Good day, ladies and gentlemen, welcome to the fourth quarter 2018 Generac Holdings Inc. 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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Chief Financial Officer, York Ragen. Mr. Ragen, you may begin.
Thank you. Good morning, everyone, welcome to our fourth quarter and full year 2018 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, our President and Chief Executive Officer. We will begin 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. We'll make reference to certain non-GAAP measures during today's call.
Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.
Thanks, York. Good morning, everyone. Happy Valentine's Day. Thank you for joining us today. Our fourth quarter results capped off a fantastic year for Generac in 2018, as we again experienced record quarterly sales through strong core organic growth of approximately 12%. Overall net sales increased 14% compared to the prior year when including the contribution from the Selmec acquisition, which was slightly offset by unfavorable foreign currency impacts during the quarter. For the full year, net sales grew more than 20% to over $2 billion, with EBITDA margins expanding 210 basis points over the prior year to 21%, or approximately $425 million.
Continued strength in all of our end markets underpinned the increases in 2018, with demand for home standby generators in particular remaining very robust throughout the year as increased power outage activity over the last two years, alongside the impact of our initiatives to grow the market, resulted in continued penetration gains. Shipments of C&I Products were also significantly higher year-over-year, driven by continued recovery in domestic mobile products and growth in demand for backup power in the telecom and healthcare sectors. In addition, strong organic sales growth was again experienced within the International segment, which was leveraged into further improvement in adjusted EBITDA margins for the year. Awareness for home standby generators has benefited from elevated baseline power outage activity during the past two years, with end user activations remaining very strong in the fourth quarter and the full year, particularly in the Northeast and Southeast regions.
Our residential dealer base continued to expand during the year to an all-time high of more than 6,000. Production levels of home standby generators were at all-time highs for the company during the quarter. Demand for these products remains strong heading into 2019. Shipments of portable generators were lower in the quarter compared to the prior year, which included the impacts of major hurricane activity. Shipments were up significantly for the full year, driven by the elevated outage activity, replenishment of channel inventories, and additional retail placement experienced. Demand for domestic mobile products remained strong during the quarter and for the full year as the equipment rental markets further recovered in 2018, with the rebound in the oil and gas markets and increased construction activity both contributing to the continuing fleet refresh cycle.
Demand for stationary domestic C&I generators also increased in the fourth quarter as the elevated power outage environment drove broad-based growth across a number of end markets. In particular, certain of our telecom account customers are investing heavily in hardening their networks in response to their customers' needs for consistent uptime. Demand for natural gas-fueled generators was particularly strong during the quarter and for the full year. While diesel gensets remain the dominant choice for C&I backup power globally, natural gas generators continue to gain acceptance as a substitute due to their economic and operational advantages. In addition to the growth experienced domestically in the fourth quarter and for the full year, our international business also saw strong growth in mainland Europe, Latin America, Australia, Brazil, and China.
Adjusted EBITDA margins for the full year for our International segment continued to expand, with improved operating leverage on the higher sales volumes being the biggest contributor to the improvement. We are also seeing success with the introduction of our gaseous fuel products into markets outside the U.S. and Canada, with both Residential and C&I Products experiencing impressive growth rates during the year, albeit off a small base. We achieved a number of significant milestones in 2018 that we believe are important to the execution of our strategy. In May, we launched the latest version of our flagship home standby generator product line with Wi-Fi connectivity as a standard feature.
As an industry first, we believe that the ability for a consumer or a dealer to remotely monitor a generator is a great first step towards enhancing the customer experience, as well as enabling a deeper relationship with both end users and distribution partners. With this new functionality, we have also introduced a new software platform known as Fleet, specifically for our dealers that allows them to track the status of every single one of their customers' generators. By providing real-time information about the status of each machine, as well as dramatically enhancing the level of diagnostic information available, we believe that dealers will be able to better track and schedule needed repairs or maintenance and will be able to do so with greater precision and speed, with the outcome being to maximize the uptime of generators under their care.
We also believe that the connectivity layers we are building and now deploying could have an important impact on other future opportunities by creating a gateway to the electrical system of a home or a business. The market for certain services related to energy monitoring and management is rapidly developing. We believe we can leverage our technical expertise in electronics and electrical systems, our broad distribution, our global footprint, and our brand to participate in this exciting new space. In 2018, we also expanded on our position as the largest global manufacturer of gaseous fuel backup generators with the introduction of a 750 KW machine, the largest output unit in our lineup. We are very pleased with the initial acceptance of the product, as interest has been strong since its release mid-year.
The substitution of natural gas-powered gensets for traditional diesel fuel products has accelerated in recent years as the performance of newer gas machines equals or exceeds that of diesel generators, while providing some tangible benefits for the end user by mitigating the need for fuel delivery, lower overall operating costs, and cleaner emissions. A core component of Generac's strategy is to build on its leadership position in the market for natural gas gensets and throughout 2018. We introduced a number of new products, new programs, and innovative technologies related to gaseous generators during the year. 2018 was also a record year for sales volumes outside the U.S. and Canada for Generac, with 22% of our overall revenues being generated primarily through our Pramac, Ottomotores, Tower Light, and Motortech entities.
Building on our success in globalizing the company, we closed on the acquisition of a Mexican genset company, Selmec, in June of last year. Recall that Selmec is located in Mexico City and is a designer and manufacturer of Commercial & Industrial generators serving Latin America with a particular focus on the telecommunications market and strong service capabilities. The integration of Selmec with our existing Ottomotores operations is well underway, with the latest milestone achieved earlier this month as we opened a new headquarters facility in Mexico City to consolidate our commercial and administrative teams into a single location. Further integration activities are planned for 2019 as we look to realize the synergies of combining the systems and production activities of the two businesses. In addition, in early 2019, Pramac acquired a majority share of Captiva Energy Solutions.
Captiva, founded in 2010 and headquartered in Kolkata, India, specializes in customized industrial generators. While relatively small in size, this acquisition gives us a physical presence in the important Indian backup power generation market and provides a platform to execute on the potential revenue and sourcing synergies that exist by integrating the Captiva operation into the broader Pramac business. Finally, I'd like to spend a minute this morning to tell you about some exciting enhancements we are making to our long-term strategy that we call Powering Ahead. Over the last 10 years, we have used Powering Ahead as our blueprint for making investments and prioritizing our resources. In that time, we have effectively more than tripled the revenues of Generac while simultaneously quadrupling our served markets.
Our business evolves from being a smaller, more narrowly focused company to that of a larger, globally focused leader in the power products industry, we believe that our strategy must also evolve. Last year, you may recall that we added the strategic pillar of Lead Gas to Powering Ahead, as we believe that our continued leadership in gaseous fuel generator technology is a critical element of our future growth and focus. As we continue to think about other areas of our business and the markets that we serve that present significant opportunities for us, we can see that connectivity and the technologies and markets associated with the Internet of Things will play a vital role in the way we interact with customers and distribution partners well into the future.
The ability to Connect will have a profound impact on the way we develop new products, the way we think about our customer service models, the opportunities to better monetize our products over their entire life cycle, and the exciting prospects around potentially creating entirely new business models around energy monitoring and energy management. As a result, we're adding a new pillar to our strategic plan simply called Connect, and we are updating the name of our enterprise-wide strategy to be called Powering Our Future. We have done for the last 10 years, we intend to continue to prioritize our resources and our efforts around our strategic plan.
With Powering Our Future, the four strategic objectives we have established of growing the residential generator market globally, gaining share in our existing markets, leading in gaseous generator technologies, and using connectivity to develop new opportunities with our customers and distribution partners will guide our focus and investments for the future. I'd now like to turn the call over to York to provide further details on the fourth quarter results. York?
Thanks, Aaron. Before discussing fourth quarter results in more detail, recall that effective January 1st, 2018, Generac adopted the new GAAP revenue recognition accounting standard. For comparability purposes, the full retrospective method was elected under the standard, which requires application to all periods presented. Although the adoption of this standard did not have a material impact on our financial statements, the prior year 2017 figures that we are discussing this morning have been adjusted accordingly. In addition, upon finalizing our revenue recognition accounting under the new standard, we made certain immaterial prior quarter reclassifications to our consolidated statements of comprehensive income related to extended warranties. There was no impact on income from operations or net income as a result of these prior quarter reclassifications. See our press release for more information related to these prior quarter reclassifications. Now looking at our fourth quarter 2018 results in more detail.
Net sales for the quarter increased 14.3% to $563.4 million as compared to $493 million in the fourth quarter of 2017. Excluding the $13.3 million of contribution from the June 1st, 2018 Selmec acquisition and the slightly negative impact from foreign currency, core growth rate during the quarter was approximately 12%. Looking at consolidated net sales by product class, Residential Product sales during the fourth quarter increased 10.3% to $293.9 million as compared to $266.6 million in the prior year quarter. Despite the fact that the prior year quarter included the immediate after effects of Hurricane Harvey, Hurricane Irma, and Hurricane Maria, the current year quarter still experienced very strong growth in shipments of home standby generators as end market demand for these products continues to be robust.
The elevated frequency and duration of power outages in recent years, coupled with our initiatives to drive adoption of automatic home standby generators on an everyday basis, has helped to make the category more mainstream in the marketplace, resulting in record shipments of home standby generators during the current year fourth quarter. Switching to portable generators, the prior fourth quarter included the impact of Hurricane Maria and significant replenishment of portable generators with our retail partners on the back of the active hurricane season last year. As a result, shipments of portable generators, while still strong, were down in the current year fourth quarter versus prior year.
Looking at our Commercial & Industrial Products, net sales for the fourth quarter of 2018 increased 17.5% to $223.2 million, as compared to $189.9 million in the prior year quarter, with core growth being approximately 15% when excluding the M&A contribution from Selmec and unfavorable foreign currency impacts. Domestically, as Aaron mentioned, we are seeing very strong growth in the telecom market as certain of our national telecom customers are in the middle of a large investment cycle for backup power equipment to harden their cell tower networks. In addition, demand for our mobile C&I Products continues to be strong as our rental account customers, both nationals and independents, continue to replace their support equipment fleets for general rental and oil and gas purposes. Finally, shipments and order rates from our industrial distributors continue to be very strong during the current year quarter. In particular for natural gas fuel generators.
As the strong economic environment and the low natural gas prices are driving significant investment in non-residential construction and the adoption of natural gas as a cost-effective fuel source for backup power. Internationally, our Pramac, Tower Light, and Motortech businesses grew modestly during the quarter despite headwinds from the weakening euro as we continue to drive market penetration across the globe, particularly in mainland Europe, Australia, Brazil, and China. In Latin America, we also saw modest shipment growth for the quarter, even with certain geopolitical headwinds that are impacting that region. As we continue to make progress on the Ottomotores Selmec integration and execute on synergies between the two companies.
Net sales for the other products category, primarily made up of service parts and extended warranty deferred revenue amortization, increased 26.5% to $46.3 million, as compared to $36.6 million in the fourth quarter of 2017, with core growth of approximately 13%. This strong core growth rate tracks with the rest of our business as the installed base of our products has expanded around the globe and replacement part demand increased due to the elevated power outage activity in recent quarters. Higher amortization of extended warranty deferred revenue also drove this increase. Gross profit margin was 36.3% compared to 37.1% in the prior year fourth quarter. A modestly favorable sales mix shift towards higher margin home standby generator sales and price increases implemented since prior year were more than offset by higher logistics and labor costs, as well as the realization of unfavorable commodity and currency fluctuations relative to prior levels.
Operating expenses increased $7.9 million or 9% as compared to the fourth quarter of 2017. As a percentage of net sales, operating expenses excluding intangible amortization declined 30 basis points versus the prior year, primarily due to improved operating leverage on the higher organic sales volumes. The increase in operating expense dollars over the prior year was primarily driven by incremental variable OpEx on the strong sales volumes, an increase in employee costs, including long-term incentive compensation recorded during the current year quarter, and additional recurring operating expenses from the Selmec acquisition. These increases were partially offset by lower warranty and intangible amortization expenses. Adjusted EBITDA attributable to the company, as defined in our earnings release, was $123.9 million in the fourth quarter of 2018 as compared to $109.9 million in the same period last year.
Adjusted EBITDA margin before deducting for non-controlling interests was 22.4% in the quarter as compared to 22.8% in the prior year. This 40 basis point decline compared to prior year was mostly due to the previously mentioned higher input costs that impacted gross margins, offset by improved operating leverage on the organic increase in sales. For the full year 2018, adjusted EBITDA before deducting for non-controlling interests came in at $424.6 million, resulting in a 21% margin and an impressive 34% increase over prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 14.3% to $437.8 million as compared to $382.9 million in the prior year quarter. As I previously discussed, strong broad-based end market demand driven by higher power outage severity and favorable economic conditions drove increased shipments across our Residential and C&I Products in the current year fourth quarter.
Adjusted EBITDA for the segment during the quarter was $115.5 million, or 26.4% of net sales, as compared to $101.9 million in the prior year, or 26.6% of net sales. For the full year 2018, Domestic segment sales increased 21.2% over the prior year, while adjusted EBITDA margins increased 230 basis points. International segment sales increased 14% to $125.6 million as compared to $110.2 million in the prior year quarter, including $13.3 million of contribution from the Selmec acquisition and a foreign currency headwind of approximately 4%. Core sales growth was approximately 6% when you exclude both Selmec and currency impacts. As I previously discussed, this overall core growth compared to the prior year was due to broad-based growth across our international subsidiaries as we continue to drive market penetration across the globe.
Note that we were still able to execute relatively strong year-over-year core growth in the International segment despite the prior year benefiting from larger project activity across certain of Pramac's global sales branches. Adjusted EBITDA for the segment during the quarter, before deducting for non-controlling interest, was $10.6 million, or 8.4% of net sales, as compared to $10.5 million, or 9.6% of net sales in the prior year. Higher margin, larger project activity in the prior year quarter, and higher input costs drove the year-over-year decline. For the full year 2018, International segment sales increased 17.9% over the prior year, with core sales growth of approximately 13%. Adjusted EBITDA margins for the segment before deducting for non-controlling interests increased to 8.1% of net sales during 2018, compared to 7.2% of net sales in the prior year.
We believe we are on track with our strategic plans to reach double-digit adjusted EBITDA margins for the International segment in the coming years. Now switching back to our financial performance for the fourth quarter of 2018 on a consolidated basis. GAAP net income for the company for the quarter was $75.6 million as compared to $80.9 million for the fourth quarter of 2017. The prior year net income includes the impact of $28.4 million of non-cash gains, largely from the revaluation of the company's net deferred tax liabilities associated with the enactment of the Tax Reform Act. As a result, GAAP income taxes during the fourth quarter of 2017 were only $2 million. When excluding the aforementioned gain, GAAP income taxes in Q4 2017 would have been $30.4 million, or an effective tax rate of 36.1% on an adjusted basis.
This compares to GAAP income taxes during the fourth quarter of 2018 of $20 million, or an effective tax rate of 20.7%. The large year-over-year decline in the GAAP tax rate on an adjusted basis is primarily due to the enactment of the Tax Reform Act, which resulted in lower federal tax rates in the United States. In addition, a favorable return to provision adjustment was recorded in the current year fourth quarter related to the finalization of our 2017 federal and state income tax returns. Diluted net income per share for the company on a GAAP basis was $1.20 in the fourth quarter of 2018, compared to $1.29 in the prior year, with the prior year earnings impacted by the aforementioned $28.4 million non-cash gain related to the Tax Reform Act, or $0.45 per share.
The specific calculations for these earnings per share amounts are included in the reconciliation schedules of our earnings release. Adjusted net income for the company, as defined in our earnings release, was $88.1 million in the current year quarter, or $1.42 per share, versus $87.1 million in the prior year, or $1.39 per share. The strong sales growth and related improvement in operating earnings just discussed were mostly offset by higher cash income taxes during the quarter. With regards to cash income taxes, the fourth quarter of 2018 includes the impact of a cash income tax expense of $15.4 million, as compared to $6 million in the prior year quarter. The current year reflects a cash income tax rate of 15% for the full year 2018, with the prior year fourth quarter was based on a cash tax rate of 12.5% for the full year 2017.
Higher pre-tax earnings in 2018 in excess of our tax shield, coupled with the fact that 2017 benefited from certain incremental tax deductions that were accelerated into the 2017 tax return, resulted in a higher cash tax rate in 2018. Cash flow from operations was $108.2 million, as compared to $136.7 million in the prior year fourth quarter. Free cash flow, as defined in our earnings release, was $87.3 million, as compared to $121.8 million in the same quarter last year. Higher operating earnings were more than offset by increased working capital investment due to the strong organic growth, incremental inventory purchases ahead of expected tariff changes, and higher capital expenditure levels. Free cash flow for the full year 2018 was $204 million, as compared to $228 million for 2017.
During the current year quarter, we also made a voluntary $50 million payment on our ABL revolving credit facility, paying off the entire outstanding balance as of December 31, 2018, with cash on hand. As of December 31, 2018, we had a total of $924 million of outstanding debt, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the fourth quarter was 2.2 x on an as-reported basis, a healthy decline from the 3.0 x at the end of 2017. Given our strong earnings and cash flow generation, we have demonstrated the rapid deleveraging capabilities of the company. Additionally, at the end of the year, we had $224 million of cash on hand, and there was approximately $277 million available on our ABL revolving credit facility. Both our term loan and ABL now mature in the year 2023.
Uses of cash during 2018 included $48 million for capital expenditures, $65 million for M&A, $24 million for the repayment of debt, and approximately $26 million for stock repurchases. With that, I'd now like to turn the call back over to Aaron to provide comments on our outlook for 2019.
Thanks, York. As we have previously discussed this morning, end market demand for our products has continued to be strong as we enter 2019. As such, we expect net sales in the first half of the year to grow approximately 10%-12% on an as-reported basis and 8%-10% on a core basis, with higher growth rates in the first quarter compared to the second quarter. This assumes an average baseline level of power outages during the period. Looking at the second half of 2019, net sales could range from low single-digit declines to low single-digit increases, depending on the severity of power outages during the year.
The low end of the range would assume no major power outages and an average baseline outage environment, while the high end of the range would assume more elevated outage activity, which could include a major power outage event during the year. Overall for the year, given these assumptions, net sales are expected to increase between 3%-7% compared to the prior year on an as-reported basis, and 2%-6% on a core growth basis. Net income margins before deducting for non-controlling interests are expected to be between 11%-12% for the full year 2019, with adjusted EBITDA margins, also before deducting for non-controlling interests, expected to be between 20%-21% for the year. The low end of the range would assume no major power outages and an average baseline outage environment, and the high end of the range would assume more elevated power outage conditions.
Furthermore, mix, operating leverage, and our level of promotion and marketing spend will all vary depending on the severity of power outages during the year. 2019 margins are also expected to be impacted by a number of other factors. Realization of higher input costs coming into the year, along with the impact of regulatory tariffs, are expected to be largely offset by price increases, favorable trends with respect to commodities, currencies, and logistics costs, and benefits from our profitability enhancement program throughout the year. Consistent with historical seasonality, we expect adjusted EBITDA margins in the second half of the year to be higher relative to the first half, with the sequential improvement being approximately 350-500 basis points, depending on the power outage environment experienced during the year. This 2019 outlook does not reflect potential business acquisitions or stock buybacks.
Given our strong balance sheet and free cash flow generation, we have significant resources to drive further shareholder value as we execute on our long-term strategic priorities. Now I'd like to turn the call back over to York to walk through some additional guidance details for 2019. York?
Thanks, Aaron. For 2019, our GAAP effective tax rate is expected to increase to between 25%-27% as compared to the 22.5% full-year rate for 2018. Based on our guidance provided for 2019, our cash income tax expense for the year is expected to be approximately $52 million-$60 million, depending on the outage environment, which translates into an anticipated full-year 2019 cash income tax rate of approximately 17%-18%. That compares to the 15% cash income tax rate for full-year 2018. The expected increase in our GAAP and cash tax rates compared to 2018 relates to certain favorable deductions that were accelerated and reflect in the 2018 rates in response to the Tax Reform Act that aren't expected to repeat in 2019.
As a reminder, we still have a favorable tax shield as a result of a significant intangible amortization deduction in our corporate tax return that results in our cash income tax rate being notably lower than our GAAP income tax rate. With the passage of the Tax Reform Act, the tax affected annual value of this tax shield is expected to be approximately $30 million per year and expires fully in 2021. In 2019, we expect interest expense to be approximately $41 million-$42 million, assuming no additional principal payments during the year and one expected rate increase in 2019. Our capital expenditures for 2019 reflect continued investments in expanding capacity and are forecast to be approximately 2.5% of our forecasted net sales for the year. Depreciation expense is forecast to be approximately $30 million in 2019, given our assumed CapEx guidance.
GAAP intangible amortization expenses in 2019 is expected to be similar to 2018 levels at approximately $21 million-$22 million during the year. Stock compensation expense is also expected to be similar to 2018, at $14 million-$15 million per year. For full-year 2019, operating and free cash flow generation is once again expected to be strong and follow historical seasonality, benefiting from the solid conversion of adjusted net income to free cash flow expected to be over 90% in 2019. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Ross Gilardi of Merrill Lynch. You may proceed with your question.
Yeah, thanks. Good morning, guys.
Morning, Ross.
Morning, Ross.
Hey, Aaron, I was wondering if you could kick it off just talking a little bit more about your balance sheet. At the midpoint of your guidance for EBITDA and free cash flow, I think your net debt to EBITDA is going to be 1.1 x by the end of 2019 if you hit the numbers. Easily, I think the lowest since the IPO. What's the plan? Obviously, you have a lot of options. How are you thinking about dividends, buybacks versus M&A?
I think, Ross, it's a great question, one that obviously, internally as a company, given the position we're in and given the prospects for the company going forward, we look at that and we say, okay, how can we best create an environment for not only our future growth here at the company, but obviously for our shareholders and all stakeholders? There's a number of things you can do, and we step through our priority uses of cash every time, and we've been very consistent even since the IPO on that. The first thing we want to do is continue to grow organically. Thankfully, it doesn't take a tremendous amount of capital to do that, so we're pretty efficient that way. That being said, there's a number of CapEx things that we continue to look at in terms of scaling the company.
There's some capacity expansion things that we're focused on this year. You'll notice the CapEx guide that we gave here this morning is a little bit higher than maybe historically. We've been around the 2% of net sales. This morning, closer to 2.5%. There's some capacity type of expansion things in there. You can imagine growing. We grew 15% the year before, 20% last year. When you do that, there's a lot of things that you need to do to get your capacity up. That's one thing. Beyond that, we've said that there are some very interesting things to accelerate our strategy through acquisitions, through M&A activity. We've done 12 acquisitions over the last six or seven years.
We have a pipeline that would indicate that additional acquisition activity in the future is something that could happen if we find the right asset at the right price that fits our strategy, we think it can accelerate things and help us grow. That's certainly something we're looking to. The universe of potential acquisition targets for us is pretty big. There's a lot of things I think we could do there, not only from an international standpoint, where some of the things have been focused, like the Selmec acquisition last year and the Captiva acquisition announced early this year. Also, I think, around some of these other potential business models and other opportunities that we've been talking about, that I mentioned in my prepared remarks.
After you step through those things, you start talking about return of capital to shareholders, you can do that in a number of different ways. We've done some special dividends in the past. I think we've done some buybacks in the past. Both of those are vehicles to do that. Paying down debt. I think we look at that, we've got a really cost-effective liability structure. It doesn't mature until 2023. We really think we wouldn't get a great return, honestly, from taking out a lot of debt. We think putting the capital to work or returning it to shareholders is a better way to go. We'll evaluate those priorities as we kind of have in the past, we'll have to figure out where we go from here. I really like the setup.
We've got a lot of dry powder here, and we've got a lot of cool things that we're looking at that I'm pretty excited about.
Okay. You didn't mention a regular quarterly dividend. Does that still feel like something you're not that interested in doing? I mean, obviously you have paid specials in the past.
Yeah, I would say this about a quarterly dividend. It's something we've talked about, and we've discussed dividends. That's certainly one possibility, but I think at this stage, the way I think about the company as a growth company, the kind of growth we've experienced here, I think a regular dividend, I don't know that we're in the right part of the cycle yet to be thinking about that. There are far too many opportunities for us to, I think, to continue to grow the company, and get an overall longer-term better return, with investing in, again, whether it's organic or whether it's through M&A activity. I just see too many potential areas where we can invest and use that capital for the benefit of all of our stakeholders.
I'm not ready to say that we don't have enough opportunities there, and I think that we've been pretty clear on this point since our IPO. Maybe there's a point in the cycle where that's going to make sense, and we'll talk about that as a board. Today, I'm just too excited about the future to say we should be thinking about deploying our capital that way versus through growth.
Okay, just last thing I thought of then I'll hand it over. This Captiva transaction with Pramac. Can you talk a little bit more about the mechanics of that? Aaron, you've seemed sort of interested in the India market for a long time, and this gives you a foot in the door. Do you potentially use this to create a much bigger platform in a market like India, or at this point, should we think of it as kind of exploratory, learn about the market and just sort of see what happens for the next three to five years?
Yeah. It's a great question, Ross. We kind of look at it as giving us a toehold in a part of the world in India that we haven't really had any operations. We've done some sourcing there, but really no commercial activity. It's a huge generator market. There's a couple of markets like that around the world where we think we need to participate. We could have went in, could have kind of pushed all the chips into the middle and gone all in with a much larger acquisition if we wanted to go that route. I think given our limited knowledge of the market, we felt it better to try this first, and if it works, I think it could be a springboard for something bigger. I think we're looking at it from this standpoint.
As we've been talking in our prepared remarks this morning, the substitution of natural gas generators for diesel gensets is something that's been going on for the last 20 or 30 years here in the United States. We're starting to see that pattern repeat in other parts of the world. India eventually will do that as well. The economics of natural gas infrastructure and the usage of natural gas for heating and cooking and other baseload power needs and things of that nature, the economic arguments are far too compelling in favor of natural gas. It's got lower emissions profiles than many of the fuels that are burned in many other parts of the world, and we're going to need natural gas for a long time for baseload power production everywhere in the world.
India is starting to realize this, and they've got a lot of projects on the drawing board for natural gas pipeline infrastructure. As that infrastructure gets deployed, the opportunity to connect a backup power system like a generator to that pipeline becomes a reality. We think that being there and having a footprint in India to begin to push on that is an important part of our overall Lead Gas strategic pillar. That's really where we want to start out in India. Could be bigger for us long term, I think it's a way for us to cut our teeth there.
Got it. Thanks very much.
You bet.
Thanks.
Thank you. Our next question comes from Charley Brady of SunTrust Robinson. You may proceed with your question.
Hey. Thanks. Good morning, guys.
Hey, Charley.
Hey, Charley.
I'm just wondering, also on the M&A, this new, the Powering Our Future, and the fourth pillar you're kind of adding in there. I'm wondering, does that add sort of an additional pipeline to M&A? Can you maybe talk about what would be potential ideas of you branching out beyond where you're at into that area?
Yeah, it's a great question, Charley. We've only made a few adjustments to strategy here over the last 10 years, and anytime you do that, you have to evaluate. Again, we use M&A to help us accelerate our strategy. I think we've been very consistent on that point. As we add this new pillar of Connect to our strategy and kind of rebranding the strategy, Powering Our Future, absolutely. The M&A funnel now is starting to fill up with different ideas. Some of them technology-oriented, some of them when you talk about other kind of monitoring type of opportunities. It's actually for our business development teams here and our corporate development teams, it's been interesting because we find that we've had to kind of interface with different parties and different people than we've been traditionally doing in the kind of, I'll call it traditional equipment spaces. Right?
Many of these business models are more around services. The business models can be very, as I mentioned before, technology-oriented. We're not ready to discuss details about the pipeline itself, but I think what you're going to see from us over the next several years is interesting. Again, I've been here a long time. I've been here 25 years, and I can't remember a time I've been more excited about the future of the company and what's going on in the industry. I think the utilities, the energy markets, there is going to be a tremendous amount of change coming in the next decade. The next 10 years is going to present just some amazing changes to all of that, and we think we should have an opportunity to participate in how that market develops.
I don't know that anybody knows exactly how it's going to develop or what's going to happen, but people have ideas. I think that the traditional model of delivering power by a utility to your home or your business, I think that's going to change radically here in the next few years. Whether that's because of the addition of renewables or storage or decentralization of the grid and onsite power generation, distributed generation. There's a lot of different formats that this is going to take, but I think that the focus that we have on natural gas gensets and the focus that we're now putting on connectivity, I think are really important parts of putting ourselves in the middle of many of those conversations down the line.
Great. That's good color. Just, I don't know if I missed it, but could you talk about the Florida nursing home assisted living facility situation that's going on there with providing the generators. Is that bleeding into 2019 as you kind of alluded to in prior calls?
Yeah, there was about a third of the facilities in Florida that were granted waivers for the end of the year deadline to get a backup power system in place. That will undoubtedly lead to some spillover here into 2019, the first half most likely. Each of those waivers are a little different depending on the situation and the size of the facility. Florida's been a great market, as you can imagine, not only for the residential markets that we serve, but also in the C&I space. Not just for healthcare. We've seen a marked increase in a number of other kind of Commercial & Industrial type applications for backup power there as it was a state that went, what, 10, 11 years without any kind of major disruptions in the grid there.
We've had a number of different things happen in the last few years. It's back on the radar screen. Florida is doing well, and there will be some spillover. It's not going to be major, but our guidance does contemplate some amount of spillover.
All right, thanks. Just one more from me. On the price cost, you talked about, I guess, neutralizing that, but I'm just trying to get a little more color on have you put through price increases, obviously, and particularly on the home standby market, because obviously the pricing is a sense of issue to that whole dynamic of the growth there. Are you going to be fully neutral for the year? Is it a ramp or are you fully neutral now today? Thanks.
Charley, this is York. Yeah, I think there are input cost headwinds, and it's not just tariffs that we're talking about. The realization of just higher steel costs and aluminum and copper and logistics costs have really spiked up in Q4, labor costs. The realization of all those higher costs are going to spill into the front half of 2019. You're probably going to have some headwinds on the price cost side in the front half of 2019. What we see, though, is today as those input costs are starting to moderate. If you look at steel, copper, and aluminum, and if you look at our currencies with the euro and the RMB and the logistics costs we see moderating. You layer on the price increases relative to the tariff situation.
Combine that with all of these profitability enhancement initiatives that we have collectively. We think that's going to flip around in the back half of 2019 to neutralize that fully for the full year. We are cognizant on the price increase side of relative to home standby and price elasticity. I think relative to tariffs, that's just something that the market will bear should the tariffs come to fruition at least at the 25% level on March 1st.
Thanks.
Thank you. Our next question comes from Jerry Revich from Goldman Sachs. You may proceed with your question.
Hi. Good morning, everyone.
Jerry, good morning.
You folks have really focused on analytics, and one interesting element that I'm wondering if you could talk about is if you're starting to see in your residential standby business any replacement demand of units that were installed 15-20 years ago, just to give us a sense for what the replacement market could look like once we get to the sweet spot of the units that were installed in, call it, mid-2000s + when the business really started to ramp for you. Any analytics that you could share with us in terms of the contribution from replacement or the ramp in replacements at all for that part of the business would be helpful.
Jerry, we haven't talked about it much because the market's only 20, 25 years old, and it is interesting. We do track all of that information, and it's a very reliable, steady march up in terms of the % of products that we sell today that go as a replacement. Today we're sitting at about 5%, 6% of our volume there on the Residential side is for replacement. I think you may have hit an interesting nail on the head there, which is, because of the nature of the way that market has grown, there's faster points in the penetration curve that have happened over the last 10 - 20 years. When you hit one of those patches and you hit that kind of replacement cycle, you should see a similar kind of offset increase in the replacement cycle in terms of that growth.
We're seeing that. As an example, with Florida, again, it was 10, 11 years ago, but prior to that, there were some pretty interesting up cycles around Hurricane Katrina back in 2005. You had the big power outages in the Northeast in 2003. We're starting to get into those kind of time frames. A generator should last you between 15 - 20 years if well cared for. It's like a typical piece of your home's infrastructure, like an HVAC system, something like that. It's very similar. We do see that it's starting to show up, and we're kind of excited about that long term, because as we build this market out now, our installed base is well over a 1.5 million machines. Actually getting closer to 2 million here, and there's a nice opportunity there longer term for replacement.
I appreciate the disclosures. You mentioned, really, the 6,000 dealer network now. Can you just talk about your efforts to continue to drive high engagement in some of the newer dealers after the post-storm enthusiasm might potentially fade, as you laid out, call it, into the back half of 2019? What are you folks doing to drive continued engagement to make sure those 6,000 dots, some of the newer ones, stay green for you?
Yeah. It's a challenge every time, right? Because you add dealers, they generally come on board as the market demand cycle is higher. When demand relaxes, you've got to effectively train the dealers on how to market. Many of these dealers are in the electrical trades or HVAC trades. Marketing maybe for an electrician doesn't come as kind of a standard part of your business practices, right? It's a new skill set that has to be learned. We have a progression for dealers. We do a lot of training. I think one of the things that is just an amazing part of this business, and I don't know whether it's investors or others that maybe don't get it, is that distribution that we've built, that 6,000 dealers, we've built that over 20 years.
We have poured countless dollars, time, blood, sweat, and tears into building that out and to making these dealers our representatives out in the market for a new product category like home standby generators. We burn a lot of calories. It's an ongoing effort. You can't relax at all. You have to constantly be coming up with new programs. I would say that one element of that, we talked about this in our prepared remarks, but with our connectivity initiatives now, this new platform that we're introducing called Fleet. It's a software platform that our team has been working on here. We've just rolled that out. We had our annual dealer conference a couple of weeks ago in Las Vegas, 2,500 people there. It was a massive event. We talk about new programs, Fleet being one of them.
Fleet is, you can kind of think of that as obviously by its name, you can see all of the generators under a dealer's care, right? Their customers' products. They can get a lot of diagnostic information, things like that. The way we think about Fleet longer term is a really important way to engage with dealers. It could potentially be a totally different platform. Many of these dealers, their quote-unquote "ERP system" is a spiral notebook on the dashboard of their van or truck. You could think of Fleet as being a potential platform for dispatch, for billing, for other things that we could inventory control, things of that nature. We see it as a really interesting way to interact with our dealers on a go-forward basis.
It's things like that that help us keep the engagement up even after the initial surge of excitement and demand passes after an event.
Okay. Thank you. I appreciate the discussion.
Thanks, Jerry.
Thank you. Our next question comes from Jeff Hammond from KeyBanc Capital. Please proceed with your question.
Hey, good morning, guys.
Good morning, Jeff.
Morning, Jeff.
Hey. Just on the 2%-6% core, is there any way to parse that out between Commercial and Residential?
Yeah. The 2%-6% core is collective. On the C&I business, I think our prepared remarks talked about the strong end market demand we're seeing both domestically and internationally. There's a number of verticals that are turned on, and we see those continuing that strong demand into 2019, pretty consistent throughout the year. For C&I purposes, we're seeing that high single digit, low double-digit growth really consistently throughout the year. At least that's what our guide shows, and it's really consistent across Domestic and International. I think that the theme there is broad-based strong demand for C&I. On the Resi side, what that would mean is probably flat to down slightly. The down slightly is mainly due to headwinds with regards to portables. Still seeing Resi flat to slightly down with portables being the headwind there for the full year.
Okay, does that inform some of the margin dynamic where commercial would be lower mix?
Yeah. I talked a little bit about price cost on the mix side. There'd probably be a slight negative mix hit on the margin side relative from 2018 - 2019.
Okay, last question. Inventories moved up quite a bit, was a big drag on working capital. Can you just speak to how much of that is some of this pre-buy ahead of tariffs? What does your finished good inventory look like? Just separately, how are you feeling about channel inventories? Thanks.
Yeah. The way I think about inventory levels, because they did increase during the year, when you think about portable generators, so last year at this time, we had just lived through Hurricanes Harvey, Irma, Maria. Our portable inventory level was wiped out there. Throughout 2018 here, we've actually been investing in replenishment in our warehouses of our portable inventory levels. Just sort of everyday portable replenishment, think of it that way. On the tariff side, we saw as we were ending the year, there was the threat of tariffs going to 25% from 10% - 25% relative to Chinese imported goods on January 1.
As a management team, we said, "Look, it'd be smart to bring in some extra components across the board, across our product lines, at least those that could be impacted by those tariffs." We decided to invest in pre-buy of that inventory prior to that potential tariff change. The third piece of the puzzle is really just on our strong 20% growth, we're going to be just investing in more inventory to facilitate our growth. I think of that being one third, one third, one third when you think of those categories that are driving that inventory increase. On the field inventory side, on the portable side, I think, field inventory is stocked, ready to go, ready for a storm.
On the home standby side, I think it's actually seasonally appropriate, seasonally consistent with where we should be, very manageable where we're at at this point of the curve coming into 2019. We're feeling okay on where our field inventories are for home standby.
Okay, thanks guys.
Thanks.
Thanks, Jeff.
Thank you. Our next question comes from Mike Halloran from Baird. You may proceed with your question.
Good morning, guys.
Morning, Mike.
Good morning, Mike.
First, just to clarify on the guidance, make sure I'm thinking about it right, in terms of assumptions on outage activity. If I think about the first half, it feels like you're essentially saying momentum from the back half of 2018 plus an average underlying outage environment. When you think about the back half of the year, it's an average underlying environment, and then the range of outcomes is based on nominal larger opportunities versus the high end being more significant opportunities. Is that how you guys are breaking that out front half to back?
Yeah. That's exactly it, Mike.
Okay, perfect. Regional variances. Obviously, you said Southeast, Northeast are doing very well. On the areas that aren't seeing as much impact from the larger scale things over the last couple of years, maybe track how awareness is in those areas and what growth looks like, dealer distribution, penetration, things like that.
Yeah. It is interesting because you see this oscillation that'll happen where you get events like we had down in the Southeast, and we had the Nor'easters that were in the beginning of 2018 or in March 2018, consecutive Nor'easters that have been, I think, kind of turning the Northeast to a, if you think of the U.S. as a heat map, it's actually very interesting. We watch just even all the way down to individual states, but even actually more granular than that, of course. It is interesting. The Midwest was a really good market for us a year ago. This year, there were quite a few storms and events in Michigan, in Ohio, Illinois, and that didn't repeat this year to the same level. That cooled off as an example.
It is interesting because if you look at it right now, today, there's actually been quite a bit more activity out West. The West and the Northwest, the recency of a lot of the storms that are going on out there. I was looking at outages this morning. We track them everywhere, and there was 130,000 people in California without power this morning from the latest event that was rolling through. That's just one state, one area, and very predictably. We now have, as you can imagine, from a data perspective, we have a fair amount of data, and there's a fair level of predictability around some of this that we could say reliably, at this point over the next 12 months in California, the growth rate will be better than it's been. Same will happen in the Northwest as well. It does move.
Puerto Rico was really hot a couple of years ago, now it's not. It really does cycle and oscillate. It's interesting that being said, this is a step function growth that we've talked about. You get to this baseline level of growth, you kind of grow rapidly, and then it tops out at a kind of a baseline level or bottoms out, if you want to call it that. It stays there, but it's materially higher than where it was prior to the event. You get another event successively after that, and it grows again. It's really quite amazing from mathematically speaking, how you can start to model that out.
No, makes sense. I know it's early days, just customer and dealer receptivity to the connectivity solution as you're putting it out there, and then, thoughts on that Resi versus the C&I side and how implementation could phase variably between the two areas?
Yeah. No, it's a good question. Right now, a good chunk of our focus has been on the Residential side, so I'll start there. Receptivity's been good. The challenge in that, if there's a challenge, is like anything we roll out to our distribution partners is there's an adoption rate, right? They have to adopt that. There's a learning curve. It's not like anything else in life, or unlike anything else in life, it's the same. Again, we're talking about mainly electrical contractors here. They're not used to working with customers with their Wi-Fi networks and passwords. So there's been a bit of learning that's going on. There's a lot of learning cycles going on in the market, but we have 10,000 s of units connected already in a very short period of time. The data that it's giving us is amazing. It's great.
The interaction level, the way we're able to increase the interaction with our customers. We can look at customers' products, we can understand what's going on. This is a really cool thing. We can deliver over-the-air firmware updates to our machines. As new features get developed in the products, we can deliver those features to customers. There's additional future benefit potential coming from that. It also then leads right into that Fleet comment I made previously. It allows for our dealers to have a much better view of all of the products under their care to affect repairs a lot quicker and more accurately. That's been a really good upside. The C&I piece is the next piece for us, and we've got our control platforms there.
We've introduced a brand-new control platform on our industrial products that's going to roll into products here over the next 12 - 24 months as we kind of cycle through it. It's a lot of product to get the new platform in. We call it our Power Zone control platform, but it's state-of-the-art. It's by far and away the coolest generator control platform in the industry. It was all developed internally. Again, this is, I think, one of the great benefits of the focus we bring to the market is we do a lot of this stuff internally, and it's the same with the remote monitoring. We're doing it all internally. We're not leaving that to some other third party. We feel that as the OEM, we want to have that direct conversation with our customers and our distribution partners.
Thanks for the time. I appreciate it, Aaron.
Thanks, Mike.
Thanks, Mike.
Thank you. As a reminder, ladies and gentlemen, that's star then one to ask a question. Our next question comes from Chip Moore of Canaccord. You may proceed with your question.
Thanks. Hey, guys.
Hey, Chip.
On the 8%-10% core in the first half, can you talk a bit more on visibility? I think you said it was more Q1 weighted. Some of the puts and takes there, and then maybe just remind us on baseline outage activity expectations. Does the events of the past couple of years, does that push that up, or how do we think about that? Thanks.
Yeah. I think our prepared remarks, the assumption there, at least for the first half, is that we're assuming just sort of long-term average levels, which actually, if you do the math, that would actually be lower than what we experienced in 2018. That 8%-10% core growth that we were talking about in the first half, it actually spreads across Resi and C&I relatively consistently. We're seeing strength both in Resi and C&I, as I mentioned. As we said in the prepared remarks, Q1, given the strength that we're seeing coming into the year, we expect those Q1 growth rates to be higher than the second quarter. I think that was the level of commentary we were providing on that.
Got it. That's helpful, York. Thanks. Good to hear you talking more on this new Connect strategy. Obviously, it's a robust ecosystem, a lot of things you could go after. Can you talk about your appetite for partnerships and organic development versus the M&A, which you can clearly use to accelerate it? Thanks.
Yeah. Chip, it's a great question. Again, I think about my time here at the company and just all the things that we've done over the years, I don't think I've been more excited about a potential area of growth and a way for us to really explore some of the great things that we've done here in terms of distribution. I talked about that before, the build-out of distribution, our brand, and the positioning we've got in the marketplace, and take that in concert with our technical expertise around electrical systems and this unique opportunity that we have. Every one of our machines, these backup generators, is connected to a home or a business's electrical panel and their electrical system. There are very few companies that can probably claim that space other than the panel manufacturers themselves. Certainly there's a claim in that space.
I think that the opportunity there to do something with that, and our distribution, and our brand, and this connectivity layer is really exciting. To your question about organic versus M&A, M&A certainly can help us do some of those things faster, and there may be some technical skill sets and the people in particular that we might need to be successful in that could come to us through M&A. Make no mistake, we're putting a lot of effort organically. The current system that we've rolled out, the Fleet system, the Wi-Fi connectivity systems that act as this gateway, that was all built internally. We didn't partner. We have a team of people here in Waukesha, Wisconsin. We're doubling the size of that team this year.
It's not a small team, it's a big team. We're going to double that because we believe in this being a really critical part of the future and moving Generac into more of a, I'll call it more of a solutions-based provider as opposed to just a products-based company. More around services. These subscription models, like we're already selling through our Mobile Link subscription, which is a monitoring subscription for generators. The amount of potential business models and things that we could do with this are almost where we've got too many things. We have to prioritize what exactly we want to go after and how we want to do it. We're going to be in the middle of that conversation. I think it's going to have a profound impact on this company over the next decade.
No, that's great. Thanks a lot, Aaron.
Thanks, Chip.
Thank you. Our next question comes from Brian Drab of William Blair. You may proceed with your question.
Nobody home.
Might have lost him.
He might be on mute.
That's my bad. Good morning.
He was on mute. Very good. Hey, Brian. How you doing?
I was wondering why you didn't say good morning back, because usually they say good morning back. Sorry. Can we just zoom back out and can you talk about did something change in terms of how you were viewing the first half of 2019, on where we stand today versus where you were on the third quarter call? Are you seeing more demand than you would have expected in the first half slightly? Can you kind of rank order the factors that drove that storm activity recently, et cetera?
Yeah, Brian, I think for sure that as we get, we're another 90 days plus away from that third quarter call. That has galvanized our view on the first half because we're closer to it. In fact, we're almost two months into it here. We came into the year feeling good about 2019. It's playing out at this point, as you indicate, maybe even a little bit stronger. I think our guidance reflects that over what we were kind of maybe talking about on the third quarter, even though we weren't really giving full year guidance. I think we said we felt pretty good about the next three to six months for sure. That definitely is how we feel about this. I think maybe more importantly, what we really like is what we're seeing in the C&I space.
C&I markets for us have remained strong, both stationary and mobile. Some of our large accounts in the rental markets, some of our large accounts in the telecom markets where we've got some customer concentration. The buying signals there and their kind of plans as they roll them out for the full year, and some of these companies are public companies, really kind of fit well with how we were thinking about the year playing out. We're pleased to see that CapEx spending for these customers is going to continue. The hardening of their networks, if it's a telecom customer, is going to continue. The overall C&I business it's felt very strong. I think that our guidance reflects how we're feeling about that. Then Resi, of course, as you said, activations were just at amazing levels in Q4.
What we look at in that particular business, we look at the leading indicators, we call them IHCs, in-home consultations. In-home consultations have been up dramatically over the prior year's run rate in the first 45 days of the year here. We're very excited about that because we think that that portends to a stronger, again, it's all reflected in the guidance, but it portends to a pretty good first half.
Got it. You mentioned telecom in there too. Have you seen any signs of a pause there? Some companies that supply into that market have said they've seen a pause at some, and obviously AT&T is having some issues and some other issues going on in the industry.
It's certainly customer specific, I think. The ones that where you're hearing pauses and seeing pauses, I think it is interesting how that tends to rotate from one customer to another for us. One year it might be one customer is doing a lot of build out in a network and maybe another customer that was doing a lot of build out the year before has pulled back for whatever reason. Sometimes it's M&A on their part. Sometimes there are other business factors or economic factors that drive that. I think we feel pretty good about remaining at some of the same levels that we saw in 2018 as it relates to telecom. It was strong in 2018. Nothing at this point gives us pause.
That can change, as we said before, I think that the realization from all of these providers that the uptime of their networks is just absolutely critical, right? I mean, most people are paying now by the bit and the byte that goes across those networks. If the network is down, it's not just an inconvenience for customers. There's an economic impact to the carrier as well. Then you couple that with just the critical nature of the communications and things that are going across these networks. It has become a vital part of our infrastructure as a country. We're also seeing that around the world. We've got some great things from a telecom perspective going on in Brazil. We've got some great things going on in Mexico.
We've got some really interesting possibilities going on in mainland Europe around telecom, and we see the opportunity to take our expertise here in the U.S. in telecom and extend that based on our expanded geographical footprint through all these acquisitions. That was always part of the original strategy, and we're starting to see some of that come to fruition.
Thanks. The last one from me is just how far away are we from seeing maybe starting to see a material impact from the implementation of your strategy with Motortech and getting more into continuous power and some of these things that you laid out at the Analyst Day, and are you seeing that now, or is that still coming?
We're actually starting to see some of that, Brian. In fact, we have dedicated commercial resources here now at the company that are focused on building that market out alongside Motortech and alongside some of our partners in the rest of the world markets where you will see more of those applications, frankly. It is really interesting because we're seeing some really neat opportunities even in places like Canada. Time of use programs from utility providers are taking natural gas generators. Customers are taking natural gas generators and using them where they would've normally had a backup system anyway, they're using that generator to reduce their utility bills. This is some of the things that we talked about at our Investor Day, a year and a half ago, and we see that market developing. As we said at that Investor Day, that's the long play, right?
We know that this is going to take time to build out. An important part of our future success there is continuing to roll out products and programs and the support structures needed to be successful in that market. We also have to grow our brand in other parts of the world where we're quite well-known here in the U.S. market and maybe in Latin America as well, but maybe not so much in other places, in China or India or the African continent or even the European continent. We've got some brand building to do, some awareness to do, but we like the prospects for that long term. It will be long term, but we're seeing some really interesting things starting out, some really good interest around that.
Is that more an international opportunity than it is a U.S. opportunity?
I think initially, that's probably right. I think the U.S. power markets, as they evolve, those opportunities will become more evident here as well. I think they will become more evident in other parts of the world quicker. There's a lot of factors that drive that. Some of it is stability of grid, where you have, again, like in India, where you have a lot of outage events, and a natural gas generator, because when you have a lot of outage events and that generator's gonna run a lot, or if you're talking eight to 10 hours a day, the input cost, meaning the fuel, matters. Natural gas costs are roughly half the cost of diesel fuel.
That really adds into the total return of the machine, and the way that a customer would view that, and that has a stronger payback or ROI outside the U.S. today than it does inside the U.S. That may change as the energy markets develop here, but again, over the long haul.
Gas market.
Yeah, as we build out the gas market even further. That's kind of how we think it's going to play out.
Okay, perfect. Thanks a lot.
You bet. Thanks, Brian.
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Aaron Jagdfeld for any further remarks.
Thanks, operator. We want to thank everybody for joining us this morning. We look forward to reporting on our first quarter 2019 earnings results, which we anticipate will be at some point in early May. With that, we'll leave you here today. Thank you very much.
Thank you, ladies and gentlemen. Thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.