Feb 14, 2017
Executives
Michael W. Harris - Generac Holdings, Inc.
Aaron P. Jagdfeld - Generac Holdings, Inc.
York A. Ragen - Generac Holdings, Inc.
Analysts
James A. Picariello - KeyBanc Capital Markets, Inc.
Brian P. Drab - William Blair & Co.
LLC Jerry Revich - Goldman Sachs & Co. Charles Brady - SunTrust Robinson Humphrey, Inc.
Christopher Glynn - Oppenheimer & Co., Inc. John Salvatore Quealy - Canaccord Genuity, Inc.
Operator
Good day, ladies and gentlemen, welcome to the Fourth Quarter and Full Year 2016 Generac Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
I would now like to introduce your host Mr. Michael Harris, Vice President, Finance.
You may begin.
Michael W. Harris - Generac Holdings, Inc.
Good morning and welcome to our fourth quarter and full year 2016 earnings call. I'd like to thank everyone for joining us this morning.
With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements.
Certain statements made during this presentation, as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors.
In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S.
GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Thanks Mike. Good morning, everyone, and thank you for joining us today on this Valentine's Day.
Fourth quarter results provided a strong end to 2016 with organic net sales improving over the prior year, adjusted EBITDA growing at a strong rate and operating and free cash flow achieving quarterly record. Hurricane Matthew which occurred in early October drove significant portable shipments and to a lesser extent contributed to increased home standby volumes during the quarter.
The higher shipments of residential products during the fourth quarter helped to offset continued declines in shipments of mobile products both domestically and internationally. Although, we didn't consider Matthew a major event in terms of power outage severity, the incremental volumes during the quarter demonstrated the operating leverage inherent in our business model.
Adjusted EBITDA margins within our Domestic segment grew significantly over the prior-year and we were able to monetize a notable amount of portable and home standby inventories, both of which contributed to quarterly records for both operating and free cash flow. This strong level of cash flow allowed us to remain active with our share repurchase program, make a voluntary prepayment on our term loan and fund our most recent acquisition of Motortech during the quarter.
On a year-over-year basis, net sales in the fourth quarter increased 17% to $417 million, as compared to $358 million in the prior-year with core organic growth of 3% and a full three-month contribution from the Pramac acquisition. Adjusted EBITDA, adjusted EPS and free cash flow during the quarter all grew in the low-to-mid teens range, as compared to the prior year.
An area of our business that remain challenging however was our domestic mobile product offering, primarily serving the rental markets. While average energy prices improved during 2016 from the trough levels experienced earlier in the year, they remain below levels required for a meaningful recovery in oil and gas related capital equipment spending.
As a result, this had a significant impact on fourth quarter mobile product shipments to our broad-based of rental customers in comparison to the prior year, as they continue to wait for a sustainable recovery in fleet utilization, rental rates and used equipment values. As discussed in recent quarters, we took a number of restructuring and cost reduction actions during 2016 to better align our cost structure with customer demand for mobile products.
Importantly, after the significant declines experienced for domestic mobile products during 2015 and 2016, demand for these products is finally starting to improve, as we've recently experienced a pick-up in orders with certain rental customers, including early signs of fleet replacement activity. In addition, although, we're not yet seeing any meaningful increased demand related to oil and gas drilling and production sites, oil prices appear to have stabilized in recent months in the low $50 range and there's optimism for the energy sector with a more favorable political environment that is more supportive of domestic energy production.
We believe this combined with the potential for a significant increase in infrastructure spending is evidence that demand for our domestic mobile products appears to have bottomed and we're looking forward to returning to growth in this market going forward. Now, let me provide a few comments regarding the trends for our International segment.
Recall that included in these result is the former Tower Light business which we acquired in August of 2013. Demand for mobile equipment in the markets served by Tower Light continue to be softer in the recent quarter, primarily driven by the continued deferral of capital spending by several larger rental customers across the United Kingdom and other parts of Europe.
In addition, the weakness within the UK market has been magnified by the devaluation of the British pound against the basket of foreign currencies, further impacting both sales and gross margins negatively. The International segment also includes the results from the Latin American region where sales volumes have been stabilizing over the past several months.
We believe the improving results we're experiencing in these markets are primarily due to the progress we've been making on a number of initiatives coupled with a gradually improving overall demand environment. Lastly, included in our International segment is the Pramac acquisition, which closed on March 1, 2016.
We have been pleased today with the overall financial performance of Pramac, which has experienced solid growth in sales and earnings compared to the prior year on a pro forma basis. The integration of the Pramac business remains an important focus for 2017, and we're making good progress in evaluating and pursuing a variety of revenue and cost synergies.
I'd now like to share with you a few of our accomplishments from 2016. For the full year, net sales increased 10% to $1.4 billion as compared to $1.3 billion in 2015, with the increase primarily driven by the Country Home Products and Pramac acquisitions.
Organic growth in residential products was offset by declines in shipments of mobile products, given ongoing oil and gas weakness in domestic markets and the deferral of capital spending within the European region. Adjusted EBITDA attributable to the company increased to $275 million, as compared to $271 million in the prior year.
Adjusted EPS was $3.03 per share for the year, as compared to $2.87 for 2015 and free cash flow grew strongly over the prior year at $223 million, as compared to $158 million last year. This strong free cash flow allowed us to continue to deploy cash in a variety of beneficial ways for our shareholders, including making strategic investments and acquisitions as well as certain capital expenditures, while also paying down debt and returning capital through share repurchases.
Regarding residential products, with the backdrop of a modestly improved power outage environment during 2016, we continue to make progress and pursued a number of strategic initiatives to increase the awareness, availability and affordability of home standby generators. These include specific projects and activities targeted towards generating more sales leads, improving close rates and reducing the total overall cost of these products.
We believe we further enhanced our market position for residential backup power products during 2016 as retail placement was at all-time highs and the number of active residential dealers at the end of the year was consistent with the peak levels experienced at the end of 2013. In addition to our distribution related initiatives, we introduced an updated version of our industry-leading home standby product line this fall.
This update was mainly focused on reducing the overall cost of installation based on several key improvements and how the product is connected to homes electrical system and fuel supply. We anticipate more efficient installations will lead to a reduction in labor cost and allow our residential dealers to have increased installation bandwidth, which is acutely needed during periods of high demand following an outage event.
As we work to continue to decrease the overall cost of ownership of home standby generators, we believe there remains substantial opportunity to further grow the market for these products over the long-term. One important accomplishment in 2016 that I would like to mention is the rapid development of our competencies around remote monitoring.
The age of connectivity is upon us and the ability for end users to have visibility of their equipment remotely is fast becoming a must have in many industries. For a generator that is in an emergency backup application on a home or a business, there is no more critical knowledge than knowing the status of your machine and having the confidence that it is ready to run in the event of a power outage.
For our residential customers, we have offered our MobileLink remote monitoring device, which is a cellular-based service sold as an accessory with an annual subscription. While we have seen tremendous growth in this platform since its introduction four years ago, we believe more opportunity exists to make connectivity a standard feature in all products going forward.
During 2016, we invested heavily and made substantial progress in developing hardware and software competencies required to make this a reality. Towards the end of 2017, we will launch an updated line of residential standby generators that will come standard with this technology and will include multiple service levels for customers depending on their monitoring needs.
In addition to providing customers the visibility they want with their generator, we believe this new platform will also allow for unique insights into how and when these products are used. This is critical information for us as we develop future products, and we'll create a better understanding of additional market opportunities that may exist.
In addition to our accomplishments, we made important updates to our Powering Ahead strategic plan during 2016. Powering Ahead which we have had in place since 2011 has guided our focus and our investment against four key strategic pillars of growing the residential standby generator market, gaining industrial market share, diversifying our demand with new products and services, and lastly entering new geographies.
We believe that our success over the last six years is directly related to our execution of Powering Ahead, as we have doubled the revenues of the company, increased our served markets four-fold and delivered cumulative shareholder returns that exceeded the overall market over that time. But strategies must be periodically reviewed to evaluate their continued relevance in light of changes to the company, it's competition and the markets it serves.
Powering Ahead is no different and although very successful, last summer our management team critically analyzed the elements of our strategy as they relate to our market opportunities, our competencies, our vulnerabilities and our areas for improvement. From this review, we determined that a number of changes to Powering Ahead were appropriate to position Generac for continued future success.
That being said, the two strategic pillars of growing the residential standby market and gaining industrial market share continue to provide tremendous runway for Generac and will remain for the foreseeable future. Although penetration rates for home standby generators continue to grow and are now approaching nearly 4% of homes, we believe significant opportunities remain to further grow this market as the dependence on a continuous source of power for homes and businesses is more vital today than ever before.
For our industrial products, we have continued to improve our market share over the last six years, but believe that substantial share growth opportunities remain as we look to further expand our product offering and improve the quality of our distribution network. Since 2010, we have dramatically diversified our product portfolio to include many engine-powered products beyond our core offering of backup generators.
This has created access to new markets, new channels and new customers that have positioned the company for growth in the future. However, our team now feels that further diversification should be more selective, and that a pivoting strategy to a deeper focus on natural gas opportunities is better reflective of the changing market acceptance of gaseous fuel generators for emergency backup and their expanded use in continuous-duty and prime-rated applications.
As part of this strategic shift, on January 1 of this year, we acquired Motortech, which allows us to build on our gas engine design technologies and competencies. Headquartered in Celle, Germany, Motortech is a leading manufacturer of gaseous-engine control systems and components, which are sold primarily to European gas-engine manufacturers and aftermarket customers.
Motortech has over 250 employees located at its German headquarters and a manufacturing plant in Poland as well as sales offices located in the U.S. and China.
With this increased focus on natural gas, we are targeting to dramatically expand our existing global addressable market for these products with the Motortech acquisition being the first key step towards this goal. The additional market opportunity is expected to be addressed by expanding our current natural gas backup generator product line, as well as by introducing new continuous and prime duty gas generators.
These product extensions will also enable us to enter new markets, including combined heat and power, distributed generation, and demand response applications such as peak-shaving and energy curtailment uses. The final change to Powering Ahead that we are initiating is a shift away from entering new geographies and instead creating improved focus on expanding in the geographies where we are currently located.
Over the last six years, we have put Generac on the path to becoming a major global player in the markets we serve. We have significantly increased our presence outside the U.S.
and Canada with sales outside this region accounting for approximately 20% of our sales during 2016 as compared to only 1% of our sales in 2011. This increase is largely the result of the acquisitions of Ottomotores in 2012, Tower Light in 2013 and Pramac in March of 2016.
Recall that Pramac headquartered in Siena, Italy is a leading global manufacturer of stationary mobile and portable generators, sold in over 150 countries through a broad distribution network. The company employs over 600 people across its 4 manufacturing plants and 14 commercial branches located across the globe.
These acquisitions, including Pramac have dramatically increased our international footprint, allowing us to better participate in the over $13 billion annual market for backup power generation outside the U.S. and Canada.
And we now believe that improving our share position in these countries we operate in today is where our focus is now needed. We are very excited about these updates for our Powering Ahead strategy and the impact it will have on our future.
We are currently formulating a number of key initiatives to align with the changes we have made as we implement the new strategic framework throughout the company. I'd now like to turn the call over to York to discuss fourth quarter results in more detail.
York?
York A. Ragen - Generac Holdings, Inc.
Thanks, Aaron. Net sales for the quarter increased 16.7% to $417.4 million as compared to $357.8 million in the fourth quarter of 2015, including $50.7 million of contribution from the Pramac acquisition, which closed on March 1, 2016.
Looking at consolidated net sales by product class. Residential product sales during the fourth quarter of 2016 increased 20.3% to $238.9 million as compared to $198.5 million in the prior year quarter.
As Aaron mentioned, we experienced a strong increase in organic sales for residential products during the quarter, as Hurricane Matthew drove a significant increase in demand for portable generators and to a lesser extent home standby generators. Residential product shipments were also aided by improved buying sentiment from our distribution partners which in turn improved the effectiveness of our promotional programs for home standby generators during the fourth quarter.
Also contributing to the sales increase was the modest contribution of portable generator sales from the Pramac acquisition, along with increased organic shipments of DR branded outdoor power equipment from Country Home Products. Looking at our commercial and industrial products.
Net sales for the fourth quarter of 2016 increased 12.3% to $148.1 million as compared to $131.9 million in the prior year quarter. The increase was due to the contribution from the recent Pramac acquisition and to a lesser extent increased shipments of stationary generators sold into the Latin American region.
Partially offsetting these increases was a significant reduction in shipments of mobile products, both domestically and in Europe. In the fourth quarter, we continue to experience the deferral of capital spending by our key equipment rental customers, as a result of ongoing softness in the domestic oil and gas market, as well as declines in infrastructure spending in the European region, particularly within the United Kingdom due to the Brexit-related uncertainty.
Net sales for the other products category increased 10.7% to $30.4 million in the fourth quarter of 2016 as compared to $27.5 million prior year. This increase was primarily driven by the addition of aftermarket parts sales from the Pramac acquisition.
Gross profit margin for the fourth quarter of 2016 was 36.9% compared to 36.6% in the prior year quarter. The increase in gross margin was driven by a variety of factors, including the ongoing realization of lower commodity costs and overseas sourcing benefits from a stronger U.S.
dollar, coupled with a favorable overall organic product mix given higher sales of home standby generators. These improvements were largely offset by the addition of Pramac sales, as well as lower margin for mobile products.
Operating expenses declined $26.9 million or 25.9% as compared to the fourth quarter of 2015 with the prior year including the impact of $40.7 million of pre-tax non-cash charges for the impairment of certain intangible assets. Excluding these charges in the prior year quarter, operating expenses increased $13.8 million or 21.8% as compared to the prior year.
The increase was primarily driven by the addition of recurring operating expenses associated with the Pramac acquisition, including the impact of increased amortization expense. Adjusted EBITDA attributable to the company as defined in our earnings release was $91 million in the fourth quarter of 2016 as compared to $80.1 million in the same period last year.
Adjusted EBITDA margin before deducting for non-controlling interest was 22% in the quarter as compared to 22.4% in the prior year. Given the strong Q4 results, adjusted EBITDA attributable to the company finished the full year 2016 at $274.6 million with adjusted EBITDA margin before deducting for non-controlling interest at 19.3% of sales.
Consistent with historical seasonality, we experienced a strong increase in profitability during the second half of 2016 as adjusted EBITDA margins improved 340 basis points as compared to the first half. I will now briefly discuss financial results for our two reporting segments.
Domestic segment sales were $339.7 million as compared to $326.6 million in the prior year quarter. The increase as we've discussed was primarily due to Hurricane Matthew driving strong shipments of portable generators and to a lesser extent home standby generators, with home standby shipments also benefiting from successful promotional campaigns.
Increased organic shipments of DR branded outdoor power equipment from Country Home Products also contributed to the increase in net sales. Partially offsetting these impacts was ongoing significant declines in shipments of mobile products into oil and gas and general rental markets.
Adjusted EBITDA for the segment was $87.9 million or an impressive 25.9% of net sales as compared to $74.9 million in the prior year, or 22.9% of net sales. Adjusted EBITDA margin in the current year benefited from the overall favorable product mix, lower commodity costs and overseas sourcing benefits from a stronger U.S.
dollar, the benefit of cost reduction actions within domestic mobile products and improved overall leverage of fixed operating expenses on the organic increase in sales. International segment sales primarily consisting of C&I products increased to $77.7 million as compared to $31.2 million in the prior-year quarter.
The increase was primarily due to the contribution from the Pramac acquisition, which closed on March 1, 2016, and to a lesser extent, increased shipments of stationary generators sold into the Latin American region. Partially offsetting these impacts was a decline in organic shipments of mobile products into the European region in particular in the United Kingdom.
Adjusted EBITDA for the segment before deducting for non-controlling interest declined to $3.9 million or 5% of net sales as compared to $5.2 million or 16.7% of net sales in the prior year. This decline in adjusted EBITDA margin as compared to the prior year can mostly be ascribed to the large decline in mobile products margins given the reduced operating leverage on lower organic sales volume, unfavorable sales mix and foreign currency impacts with the weakness in the British pound.
Also contributing to the decline in margin to a lesser extent was the Pramac acquisition sales mix. Now, switching back to our financial performance for the fourth quarter of 2016 on a consolidated basis.
GAAP net income for the company in the quarter was $41.5 million as compared to $9.2 million for the fourth quarter of 2015. The current year net income includes the impact of $0.6 million loss on extinguishment of debt relating to the $25 million voluntary prepayment of term loan debt during the quarter, while the prior year net income includes the impacts of $40.7 million of pre-tax non-cash charges for the impairment of certain intangible assets.
GAAP income taxes during the fourth quarter of 2016 were $24.4 million or a 37% tax rate as compared to $6.4 million or a 41% tax rate for the prior year. The decline in the GAAP tax rate is due to a portion of the prior year intangible impairment charge not being deductable for tax purposes.
Adjusted net income for the company, as defined in our earnings release, was $71.4 million in the current year quarter versus $65.3 million in the prior year. Diluted net income per share for the company on a GAAP basis was $0.64 in the fourth quarter of 2016 compared to $0.14 in the prior year with the prior year earnings impacted by the aforementioned $40.7 million pre-tax impairment charge.
Adjusted diluted net income per share for the company, as reconciled in our earnings release, was $1.12 per share for the current year quarter compared to $0.97 in the prior year. With regards to cash income taxes for the fourth quarter of 2016 includes the impact of cash income tax expense of $3.7 million as compared to a $448,000 benefit in the fourth quarter of 2015.
During the first half of 2015, we're recognizing cash taxes at a higher rate than what ultimately played out, which is the reason for the small benefit in the prior year fourth quarter. The current year cash taxes reflect a cash tax rate of 5.9% for the full year 2016.
As a reminder, our favorable tax yield of approximately $50 million through annual intangible amortization in our tax return results in our cash income tax rate being significantly lower than our GAAP income tax rate of approximately 37% for 2016. Cash flow from operations was a quarterly record of $123.9 million, as compared to $111.8 million in the prior year quarter.
Free cash flow as defined in the company reconciliation schedules was also a quarterly record of $114.3 million, as compared to $101.2 million in the fourth quarter of 2015. The year-over-year improvements in cash flow were primarily driven by the increase in operating earnings, as compared to the prior year.
Note that these record levels of operating and free cash flow benefited from the monetizing of approximately $50 million of working capital during the quarter. Operating and free cash flow for the full year 2016 were $253.4 million and $222.9 million respectively.
As of December 31, 2016 we had a total of $1.05 billion of outstanding debt, net of unamortized original issue discount and deferred financing cost and $67.3 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $985.6 million. Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the fourth quarter was 3.6 times on an as-reported basis.
Additionally, at the end of the quarter, there was approximately $138 million available on our ABL revolving credit facility. The company repurchased 1.24 million shares of its common stock during the fourth quarter for $50 million under our new $250 million share repurchase authorization, which was announced in October 2016.
Under the program, a total of $250 million of common stock is authorized for purchase over a 24 month period. For the full year 2016, the company repurchased nearly 4 million shares of common stock for approximately $150 million or approximately $38 per share.
During 2016, we deployed our cash in a variety of strategic ways, including $76.7 million for the Pramac and Motortech acquisition, $30.5 million for capital expenditures, $25 million for the voluntary prepayment of term loan debt and approximately $150 million for stock repurchases. We believe these investments represent very attractive uses of capital for shareholders and demonstrate our confidence in the long-term growth prospects and strong free cash flow generation capabilities of our business.
With that, I'd now like to turn the call back over to Aaron to provide comments on our outlook for 2017.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Thanks, York. Today, we are initiating guidance for full year 2017 as we expect net sales to increase between 5% to 7%, when compared to the prior year with 1% to 3% core organic growth.
The as-reported growth rate includes two months of the Pramac acquisition, which will annualize on March 1, 2017, as well as the contribution from the Motortech acquisition that closed on January 1 of this year. Importantly, this top-line outlook assumes no material changes in the current macroeconomic environment and also assumes the power outage severity levels similar to that experienced during 2016, excluding the impact of Hurricane Matthew.
As a reminder, should the baseline power outage environment improve or if there is a major power outage event in 2017, it is likely we could exceed these expectations. For historical perspective, an average major outage event could add between $25 million to $50 million of additional sales depending on a number of variables.
We expect the seasonality of quarterly results to demonstrate a normal historical pattern assuming no major outage events occur during the year. As a result, we currently expect the first half of the year to represent approximately 45% to 47% of total sales and the second half approximately 53% to 55%.
By way of comparison, 2016 organic seasonality was 46% in the first half and 54% in the second half. Specifically, we anticipate that the first quarter of 2017 will be the lowest revenue quarter of the year with sales in the range of $315 million to $325 million, reflecting normal seasonality for residential products as well as the impact of field inventory destocking by distribution partners during the first quarter, due to the success of our home standby generator promotional campaigns in the fourth quarter of 2016.
In summarizing our sales growth assumptions for 2017, we expect total core organic sales growth on a constant currency basis to increase between 1% to 3% compared to the prior year, with approximately a 1% negative impact from foreign currency. The acquisitions of Pramac and Motortech are expected to contribute roughly 5% growth for a total year-over-year as-reported net sales increase between 5% to 7%.
With regards to gross margins, recall that 2016 included a restructuring charge related to domestic mobile products and certain purchase accounting adjustments related to the Pramac acquisition. When excluding the $6.1 million or 40 basis point impact from these non-recurring expenses in 2016, gross margins for 2017 are still forecasted to improve by approximately 25 basis points as compared to the prior year.
Favorable impacts to gross margin are expected to come from pricing benefits, along with a variety of cost improvements related to new products, engineered cost reduction and sourcing savings from our increased scale and stronger U.S. dollar.
Partially offsetting these favorable benefits are impacts from unfavorable product mix, higher commodities and the additional two months contribution from the Pramac acquisition. Operating expenses as a percentage of net sales excluding the amortization of intangibles and the $4.4 million or 30 basis points impact from the non-recurring restructuring charge recorded in the first quarter of 2016 are forecasted to increase by approximately 25 basis points as compared to the prior year, primarily as a result of the impact from the Pramac and Motortech acquisitions.
Adjusted EBITDA margins for the full year 2017 before adjusting for non-controlling interest are expected to be between 19% to 19.5% as compared to 19.3% for 2016 with some variation throughout the year as a result of normal seasonality. Similar to the pattern experienced over the past several years, second half 2017 adjusted EBITDA margins are forecasted to be approximately 450 basis points to 500 basis points higher than the first half as a result of the increasing benefit from product cost reductions, a more favorable product mix, improved pricing and SG&A leverage on higher sales volumes through the back half of the year.
Specifically, adjusted EBITDA margins in the first quarter of 2017 are expected to represent the lowest point of the year, with margins improving sequentially in the second quarter by approximately 300 basis points and then increasing sequentially during the third and fourth quarters. I'll now turn the call back over to York to walk through some guidance details to help model out the company's cash flows and earnings per share for 2017.
York?
York A. Ragen - Generac Holdings, Inc.
Thanks, Aaron. In 2017, we expect interest expense to be in the range of $46.5 million to $47.5 million, which represents an increase compared to $44.6 million for the prior year.
The primary driver of the increase is the assumption that LIBOR rate exceeds the minimum floor of 0.75% on our term loan for the entire year. The forecast for interest expense includes $44 million to $45 million of cash for debt service costs, plus approximately $2.5 million for deferred financing cost and originally issue discount amortization for our credit facility.
This interest expense guidance assumes no additional debt prepayments during 2017 and our existing interest rate swap contracts remain in place. Based on our guidance provided for 2017, our cash income taxes for the year are expected to be approximately $26 million to $27 million, which translates into an anticipated full-year 2017 cash income tax rate of approximately 14%.
This represents a notable increase as compared to the 5.9% rate in 2016. The projected higher cash income tax rate is a function of several factors, most notably higher pre-tax profitability levels, as well as expected reduction in share-based compensation expense for tax purposes during 2017 compared to the prior year.
Our GAAP income tax rate is projected to be approximately 35% in 2017. Depreciation expense in 2017 is forecasted to be approximately $21.5 million to $22 million.
GAAP intangible amortization expense in 2017 is expected to be approximately $29 million to $29.5 million, which is a reduction from the $33 million in 2016. The decline in expense is primarily the result of certain definite-live intangibles becoming fully amortized during 2016.
In 2017, GAAP stock compensation expense is expected to increase to approximately $11 million to $11.5 million. Our capital expenditures for 2017 are forecasted to be approximately 2.5% of our forecasted net sales for the year.
Importantly, recall that we have a majority ownership position in Pramac and there was a minority non-controlling interest with this acquisition that must be deducted when forecasting adjusted EBITDA, adjusted net income, and adjusted EPS for the full year 2017 similar to the presentation reflected in the reconciliation schedules included with our earnings release. For full year 2017, free cash flow generation is expected to be strong, benefiting from the solid conversion of adjusted net income expected to be over 90% in 2017.
In closing this morning, sales of residential products during 2016 increased organically, as our market position remains strong. Business conditions in several of our C&I end markets remained soft during 2016, but we believe demand trends in a number of these markets are at or near the bottom, and we're cautiously optimistic in returning to organic growth during 2017.
As we look at our outlook for 2017, we believe our Powering Ahead strategy is working, as the business has become more diversified in recent years. We remain optimistic regarding our overall long-term growth prospects and our strong cash flow generation capabilities give us the flexibly to make strategic investments that we believe will increase shareholder value.
This concludes our prepared remarks. At this time, we'd like to open up the call for questions.
Operator
Thank you. Our first question comes from the line of Jeff Hammond from KeyBanc Capital.
Your line is now open.
James A. Picariello - KeyBanc Capital Markets, Inc.
Hey, good morning, guys. This is James Picariello on for Jeff.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Well, good morning. good morning, James.
James A. Picariello - KeyBanc Capital Markets, Inc.
So, you mentioned this pivot in the Powering Ahead strategy away from regional expansion and now primarily focused on natural gas applications, it makes a lot of sense. Could you just talk about when this revelation occurred internally, and maybe how you're thinking about the company's current portfolio as it stands?
Is there anything you would consider non-core at this point?
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah. So, James, every year we do a strategic planning session, and review with our management team here at the company and with the board of directors obviously and we go through – again, we evaluate our strengths, our weaknesses.
It's kind of classic SWOT analysis where you start, our position in each of the markets we're in, what's working, what's not working, where we think – kind of where is the puck going to be as we look out three years to five years. And in this year's session, I think – and maybe this has been tugging at us a bit, but really the pivot for us is this element of our strategy that's actually played a really significant part in actually York's final prepared remarks there a significant part, and I think the diversification of Generac, that part of the strategy of going after new products and new markets, we feel that we have become very diversified.
We've gotten ourselves into a lot of new markets, a lot of new product categories that we weren't in before. They all have an engine at the heart of them, which is what we like.
They provide some great scale for us in terms of not only a manufacturer of engines, but a customer of engine suppliers. And a lot of the new markets that we got into was great for the adjacencies that they gave us for our products – our existing product line.
But also, I think we all feel that to go further from where we're at today might be a bit dilutive in terms of our focus. And so, we've been feeling that as we've slowly diversified the company.
I think it's been clear to us that we needed to probably rein that in a bit. And I wouldn't say that coming from that analysis there is anything that we say doesn't belong anymore.
I think we're comfortable with what we've got, and what we've amassed. And we may full well add some other products that are real close to, in the way they operate and the markets that are served by those products, we may continue to do that.
We're just not going to make it a primary focus of our strategy going forward. So the pivot is really to – one of our major strengths, which has been natural gas generators for over 30 years, we've been a leader in emergency backup gas generators, and we believe that we can extend that leadership on emergency backup generators into some of the other places that natural gas is showing up, not only in energy combined heat/power type applications, demand response, there is utility curtailment programs, there is a lot of places where generators that may have traditionally been used in an emergency-only situation are now starting to be looked at as a potential way to actually cut energy cost.
The natural gas obviously is viewed as a very clean fuel source, and it's also going to be a very readily available fuel source for a long, long time. Natural gas is going to be the world's fuel supply for at least the next 100 years, I mean the economics in favor there are far too strong.
So the acquisition of Motortech that we just recently announced here, we believe is a really good step in the right direction of this pivoting strategy to a much deeper focus on natural gas, not only strengthening the existing positions we have in the market, but then going after some of these other market opportunities, and we think Motortech is going to really put us in a position to learn those markets and to begin to formulate initiatives as I said to go after those opportunities. So that's really the pivot that we're talking about.
James A. Picariello - KeyBanc Capital Markets, Inc.
Got it. Very helpful.
And then just on International margins, can your provide some additional color on what's driving that segment's lower profitability? You mentioned UK weakness.
So to what extent is FX just playing a factor there? And then with respect to the ongoing integration efforts at Pramac, can you just maybe provide some range on what the targeted revenue and cost out synergies are for this year?
Thanks.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah. So I'll start the – the margins in International, I think were challenging this year.
That segment has largely been our Tower Light business along with our Ottomotores business down in Latin America. And we're in a very fortunate position to be supplying the market in a very favorable way with products that that had very good margins and they still do have very good margins as a matter of fact, it's just unfortunately the Tower Light business in particular, we saw a breakdown in the capital spending by those larger rental accounts in Europe, primarily in UK, which is a big component of Tower Light's business and that really was last year, some of it precipitated by Brexit, I think that was probably the excuse if you will.
We've seen large rental companies, they tend to throttle back CapEx very quickly. And it's pointed out, I think some opportunities within that business to expand our customer base into some reaches and some areas in maybe the second and third tier-type of customer layers there that maybe we weren't as concentrated on that we probably need to expand on, so I take every negative and try to make it a positive, of course, but that was really at the core of what happened there.
And then obviously you layer in the Pramac business, which is a lower margin business. I mean typically when you look at power generation businesses globally and we've looked at a lot of them, they're really kind of mid single-digit EBITDA type margin businesses.
The reason for that is they're primarily packagers. They are buying somebody else's engine, they're buying somebody else's alternator, buying somebody else's control, there is a limited amount of value add in the value chain.
And so their margins tend – it's basically kind of commoditized, and so their margins are somewhat reflective of a market that is commoditized. And so you might ask, well why even bother going after that?
Well, it's pretty simple. We think that there is an opportunity to take these packagers and make them more truly manufacturers like we are more vertically integrated where there are more value added streams.
We manufacture our own control, the hardware and the software, our own alternators, our own transfer switches, many of our own fuel systems. There's a lot more value added content that we bring to bear, and I think it's reflective of the margins we have here domestically in those segments, and so – in those businesses.
So that is I think the long-term plan. So more directly to your question about the synergies in Pramac, obviously, of course, we're coming up on the one-year anniversary.
We've been able to capture some synergies, but not much, we expect this also will accelerate especially as we go into the back half of the year here. You won't see that dramatically showing up in EBITDA margins for that business this year.
But we think it's really kind of a late 2017 and going into 2018 story. There's a lot of engineering work to be done to globalize our platforms, and that's really at the heart of that.
And so those projects are pretty wide ranging, and they take fair amount of engineering resource, and they're currently underway, but they really won't – these are long sales cycle products as well, so they really won't have an impact on that business until later this year. Now some revenue synergies where we are starting to see some nice interest is in with gas products in the Pramac distribution, which is also part of that plan.
So good step ahead for those businesses.
Operator
Our next question comes from the line of Brian Drab from William Blair. Your line is now open.
Brian P. Drab - William Blair & Co. LLC
Hi. Good morning.
York A. Ragen - Generac Holdings, Inc.
Good morning, Brian.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Hi, Brain.
Brian P. Drab - William Blair & Co. LLC
See I wanted just to ask about the breakdown of the revenue for the year first – last couple of years, first half of the year accounted for 46%, 45% of revenue and you mentioned that in the prepared remarks. But the difference between 2015 or 2016 versus this year in my mind is that we had this major weather event at the close of the previous year.
So why wouldn't we see a little bit more revenue in the first half, so that balance be a little bit different?
York A. Ragen - Generac Holdings, Inc.
Yeah, Brian, this is York. I think Aaron – we talked about a steer in terms of where Q1 sales at $315 million to $325 million, and in Aaron's prepared remarks, he was referring to the success of our promotional campaigns in the fourth quarter of 2016.
That will just result in a level of destock in the first quarter of 2017 here, so that guide is reflective of that. And then, the reality is Hurricane Matthew wasn't really a major event, I think there was – while it took the power out for a lot of people, it wasn't for a long duration.
The severity was short (42:06) infrastructure wasn't really damaged. So, the afterglow of Matthew into 2017 is muted.
Aaron P. Jagdfeld - Generac Holdings, Inc.
It really was a portable generator, and that's more than anything is what we saw in Q4, Brian. I think what happened is our channel partners both on portables as well as home standbys, they get into a buying mood pretty quickly when they see a storm like that and we run normal promotional cadence those times of the year, and we got a high receptivity of those promos.
And as York said, that's going to result in really higher kind of fuel inventory levels as we enter the year here, and there'll be some amount of destocking that will occur in Q1, and that's really what's reflective of that kind of seasonal steer that we gave first half, second half.
York A. Ragen - Generac Holdings, Inc.
So, Brian, it's a fair question, but I think given those comments that that would then cause the weighting first half, second half to be similar to 2016 here in 2017.
Brian P. Drab - William Blair & Co. LLC
Yeah, great. That's really helpful.
And then, can you go back and talk a little bit more about Motortech and the timing of maybe some of the new products and opportunities that would be associated with Motortech? And have you been able to quantify in any way, how much you're expanding your TAM with those products?
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah. We think the TAM for those products is about – it's about 1.5 times bigger than what we currently serve today in the emergency backup market.
And so that – it's a pretty good opportunity for us and Motortech is currently selling into – that market is largely by the way I should say that TAM expansion is largely in Europe today. And we think that that is starting to appear here in North America as well and in Latin America.
So, the Motortech technology and the competencies that we gain there, we believe are going to allow us to put ourselves in a position to capture that expanding TAM here domestically and in Latin America and then the existing TAM in Europe. In terms of timing, Brian, those are big product cycles for us, and so it's going to be something we're going to begin to work vigorously on here, already actually have in 2017 here.
And that'll – I think we'll be in a position to give better updates throughout the year as we go forward, but we're excited about it. Because it's – again natural gas is going to be the world's fuel supply for a long time.
We think we're going to where the puck is going to be here in the future and we're seeing evidence of that the traditional – even in the traditional backup generator markets, we've seen this for a couple of decades in the U.S. market, there's been a shift away from diesel and to natural gas.
Outside the U.S. and Canada, it's still largely a diesel market for backup generators.
We think that's going to change as well over time, gaseous-gensets are becoming much more accepted as a substitute, if you will, for diesel, and we believe we're going to be at the forefront of being able to capitalize on that.
Operator
Our next question comes from the line of Jerry Revich from Goldman Sachs. Your line is now open.
Jerry Revich - Goldman Sachs & Co.
Hi. Good morning, everyone.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Good morning, Jerry.
York A. Ragen - Generac Holdings, Inc.
Good morning, Jerry.
Jerry Revich - Goldman Sachs & Co.
Aaron, I'm wondering, if you could talk about for your core Magnum business for light towers, what are you embedding in terms of the CapEx outlook for your customer base? In that business we saw one of your major customers put out some pretty positive CapEx indicators that also suggest the very good first and second quarter on a year-over-year basis in their planned spend.
And I'm just wondering, if you anticipate your share of the CapEx budget for U.S. rental companies staying similar or is there anything that we should keep in mind about where dollar utilization stands for them in your products compared to the overall portfolio?
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah. It's a really good question Jerry, and obviously, one that we paid very close attention to in terms of all the major metrics there around the categories that we serve in that market.
Lighting towers have been traditionally one of the better return on invested capital type products that's in a fleet for a rental customer. And so, as you would expect that's typically where we see recovery first, when we see fleet replacements occurring, and where we see capital expenditures deployed first.
And that's basically what we're seeing. As I said in my prepared remarks, it's what gives us confidence that we've kind of seen the bottom, we've steered it down and we believe there's going to be a nice rebound in that business this year.
We're already seeing order rates strengthening from those national account customers in those particular categories around towers. We think that gens generally will follow a little bit later.
The generator markets are little different because there's a dynamic there around a shift in the average sell price for those products, it's reflective of the move from Tier 4 interim to Tier 4 final engine powering in many of those products, including the generator product line that we offer. So in effect, until rental rates are – there is an ability to increase rental rates in those products, it's going to probably keep a bit of a lid on maybe the CapEx spending there, until fleets – I think fleets are going to age a little bit more in those category.
But we're seeing some really nice rebound there, we're watching and conversing with our national rental account customers on a daily basis in fact. And frankly, probably the bigger challenge in that business for us is just having rationalized the footprint of the business and done the cost reduction and the restructuring charge that we talked about last year is being able to react quickly to changes in demand, they often come in big chunks and we're seeing some of that now.
So the ability to ramp our operations and our supply chain accordingly will probably be the constraining factor for us here in first two quarters of the year so. And that's really – I mean, seasonally speaking lighting towers from a seasonality standpoint are typically a Q3 product, I mean, it's when days get shorter.
So, that's what gives us confidence that a lot of what's going on right now is true fleet replacement activity. So we like that and that's really without any recovery in oil and gas yet, any significant recovery there.
So there could be some potential additional upside should oil and gas begin to come back on line and those investments be made. So we're bullish on it.
Jerry Revich - Goldman Sachs & Co.
Okay. Thank you.
And then for the standby business, it sounds like just based on field inventory timing maybe the business looks negative year-over-year in the first quarter. I'm wondering if you would just share with us how the underlying trends are attracting, whether it's the number of in-home consultations or whatever core underlying demand you think will reflect the underlying demand and how you look at the business today, can you just help us understand the cadence of what's played out over the course of the quarter?
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah. So what we saw in Q4 Jerry, I mean we typically see a push towards the year end on activations which we saw in-home consultations usually perceive that by a couple of months, which we saw.
I wouldn't say that the spikes were as large. Regionally speaking, the Northeast was down regionally for the year and also in the quarter although not nearly as severe as previous quarters.
The Northeast still continues to come off of, I would call it the hangover of the events that had transpired out there in 2011 and 2012. So that decrease in that region put pressure overall on those things.
That being said, I think that was offset largely in Q4 as we mentioned in our prepared remarks by the impact of Matthew. Now, as you're also learning, and you mentioned, a lot of that was sell-in, not necessarily sell-through as channel partners took a fair amount of inventory, took advantage of promotional cadence we have, they were in a better buying mood because of the outage events.
And coming into the beginning of the year here, we see kind of from an end market demand standpoint, very similar trends to what we've seen in years past, not materially different. I would say that activations in in-home consultations in areas that we saw impacted by Matthew are up year-over-year and the rest of the market is either kind of flattish to maybe slightly down continuing in the Northeast still, which is pretty phenomenal, just goes to show you how big that market had gotten, but I think it's pretty stable trends.
We've got a number of things, as we said, that we're working on to focus on improving close rates. I think that's a really big focus area, it has been last year, but we've adjusted some of our programs this year to reflect the importance of close rate in the rankings of residential dealers, which we hadn't done in the past.
So we think that trying to better use market forces to our advantage to improve close rates. If we could just see even a slight improvement in close rates, it's a material impact.
We do a lot of quotations, I mean, a lot of quotations and the close rates are relatively small. And if we could get those close rates to move just a little bit, it's going to have a nice impact on overall home standby demand.
So I think that's really the game for us and our focus is that end of the market.
Operator
Our next question comes from the line of Charley Brady from SunTrust Robinson. Your line is now open.
Looks like we've got...
Aaron P. Jagdfeld - Generac Holdings, Inc.
Maybe go to the next one, operator.
York A. Ragen - Generac Holdings, Inc.
Hello. Charley, we're not hearing you.
Charles Brady - SunTrust Robinson Humphrey, Inc.
Can you hear me, York?
York A. Ragen - Generac Holdings, Inc.
We hear you now.
Charles Brady - SunTrust Robinson Humphrey, Inc.
Okay. My apologies on that.
My question is just quickly on the raw material costs, we've seen copper go up a little bit. We've seen some other raws go up.
Any impact on the fourth quarter and kind of what's embedded in your expectations in 2017?
York A. Ragen - Generac Holdings, Inc.
Hey, Charley. This is York.
Yeah. In Q4 – starting with Q4, so we have realization lag, as you can imagine, with our supply chain and through our inventory.
So what we're seeing come through Q4 can be commodity levels from six months ago or more. So we actually had a tailwind in Q4 relative to commodities and whatnot.
But when you do flash-forward to 2017, you're right, copper, steel, aluminum are all up and trending up. So what we need to do is put initiatives in place from an engineered cost reduction standpoint, a sourcing standpoint, a pricing operating standpoint to help offset those headwinds on the commodity side.
So, we did bake in some level of commodity pressures in our guide, but we also did include some price and some engineered and sourcing cost reductions to help offset. So that was reflected in our gross margin guidance for 2017.
Charles Brady - SunTrust Robinson Humphrey, Inc.
Okay. Thanks.
That's helpful. And so, let me go back to commentary in the prepared remarks on the new product development and bringing down that installation cost and the labor cost of that installation.
Can you just maybe get a little more granular on kind of (53:47) kind of what's the pipeline as to where, how much that could come down because obviously that's a very large factor in the decision process on buy or don't buy for those home standby products?
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah, Charley, we think that it's probably somewhere in the area of a 5% reduction overall, it's really focused on the labor component by just reducing the overall cost to install, the time it takes to install. So 5% to 7% reduction in that, which again when you look at kind of the sensitivity analysis around a decrease in price there that should have a move up in volume.
But that being said, as we've said repeatedly over the last several years, we do think it's going to take probably a more meaningful reduction in total cost of ownership. We've got some things that we continue to work on where we believe we can take a further step in that direction.
We haven't really seen it show up yet in our proposals, obviously we're doing a lot of proposals, as I said before. So we haven't really seen it show up yet in proposals too dramatically because the product line simply just launched end of Q3, beginning of Q4.
So, as proposals are put together, and as dealers get more experience installing the new version of the products, we think it will be – will improve that TCO push downward over the course of this year, but more to come on that. We've got a lot of work, we spend a lot of time on this internally, and we believe there are some things materially here in the future that could bring that down further.
Operator
Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is now open.
Christopher Glynn - Oppenheimer & Co., Inc.
Thanks. Good morning.
York A. Ragen - Generac Holdings, Inc.
Good morning, Chris.
Christopher Glynn - Oppenheimer & Co., Inc.
Hey, as we look at the implied 1Q impact from the promotional program successes in the fourth quarter, just wondering, if sell-through ultimately rules the volume demand over time, what's the net utility of the seasonal promotional programs?
Aaron P. Jagdfeld - Generac Holdings, Inc.
So the net utility of those promotional programs is really to make sure that there's field inventory for dealers, right. I mean if we were to keep all the field inventory here in our distribution centers and the ability to react to outage events as they occur becomes very constrained, very quickly.
So we've always been keen to make sure that field inventory levels are healthy, that's an important element of reacting to demand. Demand happens quickly, it surges quickly, and it goes away quickly.
So if levels are appropriate, we believe that that puts us in a position to win and not lose market share, should an event occur. So that's a big part of it.
We also know frankly that having those products in front of those dealers for them to sell really gets them to focus on it. So if they don't have that unit in their shop, they are not looking at it.
They are less focused and less likely to do the local advertising and the local marketing that we need for them to be successful and us ultimately be successful. So it's really kind of – it's a multipronged approach.
And trust me, because we've questioned ourselves a numerous times on this, is there – are we leaving dollars on the table, where is that kind of balance in terms of how much promotion, there's too much promotion, what's not enough. And so, it's difficult to kind of walk that path, but we think we have the right approach.
I will say the one change we're going to make going forward, last year we did our first kind of what I would say, we call it a pull promotion more at the consumer-oriented and level. So we did some extended warranties and things.
Those were very well received, those were in the third quarter. We think that a better cadence of push and pull promotions, a better balance there is a way to kind of reduce our overall total costs while still creating the same level of engagement we need with distribution partners and ultimately changing the conversation a bit over at times of the year or two – a direct conversation with end consumers about having the product.
So we continue to refine that, but that's really what the additional utility is all about with promotion.
Christopher Glynn - Oppenheimer & Co., Inc.
Okay, that makes a lot of sense. And then on the organic 1% to 3% for the year, how does that course respectively for the residential versus C&I?
York A. Ragen - Generac Holdings, Inc.
Hey, Chris, this is York. So, on the resi side, I guess qualitatively we gave a guide that basically said we're assuming power outage severities similar to 2016 excluding this Matthew event.
If you factor that as your overarching assumption on the residential side and then you factor in this destock in Q1 and then given the assumption of not having another Matthew happen in Q4, you'll have a tough comp in Q4. When you put that all together, resi is probably down slightly year-over-year from 2016 to 2017.
Obviously, you get an event, any type of event and that will take that to positive growth year-over-year. On the C&I side, we're seeing solid growth in the core stationary business, be it domestically in Latin America or in Europe, but it's that mobile business that Aaron alluded to versus where we're seeing some strong trends.
So we see on the mobile side both domestically and in Europe some strong growth year-over-year on the mobile side, but stationary, we are also seeing solid growth. So, I guess qualitatively that would be the direction we can give you on the resi versus C&I growth.
Operator
Our last question comes from the line of John Quealy from Canaccord. Your line is now open.
John Salvatore Quealy - Canaccord Genuity, Inc.
Hey, thanks, guys for squeezing me in. Good morning.
Just one question.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Hey thanks John.
John Salvatore Quealy - Canaccord Genuity, Inc.
Hey, guys.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah.
John Salvatore Quealy - Canaccord Genuity, Inc.
So some of the newer or sort of refreshed opportunities combined heat and power, DR, peak-shave, talk about what you're going to do on the third-party side? I mean, are you going to talk to utilities or DR aggregators, maybe some E&C firms on the larger scale CHP, just talk a little bit about go-to-market?
Thanks, guys.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Yeah, thanks, John, good question. And so, as I said, I think we're in the early innings here on lining up the key initiatives around that, as we refer to it internally here we're calling it, lead gas.
And so that lead gas initiative for us is going to get fleshed out here as we go forward. But clearly, from a go-to-market standpoint, it's not our traditional channels.
I think that that's where probably the biggest amount of work has to happen. And frankly the products themselves require a bit of work, but not too dramatically, there are some different emissions levels, there is some different – some of the engines are a bit more heavy-duty, the alternators and other components may reflect a bit more heavy duty in nature to reflect the higher demand cycles for those products, but it's really the go-to market side of that, I think you've nailed it that is where our big – where really our heavy lifting has to be done.
So, we'll be all the players and actors that you mentioned there are potential interfaces for us going forward. And that's going to require a different effort on our part.
And as I said it's probably not going to look similar to what we do today. We've actually been down this path before, 15 years ago when distributor generation was going to be all the rage going forward when utility costs were going to up and gas prices were going to stay low, unfortunately gas prices went up and utility cost stayed low.
So, it was the opposite effect and we ended up disbanding several sales initiatives and efforts that we had targeting distributor generation at that time. We had products in place and we had sales forces in place that we ended up ultimately moving away from and they were targeting utilities and other demand response aggregators, other places in the marketplace where you would expect to see that.
So, more to come, early innings, but we think it presents really a whole new kind of area for us as we go forward here in 2017.
Operator
That now concludes our Q&A session. I will now like to turn the call back to Aaron Jagdfeld, President and CEO, for any further remarks.
Aaron P. Jagdfeld - Generac Holdings, Inc.
Great. Thanks.
We like to thank everyone for joining us this morning and we look forward to our first quarter 2017 earnings release, which we anticipate will be sometime in late April. With that, we'll bid you adieu.
Bye, bye.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program.
You may all disconnect. Everyone, have a great day.