Q3 2019 Earnings Call
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Good morning.
And welcome to our third quarter 2019 earnings call I'd like to thank everyone for joining US. This morning with me today is there any I felt president and Chief Executive Officer.
We'll 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 could differ materially from those in these forward looking statements.
Please see our earnings release or FCC filings for a list of words or expressions that identify such statements and the associated risk factors.
In addition, we'll make reference to certain non-GAAP measures during today's call additional information regarding these measures, including reconciliations to comparable U.S. GAAP measures is available in our earnings release and FCC filings.
I will now turn the call back over there.
Thanks York Good morning, everyone and thank you for joining us today.
Our third quarter results represent a continuation to the strong start we experienced this year in the first half and are the best quarterly numbers, we've ever had as a company.
Strong domestic sales growth of 9.2% was driven by our residential in industrial stationary power generation markets again during the quarter with overall net sales increasing approximately 7% compared to the prior year.
EBITDA margins remained strong at 21% as we have been largely successful mitigating the impact of regulatory tariffs.
Increases in power outage activity over the last several years together with the threat of potential outages in California drove continued penetration gains in home standby generators during the quarter.
Shipments of stationary see an eye products were also significantly higher year over year as demand for natural gas generators and telecom related backup power more than offset softer shipments a mobile products as a number of our larger rental customers continued to defer certain fleet purchases.
Once again demand for home standby generators remained very strong during the quarter.
Activations in in home consultations, where again robust with proposal close rates, which had been trending higher for the last several years at all time highs as we continue to refine our sales and marketing processes.
Over the last two decades, we've invested heavily to create the home standby generator market as our efforts to develop distribution create targeted marketing and deploy in home selling processes have dramatically increase the overall awareness and growth of the category.
Recall that every 1% of penetration represents $2 billion of additional market opportunity at retail prices.
Power outages have steadily increased in frequency and duration over the last 25 years, primarily due to under investment in the electrical grid, which has left at more vulnerable to the increasingly unpredictable and more severe weather patterns that are being driven by a changing climate.
In California, where penetration rates of home standby generator stand at less than 1%, we've seen a dramatic increase in the number of in home consultations and other leading indicators that continue to point to the rapid expansion of this market.
Over the last three weeks local utilities have triggered numerous shut off impacting millions of customers as they seek to mitigate the risk of wildfires.
These shops have been multi day events and are projected to continue in the years ahead as the impact of climate change and the massive under investment in Northern California is power grid have combined to create a situation where public safety takes precedence over power quality.
As a result, we're working to drive awareness of home standby generators in this part of the country through television and digital advertising to promote the category.
As we've previously noted we have relatively underdeveloped distribution in this region, which could limit our ability to satisfy the increase in demand in the near term as we work to qualify train and onboard new channel partners across the state.
As is the case with most major power outage events, expanding distribution and working together with local regulators inspectors and gas utilities to increase their bandwidth and sense of urgency around approving and providing the infrastructure necessary for this product category are critical for future growth.
Based on the scale of the power shut off experience to date, we estimate the impact of these events could add more than $50 million. The sales in the current year off a relatively small base, which is roughly double our original projection.
As we continue to develop awareness and con and distribution in the region and if public safety shut off to remain a concern for Californians. We believe the total market for backup power in the state could potentially be as high as $200 million annually in the years ahead.
Our efforts in this part of the country will also be helpful. In developing the market for energy monitoring management and storage recalled. It earlier. This year, we entered this nascent but fast growing market with our acquisitions of Pike energy and Nuriel technologies.
We believe the energy landscape will undergo significant changes in the decade ahead as a result of rising utility rates grid stability issues environmental concerns and the continuing performance and cost improvements in renewable energy and batteries.
Onsite power generation from solar wind geothermal and natural gas generators will become more prevalent as will the need to manage monitor in store this power potentially developing into a multibillion dollar market opportunity annually.
The combination of Picas power Electronics battery management software and proprietary inverter technologies, alongside Marios hardware and software for energy monitoring and management will allow us to bring an intelligent and efficient energy saving solution to this exciting new market and should solidify generates position as a key participant.
Our efforts to develop omni channel distribution targeted consumer based marketing content and proprietary in home sales tools that played a critical role in creating the market for home standby generators and we believe there will be equally important as we work to grow the energy management and energy storage markets.
We recently announced a minority investment in soft ask a Canadian software company focused on developing sales like acceleration tools for the solar industry.
The company's flagship product solar graph is an all in one software tool used by solar installers for lead management, a redesign a proposal creation as well as permitting and overall project management.
We intend to fully integrate these capabilities with elements of our proprietary powerplay sale system to create powerplay CE. The industry's first complete solar plus storage sales and lead management tool for installers and dealers.
In September we launched powerplay see as well as our new Generac branded intelligent storage system called power sell at the solar power International show in Salt Lake City.
As a result, we are aggressively working to expand our supply chain capacity with the intent to ship well in excess of 100 megawatt hours of storage as early as next year more than doubling our initial second year projection for this business.
In addition to our efforts to expand the residential side of our business during the quarter, our commercial and industrial generator business also grew again with another strong quarter driven by a number of important secular themes, which continue to develop.
Generac is a key supplier of backup power system to every single tier one carrier in the U.S. and is also the largest provider of backup power for the telecom market in Latin America.
Combined with our efforts at Pramac in Europe , We believe we can become a leader a leader globally and telecom backup power similar to the leading position we have built in the Americas as this key vertical begins another extended investment cycle in the years ahead.
We've also worked hard over the years to promote the benefits of natural gas power generation as an alternative for diesel powered systems that have traditionally been used in emergency backup applications.
Increased regulation around diesel emissions of driven prices higher for diesel generators and when combined with the inherent refueling drawback of these systems and additional environmental concerns and opportunity has developed for natural gas fuel generators as a cleaner and better alternative.
We believe the natural gas as many superior characteristics when used to generate power with its abundant supply low price logistical advantages and environmental benefits, which have driven growth rates for gas generators that are twice that of diesel sets in the emergency backup power market over the last 25 years.
We also see a developing opportunity for natural gas generators to be used in certain grid support applications beyond traditional standby power such as demand response programs, which are used to help utilities better balance to supply power with demand.
Gas generator used in a limited fashion for emergency backup could be deployed and managed by the end user local utility or third party aggregator as a decentralized power generation assets.
Production of power on site for local consumption or for exports to the grid is not a new concept, but the economics of using natural gas and reciprocating engine driven genset for this purpose have become more attractive in recent years as utility rates rise and natural gas prices remain low.
Although we continue to see solid domestic demand for stationary seen I products shipments for mobile products were lower again during the third quarter, mainly due to the continuing reduction of capital spending by certain national rental account customers.
Partially offsetting the lower shipments to these customers in the quarter were increased equipment purchases from independent and specialty rental businesses.
In our view the longer term need for increased levels of spending on infrastructure projects in the U.S. is an important theme that remains intact and we believe this will translate into greater demand for mobile project products in the years ahead.
Internationally, our business is roughly flat year over year as demand has softened in certain regions as it works as a result of geopolitical risks trade conflicts and other economic uncertainties.
Although we are experiencing a challenging environment for our international business, we believe that longer term, our global presence will be important as interest in home standby and gaseous generators for commercial and industrial applications continues to gain traction in many new markets around the world.
Overall, we have a path to improved profitability and we remain committed to our long term targets of low double digit EBITDA margins for this segment.
I'd now like to turn the call over to York to provide further details on our third quarter results York. Thanks Aaron.
Before discussing third quarter results in more detail recall that effective January one 2018, generac adopted the new GAAP revenue recognition standard.
Therefore, the prior period it in there in our earnings release has been updated accordingly.
See our press release for more information related to these reclassifications.
Now looking at our third quarter 2019 results in more detail.
Net sales for the quarter increased 6.9% to $601.1 million as compared to 562.4 million in the third quarter of 2018.
Excluding the $4.8 million of contribution from the Captiva, Nario and Pike acquisitions, and the almost 4 million negative impact from foreign currency core growth rate during the quarter was approx was still approximately 7%.
Looking at our consolidated net sales by product class residential product sales during the third quarter increased 7.4% to 335 million as compared to 311.9 million in the prior year quarter with core growth being approximately 7% when excluding the M&A contributions from NURI on pica and a slightly.
As Aaron mentioned home standby generator sales experienced significant year over year growth as we continue to drive penetration of the product category.
With power outages on the rise in interest in home standby generators and an all time high we have ramped up our efforts to increase awareness distribution and close rates for these products with particular focus in California.
In addition shipments a portable generators were similar to prior year aided by the impact of Hurricane Dorian, which made a brief us landfall in early September of this year.
Recall that the prior year period included the impact of Hurricane Florence, which also resulted in significant portable generator shipments into the impacted region.
In addition shipments to our domestic industrial distributors also remained very strong as we continue to drive share gains across our product portfolio.
Partially offsetting this growth shipments of Cnine mobile products declined year over year as our national rental rental account customers continue to deferred capex spending during the current year quarter.
Internationally are seeing eye products were approximately flat with prior year on a core basis.
We have executed on a number of sales initiatives to drive penetration of our products across the globe.
However, these strategic growth initiatives were largely offset by certain geopolitical headwinds, resulting in economic softness in various regions around the world during the current year quarter.
Net sales for the other products category, probably made up of service parts and extended warranty sales increased 16.1% to 51.2 million as compared to 44.1 million in the third quarter of 2018.
A larger installed base of our products and higher levels of extended warranty revenue drove this increase versus prior year.
Gross profit margin was 36.2% compared to 35.6% in the prior year third quarter.
Operating expenses increased 18.1 million or 19.3% as compared to the third quarter of 2018.
We are investing in marketing content campaigns and promotions to drive awareness of the home standby generator product category with an added focus in the California market.
Additionally, the incremental operating expenses from the recent acquisitions of NURI on pica have given us the R&D capabilities to enter the energy storage and energy manage of markets markets in a meaningful way.
We believe these investments will be important drivers of future growth.
Adjusted EBITDA before deducting for non controlling interests and as defined in our earnings release was 126 million in the third quarter of 2019 as compared to 124.5 million in the same period last year.
The corresponding adjusted EBITDA margin was 21% in the curve in the quarter as compared to 22.1% in the prior year.
This margin decline was primarily driven by the increased operating expense investment previously discussed.
Over the last 12 months adjusted EBITDA was 451 million.
I will now briefly discuss financial results for our two reporting segments.
Domestic segment sales increased 9.2% to $498.2 million as compared to 456.1 million in the prior year quarter, which includes 3.1 million of contribution from recent acquisitions.
As previously discussed this year over year increase reflects strong and market conditions for home standby and CNX stationary generators.
Portable generator shipments were approximately flat despite a tough prior year comparison.
The domestic segment growth was partially offset by lower shipments of Cnine mobile products.
Adjusted EBITDA for the segment during the quarter was 121.2 million or 24.3% of net sales as compared to 117.1 million in the prior year or 25.7% of net sales.
International segment sales decreased 3.1% to $103 million as compared to 106.3 million in the prior year quarter.
Core sales were approximately flat versus prior year, when you exclude the unfavorable impact of foreign currency and the impact of the Captiva India acquisition.
As previously mentioned market share gains were fully offset by geopolitical headwinds, which cause economic softness in certain regions of the world.
Adjusted EBITDA for the segment during the quarter before deducting for non controlling interest was 4.7 million or 4.6% of net sales as compared to $7.4 million or 6.9% of net sales in the prior year.
Unfavorable sales mix and incremental operating expense investment contributed to this margin percent decline.
Now switching back to our financial performance for the third quarter of 2019 on a consolidated basis.
GAAP net income attributable to the company in the quarter was $75.6 million as compared to 70 75.8 million in the third quarter of 2018.
The incremental earnings from our topline sales growth was mostly offset by the additional opex investment previously discussed.
GAAP income taxes during the current year quarter.
Were $20.1 million for an effective tax rate of 21.1%. This compares to GAAP income taxes. In Q3, 2018 of 21 point 20.1 million for an effective tax rate of 20.8%.
The relatively consistent effective tax rate versus prior year reflected the lower federal statutory tax rate related to use tax reform and both years also included certain discreet tax deductions as a result of tax planning to help lower our overall tax obligations.
Diluted net income per share for the company on a GAAP basis was $1.18 cents in the third quarter of 2019 compared to a $1.11 cents in the prior year.
Specific calculations for these earnings per share amounts are included in the reconciliation schedules of our earnings release.
The current year quarter earnings per share calculation of $1.18 includes the impact of a $1.5 million adjustment to increase the value of the redeemable non controlling interest for the Pramac acquisition, resulting in a two cents reduction in GAAP earnings per share.
The prior year quarter earnings per share calculation of $1.11 includes a similar adjustment of 6.9 million, resulting in an 11% reduction in GAAP earnings per share.
Adjusted net income for the company as defined in our earnings release was 90 million in the current year quarter or a $1.43 per share versus 89.1 million prior year or $1.43 per share.
With regards to cash income taxes. The third the third quarter of 2019 includes the impact of a cash income tax expense of 15.1 million as compared to 15.2 million in the prior year quarter.
The current your reflects an expected cash income tax rate was 17% for the full year 2019.
While the prior year third quarter was based on an expected cash tax rate.
15% for the full year 2018.
This increase in cash tax rate is due to a higher level of expected pre tax earnings in fiscal 2019 versus fiscal 2018.
Recall that every dollar of pre tax earnings over and beyond or 30 million dollar tax shield is now tax at the expected GAAP tax rate of approximately 25%.
Cash flow from operations was 111.2 million as compared to 59.3 million in the prior year third quarter.
And free cash flow as defined in our earnings release was $100.8 million as compared to 47 million in the same quarter last year.
As we discussed last quarter, we expected we expected to monetize a significant portion of our primary working capital in the second half of 2019 in line with normal seasonality.
To that end primary working capital was a $28 million higher source of cash flow in the current year third quarter versus prior year.
In addition, the prior year included a 9 million dollar pension contribution and $7 million of additional interest as we changed the timing of our term loan interest payments.
Both of which did not repeat in the current year.
Taking a look at our balance sheet on January Onest 2019, we adopted the new gap lease accounting standard. This new standard requires that we recognize rate of use assets and lease liabilities related to operating leases on our balance sheet as.
As a result, we recognize approximately $40 million of additional other assets and other long term liabilities on our balance sheet in Q1 to adopt the new standards.
As of September Thirtyth 2019, we had a total of 954 million of outstanding debt net of unamortized original issue discount and deferred financing costs.
Our gross debt leverage ratio at the end of third quarter was 2.1 times on an as reported basis.
Additionally, at the end of the third quarter, we had 216 million of cash on hand, and there was approximately 271 million available on our ABL revolving credit facility.
Both our term loan and aviall facilities mature in the year 2023.
With that I'd now like to turn call back over to errand to provide comments on our updated outlook for 2019.
Thanks York as we've discussed end market conditions for our residential products remained strong and better than expected as a result of recent elevated power outage activity.
Conversely, our cnine mobile products and international businesses have softened in recent months, partially offsetting the gains were seeing with our residential products. However, based on the strength of residential products were raising our guidance for revenue growth for full year 2019, as we now expect overall net sales to improve approximately 8% to 9% versus prior year, which compares to the previous guidance of 6% to 7% growth.
Both.
On a core basis full year 2019, net sales growth is now expected to be approximately 7%, which compares to the previous guidance of 4% to 5%.
These growth rates assume normal baseline power outage activity for the remainder of the year.
As a result of a more favorable sales mix and improved operating leverage compared to previous guidance. We're also raising our margin expectations for the full year 2019.
Net income margins before deducting for non controlling interests are now expected to be approximately 11.5% versus the 11% previous guidance.
The corresponding adjusted EBITDA margins are now expected to be approximately 20.5% for the year as compared to the previous guidance of 20%.
Operating and free cash flow generation for the full year 2019 is expected to remain strong with the conversion of adjusted net income to free cash flow and tested we anticipated to be approximately 80% as we work to further monetize our working capital in the fourth quarter.
The remaining guidance items provided in previous earnings calls are not expected to change. This concludes our prepared remarks at this time, we'd like to open up the call for questions operator.
Thank you Sir at this time he would like to taking question. That's a reminder.
Do you need press star one on your telephone keypad again to ask your question. Please press star one.
Our first question comes from the line of Tom Hayes of North Coast Research. Your line is open.
Morning, guys. Good good morning compound.
Just wondering.
As you build out your California network.
With the growth in activity out there you guys currently able to kind of keep up with the demand for them in home consultations with maybe are you kind of facing any backlog in that arena.
So it's a great question, Tom So obviously things are incredibly busy out in California.
Right.
All right see numbers are our job.
Off the charts now off of this fairly small base from last year, but up you know fivesix hundred percent over the prior year. So we're seeing and Thats, a tremendous leading indicator for us and we look at that and we look at our close rates and.
That translates really well to strong demand in the in that.
Over the next several quarters. This is not going to be a one quarter event. This is going to be yellow, we think a long tail events similar to other kind of major events that we would see generally you'll see a tail that is in some cases multiyear as opposed to even multi quarter. So that's kind of how things are shaping up to answer the question on whether we're able to keep up.
The other.
The actual answer is no we are inundated right now we're adding distribution.
We're actually doing some pretty unique things around.
Sharing those leads with other channel partners outside of our traditional dealer channel simply because our dealer counts, which are growing in the state. We're now at about 300 dealers in the state of California. We started the year at about 100. So we've added a fair number of dealers in California in a very short period of time, but yet just onboarding those dealers and developing them. It takes time and so.
We had to take those leads and we're doing other things with those lead so that.
Obviously, we don't want people have to wait to talk to somebody about these products. So.
There is a backlog.
In some cases, depending on which region, you're in which ZIP code actually is down to the difficult level that you're in it could be.
Backlog of a couple of weeks, we hope it doesn't get longer than that.
We know that we need to stay focused on turning around itcs very quickly and maintain the quality of those itcs as well. That's also incredibly important so that that goes hand in hand with our success rate in closing those deals so.
It is it's a it's a challenge right now, but it's not unlike what we see.
In other parts of the.
Of the us when we get outages.
But California is particularly things are particularly acute because were relatively under developed there.
I appreciate the color maybe if it gives us one more related to California. Thank you called out you expect about $50 million and contribution in this year and maybe growing to almost $200 million in the near future is there any is that primarily the residential applications because I know if you're looking at the end the news everything its.
Also seeing a light commercial grocery stores mini Mart salad, maybe talk about kind of how you're are you focusing on the commercial application of opportunity as well.
We are Tom the 200 would be representative of both residential and commercial backup power. It does not include the clean energy opportunities that we've spoken too. So I think thats important is that that will largely be a California story as well so California the state for us.
Totality in the next few years, we anticipate is going to be up a really important market for us but back to your question.
The 200, obviously that penetration rates for backup power relatively low both on the residential side and CNS side in the state, but the larger opportunity is still going to be residential for us. We just we feel that thats.
C and I will will be very interesting as well, but I think a good chunk of that 200 million. We anticipate is going to come through the residential channel, which obviously from a margin perspective is going to be mix positive on the CNS side I think we may actually see next year. This is.
Kind of my premonition based on our experience in seeing this in the past I think the telecom companies are going to be.
Evaluating their networks in California.
In a much deeper way I think they're going to provide a lot of scrutiny on just how much backup power. They have we know that again penetration rates, even in California for telecom Gen sets are less than 30%. So.
That means that two thirds more than two thirds of all the sites the.
Wireless sites in California, do not have long range backup power.
And so that's a problem and if this is going to be the kind of situation in terms of the shut off it's going to extend years.
As as people have said it will.
The it's going to be absolutely critical it does wireline wireless networks are backed up.
You can imagine just the combination of having the power out and then the threat of these fires for to be completely cut off from a communication standpoint is really an untenable position to be in and so I think the communication companies that telecommunication companies are going to are going to focus very heavily on that and that could being the number one provide.
Peter to those markets that could be an upside potential for us next year, we're going to put together our guidance for 2020 will bring that out with more clarity here in the quarter ahead, but my premonition would be that theres theres some decent.
Some decent potential at least around that vertical within the state of California.
Thanks appreciate the color I'll get back into queue. Thanks.
Thank you next question comes from the line of prosecutor R&D off Bank of America Your life soup.
Hey, good morning, guys.
Hey, Ross.
Yes.
I just wanted to make sure I understood your guidance, because you're sticking with that.
Base case scenario no material outage, but you've just had four fairly material outages in California. So.
Our or I don't know if you would characterize them all major so are you including.
The revenue benefit from what's happened in the last two weeks and the outlook are now.
So here I think the way to think about unpacking. This Ross there's a couple of moving pieces here. One is on the residential side portable generators. We had we had a really solid quarter in Q3 actually portends were flat in Q3, and we thought we were going to are really tough comp of with Dorian.
That kind of screwed it up the coast Eastern Seaboard.
We were able to ship a lot of product that was we had a lot of visibility to that storm coming and everybody thought it was going to Florida, we're going to take a direct hit so we put a lot of product into the state of Florida, and what kind of in the Carolinas that never materialized. So the sell through was poor and so what we've got as we've got an inventory field inventory kind of.
Situation that has to be worked through we think that will happen in the fourth quarter, but it's going to probably manifest in lower portable generator shipments in Q4, so kind of I think of Q4 as there was some pull ahead into Q3 on Port Gens, then you've got our industrial businesses and our into international businesses, specifically in the industries.
Our business is the mobile component of that continues to slow down.
Yeah, that's been disappointing for us it's beyond our expectations actually it slowed down.
And you've heard many of the large national account rental national rental accounts come out and say just they're cutting back on capex spending we see it that we see it kind of as a momentary pause in their buying cycles, but it's a pause nonetheless.
It's probably a deeper pause than we had originally projected so there's that component and then internationally. We just continue to see things like Brexit.
Some of the the things that are going on Latin America. I mean, you can look at just about every country in Latin America right now and there's there's some kind of geopolitical issue going on you've got that the trade.
Tariff at trade war type of stuff also impacting and creating uncertainty around the world and so our international businesses have been feeling that.
On the flip side of that you have home standby and.
And now there is some port Jens that will go out to California, but one of the limitations with portions in California is that they have to be carbs certified so that puts a bit of a cap on what we can ship into the state.
[laughter], California, historically hasn't been a big market for backup power. So at the beginning of this year, we make our portable gen kind of pre buys for the year and our production forecast.
Those were lighter for our carb certified portable gens. So we're actually in we're we're actually in communication with.
Carb and with EPA on whether or not we can get a waiver to supply additional portable generators that are non carb certified into California, because we've got a lot of those products and we could help a lot of people in California, if we could get a waiver approved a temporary waiver we haven't heard back on that yet we're negotiating that if that happens there could be some.
Potential upside to that.
And then on home standby that as I said Thats just going to take time to develop I think we had originally size. The prize in California is probably 25 million of upside if shops happen, we're doubling that the 50 million most of that's going to happen in the fourth quarter. So I think we've assessed weve appropriately sized this and work including it in our guidance there are some potential upside there and there is some.
Offsetting pieces with international and industrial I think thats kind of the way to think about the guide.
Okay. So it sounds like.
The home standby business, if you had some scenarios last quarter sounds like the homes.
Well to the upper end if not above.
Hi end of the previous assumption, because it's offset by.
The mobile products business international and the field inventory situation and portable that appear way to think about it yes, that's exactly at Ross.
Okay.
And then could you comment on your solar storage products coming in double your initial projections in your three year outlook. You had suggested that these products without 200 basis points annually at growth for the next three years I mean, I know that was a little bit backend loaded but based on that comment can we can we assume that you would lease do actually get the 200.
At this point next year or are you actually saying you're going to at 400 basis points of growth next year.
You know from Pike.
Mario et cetera, no I think I think what we're saying as we get to that long term kind of target quicker and which means we will get more of that next year I don't I wouldn't double that 200 to 400, but.
That 150 to 200 basis point improvement.
No that could happen quicker.
Yes, I went to the SP I show in Salt Lake City.
And I'll be.
Perfect honesty here on the record I'm not a fan of trade shows that just never have been.
But this was this it was an amazing reception to our entry into this market.
I think it caught us.
I don't want to say it caused by surprise, but we were we were genuinely pleased with the receptivity to our entrance here and.
This is not going to be a demand side problem [laughter] that much I think weve most times when you enter new market.
I think going after demand is always kind of one of your concerns your chief concerns my chief concern here supply chain constraints.
It's going to be around batteries is going to be around power electronic components.
Is going to be around our ability to produce.
Yeah, we're going to have to onboard distribution of course to do installations, we have a lot of work to do to make this happen, but we're basically taking you know as we think about the the acquisition targets. When we put those together you know we put a model together for what we thought the acquisitions could do for us in year, one year to year three it out we're basically.
Essentially doubling what we had on the page for year to more than doubling to be honest I think I and I'm. If we could probably if we could get more capacity if somehow we can come through on that maybe there is even further upside I think we're we're limiting that because we're just the capacity thing is kind of a wildcard here I think we fairly size that with what our comp.
Rents represent today, but but this is going to be at this is going to supply side constraint more than it will be a demand side constraint at least in the early innings here.
All right next question comes from the line Affairs Vic of Goldman Sachs. Your line is soup and.
Hi, good morning, everyone.
Hey, Gerry good morning Gerry.
I'm wondering if you if you could talk about how you're going home consultations have been tracking outside of California, and it looks like your dealer count grew by 100 outside of California, as well in the quarter of Triangulated numbers right are you seeing that dynamic, but you've seen during prior major power outage events, where yet.
Nationwide halos that playing out.
It is to a degree I mean, I would say this jerry out yet whether I'd say, it's a halo because of what's going on in California, or I think it's more.
We keep looking at this this home standby category is.
It's amazing I I have to appetite the resiliency this category the potential upside here in terms of just overall penetration opportunity.
These have been very strong this year.
They were strong and obviously the Dorian situation drove a lot of interest in the category for a period of time that didnt materialize in terms of outages, but it did materialize for us in terms of home standby interest. It got people thinking about outages again, certainly the California outages from a national perspective, I think California's a little unique when it come.
The national coverage.
Don't know why that is I think it's just it just is a little bit like that what happens in California is a little bit more bubble and than it is maybe another.
Then things that happened in other regions on I can't explain that but it just is so maybe there is a little bit of tempering of that in terms of a halo effect, but I would say overall itcs have been.
Amazingly strong this year.
And the home standby business is just it's a great great business and there's so much runway left in that that.
Every time I look at that business for US I think it's really important point. This out we're at the point now with that product line in terms of capacity production.
We're looking at alternate sites, where we can build that product building out other supply chains, it's become so big that we need to expand our kind of thinking around how big it can be in totality I think the home standby generator category is something that is going to become.
The kind of.
Part of your homes infrastructure like Central has become I think it's going to especially as homes become more connected what are the things. It's a really interesting observation out in California. In particular is as people by home standby generators were seeing a much higher connectivity rate with our mobile link. So this is our monitoring system, our Wi Fi enabled monitoring sit.
Adam we're seeing a four to five acts.
Number of.
Connectivities in terms of percentage of connected generators over the the kind of National average, which tells me just California's always ahead of the curve on kind of Aiotv and connected homes and things like that but I think it's just a sign of where things are going to go and we're just we're really bullish on home standby.
And the last time will you folks were supply constraint in home standby there was a material carryover effect into.
The seasonally weak first quarter or is that playing out now I'm just trying to put that into context with your comments about the inventories coming down no goes probably portables comments, but can you just comment on those two items. Please.
Yes, Jerry so right now our home standby production levels are relatively high they can go higher.
We've we've made some provisions here to take them higher here throughout the fourth quarter.
And we're going to keep them higher going into the first quarter couple of reasons for that one obviously, we're watching very closely how quickly home standby demand can develop again, it's a home standby generator.
A project is a home improvement project. It just takes time I, just like I can't underestimate under kind of.
Put those in words, just how long it does take to do a project. It's just you know its months into making you have to you start out you've you find the dealer you go through the process of getting a proposal.
You have to make arrangements from a project standpoint for other subcontractors with gas and electric and Theres landscaping involved there's permitting involved it's a process and like any home improvement process generally always takes longer than you think it should.
So that will develop over time and so one of the unique things about California, we see this when we get hurricanes down south and things like that as you can install generators year round in California. This is something you can't do out in the north eastern the Midwest. So typically we get seasonal slowdowns in in Q1 because of the slowdown in installation.
Of home standby in North we the northeast and Midwest, We think because the California is a new element here installations should remain fairly robust through the first quarter. So that's that's a cool new dynamic for us and I think it should have a positive impact and we want to maintain really high levels are decent levels of.
Of flow in terms of production on home standby because if this does develop more quickly there Q1 could.
Could potentially represent.
A decent quarter because of that install type of.
Capacity that can happen, we're not making a calling that now we're not talking about Q1 guidance, but at the same time those are the realities of things that we've seen in the past and how we think this might develop.
Okay, and then given those moving pieces. It does sound like you're embedding a significant production cut in see an island in the fourth quarter can you just expand on your production outlook by line of business within.
Within see an eye please.
Yes, so on the I'm actually on the scene I stationary side, what's interesting is we've been.
We've been enough a deeper backlog there than we than we normally get into our lead times have been extended demand has been high particularly around telecom and in the back half year. The year. When we hit as we've kind of hit a telecom air pocket in terms of installs you've got some unique things going on out there in the marketplace with a couple of our tier one wireless carriers.
Both T mobile with the sprint.
Acquisition, and then you've got a TNT doing some things.
Around capital optimization, and some things there that have been in the news recently and that slowed down some of the capex spending on networks here in the back half of the year again, we think thats kind of a momentary pause.
Some of it as T mobile just absorbing quite a bit of purchasing earlier in the year.
But that where we're slowing production if we're slowing it at all is in those areas, but frankly are seeing eye factories are very busy and will remain so they were just incredibly busy for the first half of the year. Another just going to be somewhat busy in the back half of the year I would say mobile products is a little bit different that that continues to slow down.
I would say our factories that produce mobile products, we're probably going to see those kind of slowdown, especially as we exit the lighting tower season, which is kind of Q3 and into early Q4.
We generally see lighting tower business is somewhat seasonal that way and so as that slows down we'll probably see our our mobile products factory slow a bit.
Okay. Thank you.
Thank you next question comes from the line of Christopher Glynn Oppenheimer. Your line is soup.
Thank you good morning.
Chris a couple of questions on the acquisition so.
Curious.
Relative emphasis on the.
Yes solution versus combined solution with.
The new Rio home Energy management systems and secondly.
The view around the install cost to the.
Customer and where that is in the process, how that trends to more to fourth more affordable overtime.
Yes, so just on clear Chris. So your question in your first part of your question on the combination of Pica Nario. Your curious as to how thats going or how it's progressing or was that just which is the first couple of years a runway more pronounced on the combined.
Sure.
More on the.
Yes.
As a standalone solution got it got it so that is good question.
And there is some different views even internally here on that but I'll give you since I'm. The CEO I can do this I'll give you my view.
And I think what's going to happen.
Is.
The combined solution was really well received ASP.
The this idea of an intelligent storage solution and really being the first one on the market that's going to have kind of end to end energy management energy monitoring and storage in a single package by a single supplier. This is the other thing most of the packages on the market today, if they have any bit of intelligence to them.
They are generally cobbled together pieces from other suppliers, we're going to provide the end to end solution here at Generac all the way through now it's a combination admittedly of the pica technologies in of the Norio technologies and actually some of the generate technologies, but it will come together be supported and it will come together under one brand of the Generac brand that was really well received at the.
So now I personally think the hems only solution, which we're actually going to start shipping in the fourth quarter Hems only solution with bundled with our transfer switches for backup power for home standby. So you in the future starting here in the fourth quarter roughly December timeframe, you can buy a home standby generator that could have a transfer switch option, which is.
Fluids scenario technology, which is pretty cool.
Today, you can install it as a separate standalone device, but it will be embedded technology. We're actually looking at that is potentially being a standard feature down. The line, we have to get the cost structure right to do that but we really think that that's a.
Potential differentiator, we've got a lot of differentiation in that product line already that's why of 75% market share, but that could be an additional potential differentiator for us going forward I like the hems only solution, which is what I'm kind of referring to that as.
But I do think that there's no denying the just incredible receptivity, we had to the combined intelligent storage solution and then on your question about install cost.
We're very focused on this and I think this is an area that where are you know our experience with home standby generators can be very helpful. We've known for a long time that affordability is eight is an incredibly important component of adoption rate the speed of adoption the penetration rate and so a massive part of affordability of course and you do you look at home stand.
By half of the cost of the home standby is the actual generator itself and the other half is installation now it's not quite to that degree with with the storage solution, but it is installation is still a meaningful component.
What we really liked about the pica solution and this is one of the reasons why we chose pica over others in terms of acquisition is that they use and approached installation, which was much more cost effective than what others are doing they can do.
A single installer, a single person can do and install the pica solution because the actual battery modules our modular so theres no single component in the pica solution that ways more than 70 pounds. So you can you can actually affect that installation with a single individual which dramatically lowers cost. If you look at some of the other solutions on the market.
Yes, you need to or even three people to lift these things or special gear to lift these things up and mount them on walls or other areas. So that's a part of the.
That was a part of the draw for us with pica, but going forward. There are other things that we can do in the interconnections to the homes electrical system.
That we think we can improve even further the installation cost it's going to be a major focus area that being said, there's obviously a massive focus there's probably a bigger upside on the cost structure of the product itself from the batteries to the Inverters power electronics.
All the other components and sub component tree. We think is there as we've said before we have a great roadmap in front of us and we're executing against that roadmap and we will throughout 2020 to take cost out of that solution.
Thanks, good color.
You bet.
Thank you next question comes from the line Joey.
William Blair your license.
Hi, I'm on for Brian Drab today, good morning, guys. Good morning, Joe.
I just wanted to circle back on California first second has your outlook.
Outlook in terms of the longer term revenue potential there has that changed at all since the analyst day.
Hi, So I would say that we laid out at the analyst day was home standby only is what we kind of talk to we talked to 100 million dollar potential in home standby by I think we said 2022, if if memory serves me correct.
I would say that at that point in time, when we put that together I don't think we saw perhaps the shut off being as large and scale or as numerous in frequency as maybe they've turned out to be here and started they hadn't started yet. So I don't think we had a frame of reference other than what we had we knew that.
When there are a red flag days that would be the likely trigger and we looked at historical red flag days, but we weren't sure that PGT would do this and.
And I think also tempering, our enthusiasm and maybe even still so.
Just how long will this go on.
The CEO of PGM, he came out and said it could be as much as 10 years a.
A decade of darkness for the people in California, I mean, that's.
And that really kind of after after we heard that.
We really started to think about this maybe a little bit differently and I can tell you internally. We have we really were burning a lot of calories right now across the business and it's interesting it's not just in the residential side of the business, which is what we've been talking about it's as we mentioned on this call the see an eye opportunity with telecom, there's a mobile opportunity for mobile.
Generators and lighting towers right when the light squad, it's dark so theres lighting tower opportunities.
Theres water pump opportunities, sometimes utilities fail water utilities fail, we don't have power. So theres, our mobile business has some opportunities we've got our chore business oddly enough our tour business.
Manufacturer one of their there number one product lines as brush cutting equipment, there's a lot of brush in California that needs to be cleared to be successful. So we're actually seeing an uptick in brush cutting equipment in instant grinding equipment. Some of the forestry management equipment that we manufacture for that business, which is really interesting.
And then you've got the clean energy side of that and I think thats probably the side.
And again I wish I could tell you we were this smart when we did our acquisitions earlier this year and we kind of looked at the battery.
The storage market in the energy management energy management monitoring markets to know that this was going to happen. We didnt. We did not have this on our kind of a in our math or in our model. So.
Indirectly, yes, I think we have a lot more optimism regarding the importance of California to the business going forward than what we were probably talking about during the Investor day.
Okay. That's really helpful color, Thanks, and then.
Switching gears, a little bit more of a quick modeling question are you able to provide any any guidance in terms of.
Expectations for gross margin EBITDA, just directionally in 2020 Universe 20 2019.
At the 2020, we're not we're not.
We're not giving any 2020 guidance I guess, if that's your question.
We're going to so our normal process for that would be will finish up the are here and we were obviously in the middle of that we're working on that were like any company. We got an LP process and we're kind of grind through that and obviously, it's pretty unique in our business and this is always the case.
And maybe it begs for a different year end or defer cycle or something but we always have in the fall. We have us. This is a seasonal business. So you can you kind of don't know what you're going to get in terms of seasonal demand right. So it could be hurricane season. If you have a strong hurricane season, or if it's a early winter season with no racers or in this case.
The wildfire season, which is played out for us in terms of the blackouts out and out in California, those always add a new dimension in terms of trying to calibrate what you think you're going to do next year and as those seasons develop were right always in the middle of our LP, We end up redoing, our LP I don't know how many times your cuts it becomes an incredibly entered a process, which is rolling it's just.
It's not very efficient, but it is the nature of the Beast and so we're in the middle of that and we're Recalibrating again based on my my comments here just a second ago to you regarding how we're thinking about California in particular, but we'll put all that together and then you know it's it's something that will do in Q1, when we do that call for the Q4 call, we'll give our 2020 guidance there in more detail.
Thank you next question comes from line of Jeff Hammond of Keybanc capital markets Your life soup.
Hey, Good morning, guys, Hey, Jeff Asia, just on the margins I mean, the mix was was better on home standby then like the lower margin commercial and portables, yet there wasn't a lot of leverage just want to understand like investment costs and.
How that impacted the margins in the quarter.
How to think about that going forward.
I think we are I mean, if you're talking gross margins.
We did see that mix improvement, which drove gross margins higher I think.
I think we were pleased actually that we saw.
That increase increased gross margins in light of the tariff environment I know, we've done a lot of work on with pricing actions and and our profitably answered programs collectively around the company.
To mitigate the impact of tariffs, so and I think we six that we're able to successfully do that.
And then on top of that we were able to.
With a higher mix a drive gross margins higher I think collectively.
The price cost.
Overhead improved overhead absorption is embedded in there.
Opex leverage not having the leverage I think are we talking gross margin or opex.
Margins.
Margins operating margin. This yeah. So so so thats the gross margin side than on the Opex side as you are right.
If you just look at our fixed.
Opex costs.
There was obviously a nice leverage on our on our fixed operating costs.
From a variable standpoint, we made some pretty big investments.
One you've got the clean energy Opex running through there now right and so those are we said there was a start ups right those are money, losing businesses at least initially here.
We hope to get to breakeven even quicker based on our our.
Our optimism for that business going forward, but we made some pretty big investments around clean we've got some big investments continuing to go on around kind of activity.
That's a big that's a big place that we've we've made investments.
Lead gas we early gas initiatives are theres, a lot of missionary work, that's going into that to build that out those are global initiatives to because obviously, we got to do a lot of work. There. So we just felt we felt that the right thing to do for the long term for this business has to make those investments I think the easy thing to do would have into put that.
And our pocket and not invest I'm, a big believer and continuing to invest not only in the R&D side of the business, but really in the market growth.
Areas. We're also spending pretty heavily in California. So as you can imagine you know to dropped to build that market. We're running infomercials now we're running a lot of digital advertising out there. We've got a lot of awareness building to do and so that won't necessarily materialize, maybe as dramatically as the spend would would indicate like if we spent that.
Money in terms of efficiency of spend in other parts of the country would probably get a bigger left but knowing what we know around just how it's going to take the developed California. That's an investment in the future. So those things are really why you didnt see the on the leverage on EBITDA margins. The way you might have expected I think youre exactly right on the gross margin line, we're pretty happy with that I mean, we've been fighting off.
The tariffs stuff all year long I think we're pretty happy that we're able to do that.
And we've had some pretty good leverage in the factories, just being able to run things as as.
As a.
Utilization rates as high as they've been but.
On the Opex side, we've been making some some pretty big investments for next year, so far that whole step function change as a company. We got to go in fill in on the Opex side.
That that next level of ticket that next level of growth, we've got to fill in the infrastructure.
To be able to achieve that.
Okay Thats helpful. Just.
If you can I know you don't want to give 2020 guns, but if you can just level set us on how to think about clean energy growth.
From a baseline level in 2020, just mean it sounds like you're feeling you got very good reception, but you got supply constraints and just just trying to think how to model that.
Yes, I think the prepared remark was well in excess of 100 megawatts.
Hours 100 megawatt hours of storage that we would deploy next year and that is more than double of what our original kind of plan on a page was for year two of these businesses and and so I mean calibrating around that again I'm going to stop short of probably giving yet and xact sales number because it there are some moving piece than that.
We talked a little bit on this call about the individual hounds devices. So you've got that that's not really in 100 megawatt hours. Obviously 100 megawatt hours is is really storage, but everything else kind of goes along that we've got what we refer to as PV links which are the modules that go on the rooftops that go hand in hand with the solar systems that are components of the overall solar.
Plus storage so theres other components outside of just the storage systems themselves.
But I would say that Jeff on the overall point is that if you go back to our Investor day, and you kind of look at where we recalibrating kind of yes out to 2022.
There's there's a really good chance so we're going to get there are a lot quicker that that's the that's really the the comment today.
How far we can go next year, I think again as Mike I'm tempering that by.
Talking about supply chain.
There could be some upside not even further of supply chain can go further this is not a demand side problem, you're one are here to.
Theres a lot of demand and California is going to drive the demand even higher I think thats. The the piece maybe that change even from the Investor day is just the level of interest around storage. What you what you've got is a situation where you got a lot of solar roof tops people, who have solar on their homes out in California that thought they were covered in a blackout.
And what they're finding out as those systems were structured such their engineered such that the power is fed back to the grid. It's a one it's basically a one way trips. So when the grid is down the systems down. So there is no backup and so the lights are out and so what they need to do as they need to add storage to their existing solar systems only 2% of the.
2 million solar systems that are out there in the us have storage, 98% do not.
That's a very right market for us to go after in terms of adding storage to an existing solar system and that's going to be a target market for us as we go forward and I think out in California, that's going to be very ripe market as people look to add.
Some resiliency to their existing system and I think they how they now have a much greater awareness that those systems have a lot more severe limitations and maybe they were aware of.
Thank you next question comes from the line of cheap more of Canaccord Your line.
No morning, Thanks, Hey, guys.
Oh I.
I Wonder if we go back to the 50 million in California, just given.
Some of the emissions regulations can you talk about how much of that as portables versus standby and then as we look forward anything to consider all the regulatory side.
Automatic standby.
Yes thats.
Yeah, I think the from a from a mix standpoint, the majority is standby.
Because we can't get as many portals.
Accuse me into that market.
Again, it fits it's really kind of it it's a conundrum because.
We have a lot of portable product because we were planned for season Dorian did take a fair amount of product that we still had product leftover we're prepared for the winter season, as you would see normally in the Midwest and northeast, but those products are what we refer to in our business is 49 state product. So they are EPA compliant, but the California, our resource pool.
Board has a higher level of standard for tailpipe emissions and so we have a special skew for California, we call it a carbs Q.
We don't plan year end year out, California, traditionally has not been a huge portable generator market. So when we did our planning cycle. This year, we just didnt plan for a lot of carb units now we've tried to add more but we have long supply chains, there and we're bringing more in towards the end of the year, but we have a lot of product. We can put in that we could put in California today, and we have retailers that are begging.
For but we can't ship, but they are legally so we're working with California. The regulators to see if we can get a temporary waiver to help people I think this is a really critical thing.
These are incredibly limited use products over their entire lifetime. So in terms of overall tailpipe emissions that they are never going to approach, which you might see an a different kind of engine powered piece of equipment. So I think probably the regulations shouldn't even deal with these types of products, but they do that's just the nature of of the Beast and we have to comply with all the regulations going forward.
If we can we're obviously going to take a bigger bet on carb related portables going forward, we'll plan differently for next season, and we'll have more of those products. So the mix is probably going to be I don't want to say, it's more evenly balanced, but it's certainly going to have more affordable Gen mix to it in years ahead. If we have the same situation develop so I I think that today.
Hey, it's going to be very heavily skewed towards home standby, which is by the way might vary margin positive in terms of just overall mix.
Right that's helpful and anything we consider our list the standby side in terms of.
Karp related.
All of our all of our home standby is our what we refer to as 50 state compliant products. So it's the same product everywhere in the U.S. So no constraints on home standby at all.
Perfect and then just one more on on the clean energy side.
Looking to potentially double that original plan at 100 megawatts can you talk about.
Some of the key components you mentioned the supply can supply chain constraints just.
Your confidence that you have those and then a price pressures.
Yes, so I think.
My confidence would be sized appropriately for my comments today, it's double the original plan we had.
If we were to satisfy all the demand that is potential there for next year.
It could be higher and I think weve appropriately size the constraints and the constraints are everywhere chip I mean, there on batteries are on the the power electronic components going in the Inverters.
Yes, there are some capacity constraints on even assembling.
The systems themselves, we're looking at.
Our factories here today, we have.
Pica had third parties doing that they're not a manufacturer. So they had third parties doing that we're going to likely bring by the end of next year will begin to bring that in house to do more of that if we can or at least help maybe as a second source to the existing sources.
So that we can increase capacity, but but it's basically.
It's a capacity constraint along basically all the components and then in terms of cost pressures.
We're not we're having some good success early on here taking cost out of the system. We think we were on our original trajectory. So I will tell you that that trajectory is quick end I wouldn't though not the demand is quicken the trajectory of cost out. So we have no it's going to happen over the course of next year. So the margin starting out.
Are going to be on the lower side as we had projected and we will grow to be kind of.
I think of kind of our overall corporate margins by the time, we hit the end of next year, that's kind of our target and so today they are less than that and by the end of next year, we hope to be.
Kind of in that kind of overall corporate margin range.
Great. Thanks, a lot.
Thanks.
Thank you next question comes from the line of Phillip Shen from Roth Capital. Your line is soup.
Hey, guys. Thanks for the questions.
You talked a lot about constraints.
On the supply side.
Can you address the constraints you may be seeing if any on the installation side and how that might play out I think labor.
For solar and storage in solutions, certainly solar is quite tight.
And in California.
Others in the industry have talked about that.
So as you guys are generating these leads through your in commercial infomercials.
What kind of bottleneck or lag or are you seeing potentially with your contractors.
And how do you expect to address that overtime. If that has a problem. Yes. It's a great question, Phil and it is part of the we've been focused on the supply the supply chain side constraints, but there is that.
As the same issue we run into with home standby frankly, so we're actually we're pretty experience that at how to help onboard installation bandwidth.
So it's a problem we face.
Anytime we get a major surge in demand.
For our home standby products, we have we have similar constraints.
So the way we deal with that and the way we're dealing with this in particular around clean energy a couple of things I'll talk in general to how we deal with it and home standby how that applies clean energy and then maybe something it's a little more specific to clean energy. So on what we would normally do as we onboard dealers. We have six almost 6200 6300 dealers nationwide here.
Today, and those are mostly electrical contractors now we only have.
100, we started year was 100, California were up to 300, but we're adding dealers very quickly out in California, we spend a ton of time training them on installs and training them on efficiency of install we're very focused we we want them to take a pit crew mentality on installs because we know that if they can double the number of installs that they can do.
That is has a material impact on inflation bandwidth without having to add a ton of additional installers.
That being said installation bandwidth is going to be in short supply for the near term future. So there will be constraints across the board.
As we add dealers, but I think the unique thing about generac and what we bring to this clean energy space is the fact that we we can bring these dealers on and they can be representing us across a wide range of categories and were very good it engaging with electrical contractors.
On home standby, we're going to be equally as good as engaging with them on clean energy. So we might have an today as an example, we could have a dealer who is very interested in home standby and maybe they're out in California, and they joined the team they become a dealer today and we tell them about our clean energy products and say, yes, thats interesting, but I'm up here in northern Cal everybody's really talking home standby, that's what I'm focused on.
As that demand relaxes and it will over time, the ability for that dealer to shift into a clean energy type of installation bandwidth mode and away from home standby is I think real that will happen. The other thing that's real and this is maybe unique to the CE business or the clean energy business for US is that we're going to partner with some of the.
Rational.
Solar companies because they do have installed cruise many of them have their own install crews are they use third parties. So we're in negotiations and discussions with a number of those national companies today, and we believe that very soon we will then be announcing several partnerships there that will I think help us.
Get that installation bandwidth to an even higher level. So I think it's going to be a constraint in the short term, but I think longer term I think we're going to be in a great position to be able to resolve that constraint and maybe maybe in the best position.
In the industry to resolve that constraint longer term.
Great.
Thats great color. Thank you one quick follow up.
As it relates to.
You're talking about.
Potentially some of your existing contractor switching over to clean energy.
The in solar certainly have to get on roof.
To do the install to what degree do you think you're you're contractor base has that skill sets. How realistic is it for them to you know to to be comfortable working on a roof and developing that.
The safety and other training programs to to actually be able to switch over to be able to do solar and storage would you think those contractors were just focus on the clean energy kind of battery side of the.
Skillset and less on on solar.
Yes, it's another good question, Phil and so we as we've kind of pulled our existing distribution right. So these are again. These 6200 electrical contractors there as a percentage of them that are comfortable with the additional duties that are required to install panels and some of them do actually today already some of them have panel installation businesses and solar components in their business. It is a smaller.
A percentage I'll admit that.
And there are others, who have said hey, with the the storage component and the other power electronics components, they're very interested in that because that's obviously.
Well I'll call it high spec labor right for them that you need an electrician, making a many of those connections when you talk about connecting the actual inverter connecting the circuits connecting making all the interconnects to the solar system itself. They may choose to focus on that side and higher out labor or add labor that cash.
And take care of some of what needs to happen on the rooftops.
Theres some guys that are getting creative with that in terms of creating partnerships with roofing companies that they believe that have already some of those skill sets in the safety.
Orientation, that's necessary to to affect that kind of work up on a rooftop.
I think it's going to develop and I think you're right that that could end up manifesting itself to be.
A new dynamic for our existing distribution that we'll have to help them solve for and it's something we're learning to we're going through a lot of learning cycles. In this business in a very short period of time and learning about the requirements of being on the rooftop how those panels go down what the safety requirements are which is absolutely Paramount obviously for everybody.
All of those things are new to US, but were quick studies one thing one thing you'll you'll you'll know as you as you kind of.
Follow us a bit fill and others, we pick things up quickly we adapt very quickly we move with agility, we we react the things with a sense of urgency here. This will be no different where we see opportunity or challenges. We go after it and as this develops I expect that we'll see both of those things challenges and opportunities and and I think.
We're going to we're going to be in a really good position I know I know our team's ability to execute I think one of the what are the hallmarks of this company is execution and I think one of the things as we watch the clean energy space develop when the challenges that markets had is execution. So I like what we bring to that market in terms of our ability to execute I'm pretty excited about that and that's that's part of what was so well.
Received I think with our entry into this market SP I was hey, here's an entrance somebody who has been they're done that and has a track record of execution and it's not to say that we'll probably have our own challenges, but I I like our chances when it comes to being able to get things done.
Great. Thanks, Ken I'll pass it on thanks, Phil.
Thank you there are no further question I would now like to turn the call back over to hear you axles for closing remarks.
And we want to thank everybody for joining us. This Halloween morning, we look forward to discussing our fourth quarter earnings results with you at some point in mid February of 2020. Thanks again, this morning and goodbye.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating given now disconnect have a great day.