeply involved with retrofitting automotive and truck derivative engines with fuel systems that operate off of natural gas or propane. That technology is not rocket science but it is a certain amount of technology something we have been doing for over 30 years. So, not only do we build our own air-cooled engines, but we really understand internal combustion engines. We understand how to make those internal combustion engines run very effectively off of natural gas or off of propane. It's a skill set that not a lot of company have, Generac has adapted and has perfected that skill set here over the last 30 years.

Multi-layered distribution network, as I mentioned before I went through our distribution strategy and philosophy, because of that multi-layered distribution network we had a lot of different options to take new product to service the market through. So, that’s something of a key capability.

Our focus on innovation and I will talk more about that here as it relates to a particular product line that we are entering into. But the company is incredibly focused on taking ideas. We are trying to solve problems for customers, in unique way, if they haven’t installed before. We have 150 engineers on staff working everyday on power generation and engine powered product. They are thinking about this solutions, if you look at the competitive set of companies that are out there that compete directly with Generac, we got a single one of them with power generations first in their mindset.

All of our competitors do something else first and foremost. Power generation is secondary (inaudible) in their businesses, because power generation and engine powered equipment is first and foremost what we do. We spend the lot more time on innovating those components and innovating those systems. And coming up with innovative solutions.

Best-in-class consumer insight process, I will walk you through what we think is something that we figured out in terms of making sure that we are getting customers really listening to customers, is really what it comes down to, listening to customers, understanding the pain point that those customers have and then again using our innovation focus to solve those problems in a unique way. And we also have the rigorous QA process here as the company, obviously you can understand with a home standby generators and needs, but that product to run in an extended outage, 7, 10 days, 2 weeks nonstop. The kind of qualities you have to have built into the product to something to do, you wouldn’t sit there and hop on your lawn and drive it for two weeks. Our product is designed for long life and long use. And takes a different level of quality assurance well beyond what is expected out of most non-principle application type product.

We have category selection filter process. The point of this here is I want to let you know that before we jump into some of these other product categories whether it would be mobile, light towers or whether it's power washer which I will go through here in a second. We went through a pretty rigorous filtering process, it's new marathon which (inaudible) we are able to create basically a weighted average type of formula that helps us drive kind of go, no go decisions around where we want to put our resources or where do we put down our best on the next product or next end market to enter. So, it's a critical process, it does exist and it's something that we use to help drive decisions around where we are going to put our resources going forward.

Now I will talk about consumer insight processes. We really look at the consumer insight process and this is something that’s pretty new to the company and I credit with some of the new talents that we brought in, the company like (inaudible) who have been with us little over a year coming from other places. These are processes that have been used in other industries for a long time. At Generac we always had elements of this but this rally brings us together kind of end to end in a process that helps us kind of understand it and speak to it internally here as the company (inaudible).

The first thing in any new product category you got to build the foundation for that category, and that foundation comes from the understanding of what is your brand going to stand for in that category. What’s your vision for Generac in a new category whether that’s power washers or if you are going to buy a brand like we do with Magnum. What does it stand for. Maybe you got to look at the trend, the macro trends, the consumer trends, you look at the channel trends, what are the massive trends that are out there or the major trends and how you are going to fit into that. And build off of those trend.

Maybe you look at in-home ethnographies as well as doing the pain point analysis that I talked about before. What are pain points not only for the consumer and how to use that product, but what are the pain points for distribution. And how they sell the product, how they service the product, in some cases how they install the product. If it's an installed product, showing the product is a big part of the pain point so we look at in distribution. In particular we talked about big box retailers, what are some of the issues that they see in selling some of the products they have. How can we as a company create solutions to only help end consumer with about our product but to help the distribution point, resolve some of those pain points.

Let me go through the ideation process. And again this is all foundational. We develop a unique selling proposition and then we have to develop concepts. And then quickly after you build the foundation you move into kind of the evaluation phase. Did your innovations work, that you speak to people, that you speak to the consumer. It's a lot of testing, your testing with the concept that you have developed, the testing of those consumer, you are testing with retailers, you build prototype off of your feedback out of that consumer testing. What is understanding kind of how people are going to use the product the kind of smaller nuances. And so you actually build the product. One thing they have it on paper so other thing they actually have it in physical form.

How do people interact with that product, take those (inaudible) that’s out in the field. Let people use them, watch what they do with it. And then be able to quickly take and go back and adjust and apply what you need to adjust before you take that product to market. That’s an important part of the evaluation through step 2 in its evaluation process.

And you get in turn those same consumers and for a distribution partners you go through preference testing, what competitive units are right against your product. What do people look at in the competitive set versus your product. What speaks to them until the feature sets or benefits or price points. So, we put all of it out there, so we do preference testing on those products. And the last piece of is really product launch. The communication of the product launch, the communication of that unique selling proposition for that product, the communication of the innovation, the messaging hierarchy and how are you going to develop that. It's a point of purchase display if you go into retail channel with a product. All of those things all into the step, the four steps of that.

This is a very critical process that is stage gated process, it's something (inaudible) as we launch we product, once we decide which categories we are going to get into. Now this is just one example, and I want to show this because I think it really shows how we take insight and we use those insights to create innovation.

So, when we looked at power washers. Power washers if you recall in my earlier comments today, this was a category of product that we basically consumerised this product in their 1990s, Generac did. It has been around since the 1970, power washers started out in painting segment. The people who do large commercial painting jobs were using engine powered power washing equipment manufactured by a couple of manufacturers and we look at that back in the 1990s when we said there is an opportunity here to take this and consumerise it and put it in every home owners garage. Because home owners, garden (inaudible) so much power, so if you are a home owner and you want to clean your deck, you want to clean your sidings, you want to clean your car, your boat. Whatever you are cleaning sometimes you need high pressure water. But you don't necessarily need an industrial piece of power washing equipment which cost thousands of dollars, it's much more technical to operate. Not they are user friendly.

We actually went up, developed that category in 1990s, grew it to be a fantastic category for this business, we are number one in that segment back in North America in 1998, we sold it. As far as that global products business. We have a nine year non-compete. With that portable generators were part of that sale, we reentered the portable generator category in 2007. As an example of how quickly we are able to move with these types of insights and take them to the market. Portable generators being only back in their markets for four years, well back to being number one in market share in North America for portable generators.

We think that we can take other categories of product like power washers and do the same thing. So, back in power washers, when we look at this category we said we really want to reenter power washers. We also said this question about two years ago. And we look at our process, filter, the filter said there is a decent market here, there is a lot of unit, engine power tool, the competitive set is pretty limited, the barriers to entry are not very great and there is a lot of opportunity when you look at without there. (inaudible) those products were holistically underwhelming, and we are on the market at that point. And they were by and large identical. They did the same thing there is no innovation and the price points have been driven down over the last few years.

You looked on line you look at consumer reviews for those types of products couple of years ago, because (inaudible) one star reviews were very prevalent. So, people were, they were underwhelmed by the product. They spend a couple hundred dollars, they get a product home, they use it for a task and they put it back in their garage, it wasn’t fun to use and wasn’t engaging for them and they never use it again or they had some other mechanical issue with it, because it wasn’t robust enough for what they were trying to use it for. It was too complex in their mind.

So, we saw this as an opportunity, we saw as a nice candidate to go out there and do something unique. We started asking consumers, so their next part of building this foundation for this category. We ask consumers, and consumers said, when I buy a washer for a specific task, all I see is Psi in engine cc's, you got numbers on the product when I go shopping. (inaudible) and engine cc I have no idea what that mean, how do I translate that into what I need to do to clean my desk. So if I want 3000 Psi or is one that 2200 Psi enough. So, it really didn’t speak to people in a way that told them how we are going to solve their task, or do their task?

The machines are confusing to operate. What are knobs and switches for? I burned up the last one and returned it. My hand hurt, after 15 minutes of using it. So, again engagement point. With the product you are holding this wand and this gun, and you are holding it for difficult task when we look at what people use these product for. They use it for up to two hours at a time. And one felt stroke what people normally do is they (inaudible).

The problem is these products are not ergonomic and we are not ergonomically designed and after 15 minutes their hands were tired because of the way the guns were created and the way they were engineered. The other thing we heard from people is all of these machined seem cheap, the online review is not very good. We went out we did testing, we took the competitive set of products that was out there. We asked consumers to show us how to use it. Show us how help us (inaudible), show us how you started, how us how you cleaned. And we understood how they interacted, how they used the product. we asked them to choose between what competitive set out there. So, which one would you choose and why? What drives you to gravitate towards this product versus this product?

Again to deepen our understanding to build that foundation. Then we also took the next big step which I think is massive when you are talking about a product like power washers are sold predominantly through big box retail channels. Those products we went and asked the big box retailers. We asked the merchants, we asked the buyers. We said what do you think about this category? Same answer from all of them, too many skus, need to cut back, return rates are high. When I compare those to other outdoor power equipment number one issue is pump failure. We get products back and the pumps burned up, why is that? Because most people pour gasoline in it, pull the rope start and then go figure out to turn on the water and hook up the hose. The problem is the pump is lubricated by water. So, if you read which we all do the manual for every product, of course, you would see that. What we would read of course like we all do the details they are right on the top of the machine. That say step 1, step 2, step 3, hook at the water and pour gasoline and start it. We all do this, except that we don't. Because we all see the gas cap and we say okay go pour gas in it. I see a rope and we are going to start that, if the engine make noise, I don't (inaudible).

The problem is you shorten the life of the pump you can burn it up. So, we heard that universally from buyers, that’s why the return rate is so great. We also heard from buyers, all people want the Honda engine. This perception had been built that somehow a Honda power washer was better than any of the power washer in the market. A Honda built a great engine, we know they built a great engine. They also built an extensive engine. And because the consumers has been basically talk to, that Honda engine somehow in their mind they built up the images. There was no brand on the product. The brand was all about the engine. (Inaudible).

It's Honda engines North America’s largest customer, because of products like this, because consumers they got to have a Honda engine and retailer said people want Honda engine. The fact of the matter is you don't need a Honda engine and a product like this. It's a great engine, it's too great for product like this. The product is going to have some limited use. You can take the dollars, instead of spending money on a Honda engine, put those dollars in ergonomics, put those dollars into features and benefits that other can use. Drive a better value for the consumers solve more problem.

The other thing we heard from retailers, there is no innovation. Somebody need to bring me something new, and price points of course have been driven down because there was no innovation. Because everybody was focused on the Honda engine, the rest of the balance of the machine has been cheapen, the quality was cheapen. It is great engine surrounded by junk, and that’s our assessment because we look at the start before we jump into it.

Removing the pain. This is the other part of the foundation. If we look at this, we took it, we reduced the pain of return to the retailers. We came up with an innovative feature to protect the pump. If the pump goes without water for a period of time, for a short period of time it shuts off.

Our engines have had oil shutdown, low oil shutdown for years, become standard on our engine. So, with that why shouldn’t we protect the pump, why is we never done that, because when the (inaudible) price points, people are de-contenting product, not putting content into product. we saw there is a different challenge and a different solution.

Remove the pain and selecting a power washer for the consumer. One machine for all tasks. We said, if you are a consumer, and you are shopping, instead of this whole thing Psi and cc, let’s talk to you about that, what you are going to do this Saturday morning. Are you going to wash your deck are you going to paint off of a building. What do you want to use that power washer for? Maybe you are trying to clean concrete or brick, that takes a lot higher pressure than cleaning a wooden deck. Why has nobody developed a power washer that has variable pressure. Why is each one an individual SKU around a certain task.

I buy pressure washer at a low Psi to do my deck, but I can’t clean concrete with it. That makes no sense to us at all. But again if you are driving price points to the bottom and so race for the bottom on price and margin you don't innovate. You know what additional content into the product. We wanted to fully assemble it out of the box. One of the things you heard universally from people we talk (inaudible) buying this for a task.

If I’ve got two hours on a Saturday morning to clean my deck, last thing I want to do is force out of box and spent two hours putting it together. So, we made it (inaudible) right out of the box, the wheels are on it and tilt the handle up, you are ready to go, pour gasoline in it, put the water up first, before you start it and out of the box you are up and running in a few minutes.

Remove the pain of using the washer. Where this cleaning task select or not, for the variable pressure, it's very clearly labeled what you are going to do with that, on that pressure setting. It's for a deck or your cleaning brick or you striping paint. We told you let’s make it easier. Everybody, all of the major appliances in your home are kind of go into one bucket, think of washing machine, think of a dryer. It's all about making one user interface point. People who want set it switches and knobs and levers and cables, they don't know how to make it easy. So, making it easy is all about kind of one knob, one starting point, bringing everything to the front of the machine. I will show you that here in a second.

This is what we came up with. There is one of these on the lobby for those of you who spend a few minutes with. We call it OneWash, we just (inaudible) at the Lawn & Garden show in Louisville last week. It's a great product. We bring together on the front end of the controls here, everything into one knob. We make the controls consolidated, we make it easy to use, it's clear to people what they can use different pressure setting for. It's got low oil shutdown protection. It's got pump protection. This is what we think we heard people say and we think we can drive a better bargain with this. We think we can drive a higher price point. Instead of driving the market the other way, you think about (inaudible) done with vacuum cleaners.

People how they are paying 5, 6, 7 hours for vacuum cleaner. They change the game, why, because people have a product, but they see lot more utility and value and feature and benefit in to pay that higher price point. We think there is an opportunity same in the power washer category.

We are going to continue to look at other categories, we can’t get back to the category selection, but what’s next for Generac. I think there are other product categories we can take the same approach to. Take those key capabilities that we have and leverage them.

Now I do want to talk strategic objective here about expand geography. Entering new geography is some 98% of the company’s revenues are in U.S. and Canada. Highly concentrated. But it's a huge world out there, the world’s power generation market is about 14 to $15 billion in value. The U.S. market for power generation about 2.5 to $3 billion. So, clearly great market here in the U.S. and because we have got some of the great opportunities like the residential market we have been focusing on our efforts here almost holistically.

We think there is an opportunity and we thought this for a number of years to expand beyond the U.S. and Canada. We have got some accomplishments, we are working on this for a couple of years. We have established a Latin American sales office in Miami. We opened an Asian Pacific sales office in Hong Kong. We hired a sales record for the EMEA region. We have actually got over 100 dealers in 35 different countries in over two years. So, we are making progress on this initiative. But as you know and as you can imagine growing organically in an overseas market and penetrating those markets takes time. And so this is one that we told people this initiative is very long-term. Many of the initiatives we are working on are long-term but in particular if we want to get outside U.S. and Canada, this is going to take a long time. We going to build the support structures, simple thing. We are proud of our Spanish language website. It seems so simple, we should have a website that’s easily translatable into Spanish even for our U.S. customers, where Spanish is a better language for them than English. That’s something we launched here in September of 2012. But if we are making great strides, we are speaking to support an infrastructure together.

How we prioritize the next region to go into. We identify a set of criteria. It looks lot less a filter process that we use for the next products. These are the next regions we go into. We give weight to each of the criteria that are important population, power quality, competitiveness, natural gas availability. One of the things that we have determined because we are the number one supplier of nat gas generators in the U.S. market is can we extent that to other markets around the world. You go into a many markets and although deeper here in the U.S. is the majority. It's the only option in many markets around the world. Natural gas is not even an option today in power generation. But quickly becoming an option, because natural gas is not only going to be the U.S. as fuel source going forward for decades to come, it's going to be the world’s fuel source.

So, we think we are very well positioned to capitalize on that, but it goes into our criteria here in terms of selecting the next region of the world that we want to go into. We further split those regions down into sub-regions, so that we can manage them and resource (inaudible) markets against criteria in each major segment. Is this a good residential market. Is it more of a fast moving consumer goods market, is it more of a better industrial market? helps us align the right resources around that, and helps us rank order and prioritize each of those markets.

And we have an opportunity. This is a typical what you see here, we take all of that in, we dump it in a top to kind of segment those opportunities in those regions, find the right the channels to go to market to. We mainly look for channel partners. We assess who are the partners that are out there that we can benefit with like partnering and we focus our product training, our marketing service sales terms. We just as those resources that we have as company we bring those to bear with those channel partners in those new regions. We need to distill down those opportunities.

It's a big world. $40 billion power generation market. Where do you go first? You go to BRIC countries. For us instead the BRIC countries like India and China, some of those countries might be better suited to go into do an acquisition, or do a JV or deeper partnership. Whereas other markets in the world maybe look like something we could organically and that’s how we are approaching it. An example of that when we look around the country, we look around the world, we still kind of focus over here on Australia. And one of the things we did is we came up with a we signed a distributorship agreement with a master distributor for Australia. This is a market we see as very opportunistic for company like Generac that’s focused on nat gas.

Australia as a country has a decent population, has availability of natural gas, it's also got some power quality issues, power quality issues associated with growth. The power quality issues associated with the severity of weather that you get in the continent. And so we saw the opportunity to take and in particular we think about this in terms of segmentation. We saw residential market here, it looks very attractive to us. The potential for residential market nobody dare today, selling standby generators in Australia.

We think there is an opportunity to create a space for residential generation in Australia because of the power quality issue, because of the availability of nat gas and so we are going after this channel and we have done it with it our master distributor. We also take some of our other product that washers and portable generators there as well. What we had to find is an example. Here we have find a partner to do this with, because Australia although the language barriers are low obviously speaking English, it's pretty far away. We have to make sure that if we are going to go to market with these product so we got the right amount of support for those products both technical support as well as sales support. So, again this is how we think a typical relationship of foray into a new region of the world will look for us when it's not necessarily a BRIC country more of a developed country approach. Right finding and distribution partner in this case the master distributors who can handle all of these products. We are also looking for distribution partner for the commercial and industrial side of our business in Australia. So this partner will only handle the residential part. We think that there is an opportunity to find a right partner in C&I space in Australia.

Now when we enter these new geographies we have to create our value proposition. You heard me say it before, and you hear me say it again, but we are a focused generator manufacturer. We think that brings a lots of their on any relationship as we go into our new country. We can bring together special knowledge in power generation, may be other companies can’t. We have a high degree of vertical integration. We want to have full control of all manufacturing steps of our products. That benefits customers by seeing our expertise in nat gas, our technical knowledge, our breadth of product offering. We can bring everything from power washers. All we have the large huge multi megawatt GenSat systems to bear on a particular market. Product qualities I mentioned before. And I think most importantly is allow these markets to backing of the U.S. market leader in many of these markets. Light tower is a great example of that.

If you look at the light tower market worldwide it's dominated by really smaller player outside the U.S. We think they are coming in with the Generac or the Magnum brand. The backing of Generac as a large corporate with light tower and going into those markets worldwide. There is opportunity there. That’s just one example of something we are evaluating today in terms of where we take some of our existing products to some of our existing brands.

So, with that I’m going to turn this over now to York and he is going to go through a couple of the longer term growth targets that I know everybody is kind of waiting for York this is what people kind of skip the first couple hours of the meeting and gotten to you.

York Ragen

Thanks Aaron. So, looking at Slide 67, for those on the webcast. As you can see on the left is our historical growth. And as Aaron talked about early on in his introduction, we have grown over the last from 2012 LTM, 17% on a CAGR basis. And as Aaron mentioned from 2012 we doubled our business. And despite doubling our business looking forward now for the next three years on a CAGR basis we have a target now that we are establishing, high single-digit organic growth that began to slight doubling our business over last five years, taking our organic growth target to a high single-digit and with M&A on a low teens basis.

And how I think of this and when we put this all together just four main drivers or four main considerations that we should be thinking when we set these targets. The first and foremost is what we talk about the last hour and a half. Our power ahead initiatives and really the things that Russ talked about would be the AMP process and power play and being able to close leads more efficiently, signing up additional distribution. So, that’s the key part of the strategy and continuing to push that 4500 residential dealer network to something bigger.

We want to continue to (inaudible) that Terry talked about from a customer access standpoint, from a channel optimization standpoint, from expanding your product offering standpoint, that’s going to drive our C&I business forward. And as Aaron talked about developing new product, things like power washers, what’s the next engine powered tool that we can get into and then expanding into geographies, that’s like we said only 2% of our business is in North America. So, what can we do outside of that?

So, the first consideration is our powering ahead initiatives. The next consideration is thinking about what we are going through here in 2012 over the last 15 months think about the major power outage activity that is impacting nation, the east coast in particular and the impact on our results. And what we have talked about at many times is what is the impact of the major outage on our business. And we figure out the portables, you get an immediate uplift in sales immediately prior to or maybe just after or during a major outage event. But with home standby sales, it's much different, whether there is tail on those sales and there is a surge in demand and that demand can last, that surge can last 2, 3, 4 quarters after a major outage but then it settles down to the new and higher base line.

So, really the last 15 months as in spite of being well document. We have seen a number of outage event, major outage events in the east coast, the one in the Midwest. The outages happen every day around the nation, we estimate roughly 250,000 people without power every day. And that drives base line demand, these major outage is that it accelerate the penetration of home standby generators and drive awareness so the category, significant awareness, and as well allow you to setup up distribution buying the awareness to create that new one in our baseline.

So, now when you think about four in the forecast period, the question is what are you assuming in your out year's for major outages and what we have done really the outage activity we have assumed normal, average outage patterns in the out year's. So, I’d say that normal average out year's are just that. I’d say that here in 2012 what we have experienced in the last 15 months is high above average. So as a results there will the surge in demand but the settling account to base line. We needed to consider that when we set our growth target.

The next consideration is the economic environment, what considerations are we assuming for the economic environment during the forecast period really we are only assuming more of a gradual improvement in economic environment. What are the things that impact our business residential investment more, putting money into your existing home, only about 15% of our sales are in new homes, that what help as new housing starts are creep up here overtime, but it's that residential investment putting money in your existing home that we are assuming again gradual improvements in that category. And then non-residential construction, things that drive the C&I part of our business. Things that drive the Magnum demand as well. So, again gradual improvement in the economic environment.

And then M&A, we talked about going from high single-digits organic to low teens with M&A. Now we can’t obviously, we can’t necessarily control the timing of an M&A transaction rally given our focus, given our lead time we believe we can execute on transaction and we have demonstrated that with the latest Magnum transaction as well as the GenTran deal that Aaron mentioned.

So, how does that sales grow, that sales CAGR that low teens sales CAGR translate an earnings per share growth. And I think the first thing really to talk about off of what base line are we basing off of. So, I’m looking at 2012 estimates, adjusted EPS but I’m taking a pro forma number, pro forma assuming the dividend recapitalization happened at the beginning of 2012. We had a dividend recapitalization where we took out more debt on May 30. So, it's unfair to sort of compare different capital structure. So, assume that dividend recap as of January 1. So, current guidance has adjusted EPS of roughly $2.95 to $3. This about $0.25 off to pro forma a full-year impact of the dividend recap. And that’s the starting point.

So, then how do we read this slide? We have got the first three bars are really what I’m calling our operating EPS growth target, our operating EPS growth target, we anticipate are targeting for a low teens growth target, but with modest operating leverage. It's not on the slide but that’s the key point to make. Low teens growth target with modest operating leverage. And so which is roughly consistent with the sales growth target and if you look at the organic growth and the M&A growth it's about the same relative mix as the sales growth target as well.

I think if you look at the growth drivers on the far left, I sort of walk you through, growing the top line, the same relative drivers will drive EPS growth as well. Now one other thing that we wanted to highlight then in terms of the forecast period is, we do expect to pay taxes starting in the forecast period, we talked a lot about our tax attributes, we have a significant tax shield as a result of our change of controlled transaction, back in 2006, whereby we stepped up the basis of our assets by $1.8 billion and that step up in (inaudible). And as a result create a significant amount of tax shield in our tax, couple that with 139 million of net operating loss carry forwards, creates a significant tax shield that we had the benefit of really change federal income taxes over a history here.

Looking forward we expect given our results, we expect to eat into that NOL and then even after that amortization of that $1.8 million per year, that’s roughly $127 million of taxed amortization different from book amortization. We do anticipate paying taxes in the forecast period which would be a headwind compared to the 2012 baseline looking out into the future, but offsetting that though, we do anticipate paying down debt one of our priorities that we will talk about in second. We will be paying down debt. We will also some interest rate swap will drop off to our interest cost will improve. And then overtime as we delever we should be able to benefit from lower interest rate as well. So, combination of paying down debt and better interest rates will lower interest cost overtime in the forecast period. And there maybe some capital structure things like potential share buyback that would help offset that as well.

So small but roughly I’d say 2 to 3% growth (inaudible) capital structure. You take the low teens growth target of operating EPS, our target you take 2 to 3% of that for this taxes and capital structure and you end up getting your adjusted EPS three year target for the company CAGR.

So how does that all translate then into cash flow. We talk a lot about our fantastic cash flow profile. First step is we do have 58 million in cash in September 30. We do have a $150 million revolver should we need it, we don't have any borrowings outstanding on that, but the meat of it is really the fantastic tremendous free cash flow profile that we have. Our great attractive margins, our capital efficient operating model, we don't need to spend a lot of CapEx to drive growth in our business. And then the tax attributes that I talked about, that will continue to benefit, even we will be paying taxes, we will be benefiting from this step up in amortization about $127 million a year is still creating a shield for us out to 2021.

So, all of that put together, it's going to drive roughly a target, free cash flow over the next three years of 550 to 600 million, when you put that all together provide tremendous amount of liquidity available to drove the company roughly 750 to $800 million of capital and liquidity to drive growth in the company. So, what are we going to use our money on, we talked a lot a length about what are our priorities of cash and it's very consistent with what we talked about. First and foremost we want to drive organic growth in the company. All the initiatives that Aaron and Russ and Terry talked about, we want to put investments into that. But as we talked about, it doesn’t take a lot of capital expenditures to drive the growth of the company. Historically less than 2% of sales is our capital expenditures.

But we do want to drive organic growth. We do want to delever. We got roughly $900 million of debt, we are going to pay down debt overtime, we use the piece of that $800 million to pay down debt. We do have a state of leverage target of two to three times growth that leverage. We just go to three times down, so looking more at that two times as out in the future.

Strategic bolt-on acquisition. This is something that I talked about. We do have a pipeline, we do have a focus on this. Things like a Magnum in terms of highly synergistic, highly strategic, things of bolt-on in terms of the size of the Magnum that make sense for the company that are going to drive growth in new end markets, new products, new geographies. All those criteria, all the powering ahead criteria to drive growth in those objectives are open for acquisition activity. And then once you step to those three criteria you step through, you get to see a potential return on capital on return on capital shareholders. We have a dividend, we get a share buyback that I refer to with more.

And then really what are the investment criteria that go along into those investments, because those are organic growth, strategic bolt-on acquisitions. So, what are we going to do with our money and how do we evaluate what we are going to do with our money. And it's really all driven by creating shareholder value. What creates the most shareholder value but prioritize it, and the highest return on invested capital. So, it's really what Generac, Aaron talked about continuous improvement, cost conscious. What Generac is at its core driving the highest return for our money. We are very efficient with our capital and we have demonstrated that overtime.

Question-and-Answer Session

Jeff Hammond - Keybanc Capital Markets

Jeff Hammond with Keybanc Capital Markets. Maybe this is for York but just to be clear on the CAGR, with the tax payment can you give us a better sense of when you start paying taxes with the NOL and then f you can just is the earnings CAGR kind of 10% if you knock down from low teens growth to 10% I mean is that the right way to look at it.

York Ragen

The taxes are really it depends on how you model it, but when you look in that 295 to $3 a share in earnings per share for ’12 you are going to have a significant, even once you step to the tax return in that 127 million of tax amortization. So, you can really look at the book amortization, you have to get a cap the 127 million tax amortization model that, through your pretax income models. And it will eat significant amount of NOL in 2012 and should as well in ’13 and even stepping through pass that 127 million of amortization. So, I think when you model it all together, possibility pay some taxes ’13 but we haven’t necessarily provided guidance specific to that, but I think your model will show that if it's a 127 million of amortization. And then on the EPS target, the low teens operating growth target, I mean that’s a 10 to 14 range and that 2 to 3 tax and capital structure impact in the question.

Steven Hill - First Investors

Steven Hill with First Investors. Aaron I had a chance to see firsthand the opportunity for Generac pretty much everywhere created by Sandy. Can you help me bring some focus to that though. What are going to be the largest margin opportunities for you and maybe what are the strategic opportunities here. I’m sure you can sell just about everything you have to everyone, but what opportunity has Sandy created for you that you plan to capitalize on. Is it something what telecommunications, is it residential, is it industrial and lower Manhattan, what is the opportunity here that you need to capitalize on?

Aaron Jagdfeld

So, I think the best way to answer that is yes. All of the above, residential, light commercial and industrial. So, those are kind of the three areas that we focus our attention from resources and way we can align our programs and our sales teams and our channel strategies, all kind of aligned around those things. So, let’s take one at a time.

Residential, again you got a major awareness event like Sandy occurring in the same region of the country where you have another major awareness over the last year and a half. That creates kind of an amplifying effect in terms of the awareness for categories of product like backup power generation, but take it once to further categories of product like home standby generators where awareness is still very, very low. So, we look across the country and you have this conversation with people about automatic home standby generators, the first thing you get is I don't know what it does, you never heard it before, I don't know anybody who owns one. Tell me about it.

So, that’s been the conversation over the last 10 years, and tell me what that product is, tell me what it does, tell me what it cost, tell me where to get it, where we can buy it from. So, the awareness the opportunity for us to have that conversation in a meaningful way with people and to increase awareness about residential home standby generation. When you have an event like Sandy, we track our marketing teams, the number of iBalls, whether it's Tread Media or whether it's online or whether it's radio or TV. It's number of impressions that a company get. Over last 10 days Generac, we have gotten over a billion impressions. Now that is no something that you could all the marketing dollar you can spend in the world, our marketing guy would love to go out and hit a billion impressions and they give you a marketing budget numbers comes with that. They will be off the chart.

But the opportunity with the kind of awareness created by the tragedy that is Sandy and our last and foremost are to get out there and help people, we have our product that are lead product. So, right after that, I mean conversation quickly turns to I need a generator. And so right now on the residential side it's all about that, it's ramping up production, that’s what you saw with that, the factory that we are going to bring online quicker that’s all of the residential product. But then very quickly you shift into the C&I space. You have businesses, Terry talked about in his part of the market you get this, there are two parts of the industrial market. So, return on the investment has to be there, and that’s what Terry talked about its Generac sweet spot in those side products. The smaller product and one step further our natural gas expertise. Our ability to capitalize on this because natural gas generators and side ranges are less expensive than diesel. Diesel has been heavily regulated. No diesel engines today versus where it was eight years ago, it was about 3x cost going from tier zero to tier 3 and 4. It's massive and more expensive.

Mike Halloran - Robert W. Baird

Mike Halloran here with Robert W. Baird. So, couple of questions first on the leverage. York you commented that there wasn’t a lot of leverage in here in the model, very strong organic growth. Is there something that limits you from an operating leverage standpoint when it comes to mix facilities and things like that?

York Ragen

I think the key to that question is Generac by its nature is a lean company. We historically been a lean company, but also do have very high aspirations to direct growth in the company. As we continue to do that we will continue to add infrastructure not only to drive future growth of the company but also support the growth that we have established here in front of us. We have doubled the company in the last five years and we need to put that infrastructure in place to support that growth, but we also have all the powering ahead initiatives as well. So, there is a number of infrastructure add that we are putting in ahead of that, and we continue to do that which I think would limit some of that operating leverage that maybe traditional industrial companies may get as a result of that.

Aaron Jagdfeld

Generac is almost 19 years now and seen us go through these. The business is lot like a step function. When we look at major events, drive awareness to product category that up until that point has more limited awareness, you put more distribution in the field.

Brian Drab - William Blair

My first question is just on the growth over the next three years, we are talking about single-digits revenue growth. I’m wondering if next year you are expecting to grow and in the face of the strong growth that you had recently and are you already assuming that you take a step back given the extreme whether events that we had in the make up for that growth in the following two years.

Aaron Jagdfeld

We don't know yet, we think we know but you got almost 600,000 people still without power in New Jersey and New York ongoing still, 10, 11 days after the event of Sandy. We are trying to calibrate around just what is the magnitude of this event. We know at the peak there are about 8.3 million home to businesses without power through this event versus when you compare that to Irene the peak was about 5.9 million. So, it's an order of magnitude greater now you do have some (inaudible) so we are trying to sort through some of that. What do we really think is going to happen (inaudible) serial nature of this large event. Certainly is my comments before, we can look back and say okay, what did Irene do for the business, you guys can see that on our results. Q4, Q1 of this year, Q2 going into some around the in second half. We have been messaging to people that comps are going to be tougher in the second half of this then they were in the first half. That clearly has changed with the events. And frankly we were pretty strong coming into prior to Sandy. We were still seeing increased levels of demand, we have always said that tail is 6 to 12 months. But Irene was a fairly large event and we are going to highly concentrate on populous area that frankly demographic was speaking is a good market for us.

Now a year later you take an even bigger event, you layer that on top of that. We caused a tipping point for people. When d people get to that tipping point, you guys have heard me say this before, every home owner or every business role is different. Some people are trying to go a day or two without power, some people who go as long as a week. They turn into an extended camping trip in their living room. And for couple of hours I can’t use my Blackberry, I can’t use my phone, the kids are driving me crazy. So, that’s the problem. Those are issues you can’t wait a week for. So, those people have different tipping points than other people. So, I can tell you this after the second or third major event we have power out for week. We have a lot of people today they may not have been there after Irene. It push people a lot further. So, Brian, to answer your question we don’t even have our forecast, we kind of have our forecasting process. We are well in that process here before Sandy.

Brian Drab - William Blair

Your team presented Frost & Sullivan data, and I’m just wondering how you, did you explore the methodology that they use to put that together and did they talk to you when they put that together. I’m looking at that chart wondering who should be talking to whom to get a real idea how this market is going to grow.

Aaron Jagdfeld

Like most research companies Frost did a good job of certain, more mature markets that are more known as, C&I side Frost did a better job on C&I, they talk to the industry participants. The industry are more known quantity. It's easily quantifiable, the players are somewhat known. We have the Electrical Generating Society of America we call it EGSA. It's something that as an industry participant in those types of studies, so I’d tell you tell you those numbers are pretty decent. I like to have pretty good trend, the residential market improve.

Unidentified Analyst

Quick question on the retail channel and just lot of the growth you guys talked about is more growth which are existing dealers. Quickly answer your expectations for growth in that dealer network going forward.

Aaron Jagdfeld

So, growth in the dealer network going forward, expectation that’s we didn’t talk as much about barriers to entry as I talked in the past. That distribution network of 4500 dealers is an absolute critical market advantage for Generac. We have grown it, it's been a 10 year period of time when we put that together. I think you may have heard our more recent comments, we are down in a conference earlier this week, we have added 500 dealers on a net basis over the last 12 months. Again the interest level, the awareness goes up for consumers just more people calling distribution points asking for the product, introducing distribution points of the product. So, I’d tell you the expectation going forward coming off of the latest series of events is that’s probably going to remain somewhat elevated over the long-term average over that 300 to 400 a year. I think there is a lot of room and opportunity there to continue to add partners at only 2.5% penetration and we have got 4500 dealers, how many unique. I’m seeing lot more, you want to take that 2.5 to 10 is what we are trying to do 20 or 30. I want to be at 70% by central air conditioning at some point, so they think that where it's going to go (inaudible).

Unidentified Analyst

Next level of that, can you just quickly talk about partnerships going forward like the Honeywell deal that you guys have. And then I guess how far long that is?

Aaron Jagdfeld

Honeywell is great, we did a private label deal about 8 years ago now with carrier. Largest North American HVAC OEM in the market. We private labeled the product for them. We sold it to carrier corporate who sold us to 152 distributors who sold more than 10,000 dealers. But yes they still made it work. It was that contraction, we felt for a long time that HVAC contractors our sweet spot because they know natural gas, they know electricity, they are comfortable on those two things. They understand built-in home systems, they understand how to sell to home owner.

Steven Hill - First Investors

Steven Hill again. I’d like to follow-up on the answer you gave Brian about when your next year earnings could look like? Could you help me understand after Sandy how your cost could be down or even flat is it because you are worried about increase in SG&A to chase the opportunities. Is it because you are worried that 9 months from now there will be a dramatic drop in sales, could you just help me understand why, I couldn’t just automatically conclude that your cost are going to be (inaudible).

Aaron Jagdfeld

Again because we are not offering up specific 2013 guidance today, I think it would be, I’d be stepping outside of offering that up, but I’d tell you this. I think if you look at, you got to kind of look at history, you look at Irene, that’s kind of a proxy for what we are looking at minus my comments before, that’s a bigger event and you got the amplification because the second or third event for a lot of people or maybe even a fourth event unfortunately. If you are also impacted by the wind storm in the Mid Atlantic just this past summer. I’d tell you there is one product category, your comps are always difficult but you don't get the kinds of potential guys with portable generators. So, we said this before and I don't think we are outside saying that, notwithstanding our assumptions here in the long-term model that we built in those kind of high single-digit or low single-digit comps that we are talking about or growth rates that we are talking about. That’s something that portable generators are there to satisfy immediate need for storm demand. So, even if we were to model what we are modeling for an average year next year on storms. As York said I think it's pretty clear to say that this year was about average.

Steven Hill - First Investors

Last May you were considering if memory serves as much as the $10 special dividend and you did $6 because of the state of the lending market. I understand the slide you have up here considering potential share buyback, would you revisit a special dividend, perhaps going back to another $4.

Aaron Jagdfeld

We announced up to a $10 dividend when we announced that’s really is just give us room to smaller market opportunities. We decided that ultimately the liability structure that came, if we have in the $6 dividend was better, liability structure for our balance sheet going forward. And that’s why we settled on that, but I think the question is more in line would you consider to go out and do a special dividend again. I think I go with this slide here, they uses of cash priorities is really what we said and frankly if you follow the company now for almost three years. Those usage of cash are exactly the same in terms of the order. First and foremost we are going to grow organically. We put money into the CapEx expansion and some of the other things that we need to do to take the next leg of growth up after that. We want to delever, we are going to leverage target 2, 3 times of gross debt. So, we want to be at, before we get to the next leg of the stool here which is opportunistic M&A, strategic M&A, bolt-on M&A.

John Quealy - Canaccord Genuity

John Quealy from Canaccord. Three questions, first can you quantify what impact on operating margins and power play initiatives will have both on the residential side and maybe I know it's called that for C&I, but what’s the plus or minus to centralizing all of the sales function. And will there be a potential expansion of for example showroom flooring on a financing side? The second question Aaron, can you sensitize us in terms of national account conversations with cell powers going down for many days when they want to built that way. What sort of conversations you having with national accounts and would the SEC need to get involved to get a product refresh there? And then the third, when you resurrect product categories like the OneWash, can you just talk about change in margin from what you sold in ’98 to what you think you might get?

Aaron Jagdfeld

First question was about power play, so what is that sales process, that integrated sales process that Russ talked to us about today everything from driving leads to corporate controls when as opposed to what we did before, which we would do the marketing and then the leads will go into the distribution which is great except that people (inaudible) that way. We wanted to make a more homogenous experience for people and more standardized experienced people and that’s really the jiff behind power play. And frankly we also want visibility. That’s the other thing we natural get when leads are being created out in the field. We get visibility to those leads, we had a lead generation program here before, we track leads where people did call the factory those are very limited (inaudible) driving people here for that to start that process.

Now that we have changed that, I don't have an answer for your question actually quote the number around what could be the upside to that. But I do know this, the early returns from our distribution partners that are on is as Russ said we rolled out a beta test here in October and into November and we are starting to roll those iPad that process out to people. We got a Generac lead team that frankly has been inundated. Some of the things that we were doing we are advertising in the weather channel, we were doing advertising during the storm. We are doing a marketing campaign right now direct mail marketing campaign in the Northeast that actually kicks off Monday of next week. That’s going to drive those leads into our process. It's so new that I just can’t tell you what it's going to be, but I can tell you this, we are going to have a lot of visibility to that going forward.

And I think Russ touched on, but the other thing we get visibility to is after we do a quote. You take somebody all the way through we qualify that lead, we hand it off to the dealer, the dealer does the in-home appointment, the in-home selling pitch, gives them a quote. The next time that dealer hits a wifi connection that quite comes to us. We have been driving the product cross down to make it more affordable. Because we do think there is a new elasticity of demand associated with that price and lower price points, but it's lower total price point.

But when it comes to the installation there is a tremendous amount of variability, not only in how the installations are done, the efficiency with which they are done. But in terms of how they are priced, the pricing around which are done. And so there is a whole world of opportunity that we believe and making installations more efficient that we can understand what the pain points are on that, maybe communizing some of the pricing. So that people have a better view on what those prices are. So that’s the first question. I don't know the answer, but I think it's going to be, we are very excited about it, distribution is very excited about it.

On the communications with national account customers, I can only tell you that because the events are still (inaudible) a lot of the communications right now about product in field. And we have had tremendous up time on our products that are in field right now in a C&I space. In the telecommunication space in particular. The task they performed very, very well out there in the marketplace out in the Northeast. Now I will tell you that we suspect that there will be an elevated level of interest from national accounts, telecom and otherwise. Some of these other light commercial opportunities I spoke to, that are going to all of a sudden become very interested in when it comes to telecom or others hardening their infrastructure right against outages. And for telecom it's easy, you just have to spend more. You just have to wind up the bandwidth to install it.

Could the SEC get involved to mandate some of that, it's very partial. After Katrina in 2005, the federal government formed the Katrina commission. The Katrina commission looked at all of the global things that happened coming out of that event. One of the things that Katrina commission decided in their final report was it all wireless, cell phone communications. All wireless communications, cell powers should have a minimum 8 hours of backup power. And it was ultimately delayed because it was determined at the SEC had kind of going out of scope in terms of the way they are going about, they didn’t have the right public common period. Whether they come to fruition or not I think we will lead that up to the SEC and people who know better.

And then your last question was on washers margin. That we didn’t get back into that product category to sell a $199 product and make 10% margin, you can look at the (inaudible). What it is that there has been no innovation. We think again pursuant to my comment that if you can innovate and can bring products to market that people want, if they can engage with. The engagement elements of OneWash, the gun, and you can check it out it's out, you can feel it on the way out of here. That gun is ergonomically designed. It's not going to stretch your hand, or stretch your arm or you stand in there for couple of hours, power washing a surface. We think they even get paid for that.

Now our legacy product that we introduce a year ago though which also has higher price point then many of the entry level products out there has done very well, because I think people there were some elements of what we are talking about right now.

Mike Harris

Aaron we are actually going to end it now, we are running out of time. We certainly appreciate everyone’s question and Aaron I will turn it back to you.

Aaron Jagdfeld

We certainly appreciate everybody’s attention today. Great to have everybody here, that will end the webcast portion of this and then we are going to get started up here for the logistics, we need to load the buses and into our Whitewater facility. Just a real quick logistic note for some of you, we have here on vehicles, we are going to drive about 30 minutes west of here and so you are happy to follow the bus or if you have got a GPS, the address is 757, Newcomb Drive, Whitewater, Wisconsin, 53190. So, put that into your GPS, half hour later we will see you at the plant. Follow highway 59, which is main highway out here, go straight out there. So the other thing is it's an hour to the Milwaukee airport from that plant. We will get you back if you are going to leave your car here, we will have you back in this building by 2 o’clock. And we are going to do a wrap up here at 2 o’clock if you want to come back. Russ if we got time we are going to do power play demo there at that point and we show in the slide shots here.

Thanks again for your time and we look forward through this afternoon. Thanks guys.

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