Good day, ladies and gentlemen, and welcome to the Q2 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 operator assistance, please press star then zero on your touch tone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, York Ragen, Chief Financial Officer. Please go ahead.
Good morning, and welcome to our Q2 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. In addition, we'll make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings.
I will now turn the call over to Aaron.
Thanks, York. Good morning, everyone, and thank you for joining us today. Overall, our results this quarter were the best Q2 numbers that Generac has experienced, with robust year-over-year organic sales growth leading to strong improvements in margins as we leveraged our operating costs and demonstrated the earnings power of the company. Specifically, overall net sales increased 25.3% compared to the prior year, with core sales growth of approximately 23% when excluding the favorable impact from acquisitions and foreign currency. This sales growth drove an overall 190 basis point improvement in gross profit margin and a 300 basis point improvement in Adjusted EBITDA margins. Demand for residential home standby and portable generators was strong again this quarter, given the afterglow from power outages in previous quarters. In-home consultations and end user activations remain elevated as we head into the H2 of the year with continued momentum.
Shipments of domestic, commercial and industrial, or C&I products also experienced significant growth during the quarter, driven mainly by the ongoing replacement cycle for mobile products, as well as solid growth in orders and shipments for stationary products. Sales within our international segment continue to grow as well, as global demand for our backup power generation equipment remains strong, helping to drive double-digit EBITDA margins in the segment. Our Q2 results highlight the benefit from the increased awareness of the home standby product category, primarily from the afterglow demand generated by the active 2017 hurricane season and the storms in the Northeastern U.S. in Q1. As a result, shipments of home standby generators during the quarter increased significantly again compared to the prior year.
The recent higher outage environment has allowed us to make further progress with optimizing our targeted marketing and PowerPlay in-home selling solution to generate more sales leads and improve close rates. In-home consultations, or IHCs, also increased significantly during the quarter, a good leading indicator of future home standby demand, and end user activations remained very strong, with activity in the Southeast and Northeast regions growing dramatically compared to prior year levels. In addition, we continue to expand and develop our distribution, ending the quarter with approximately 5,900 residential dealers who sell, install, and service our products. Towards the end of the quarter, we also began to ship the latest version of our flagship home standby product line, which includes Wi-Fi connectability as a standard feature.
The ability for these products to be remotely monitored will allow homeowners to gain further peace of mind that their generator stands ready to protect their home and their family. Additionally, our dealers will now have access to important information about their generator fleet to improve their efficiency and effectiveness regarding service intervals and critical repairs, including the ability to view activity logs and error messages and perform selective maintenance functions remotely. The new Wi-Fi enabled generators are also capable of receiving important firmware updates automatically, such as product improvements, as well as new features for our customers that may be developed in the future.
The launch of Wi-Fi connected products marks an important milestone for the home standby generator category, which we believe will only further improve our customers' experience and dealer engagement. Also provides us with a tremendous amount of knowledge about the use of these products while creating additional revenue streams and future opportunities to further monetize a home standby generator. Shipments of portable generators also grew substantially compared to the prior year and were higher than expected due to retail channel replenishment resulting from the elevated outage environment experienced in recent quarters.
Additionally, we are launching a number of new portable generators in the H2 of the year, including a new inverter product offering, a new pro generator line, and a series of products that include our new COsense technology that shuts down a portable generator automatically and alerts the user when high levels of carbon monoxide are detected. This innovative new safety feature is the result of years of research and development around improving the safe operation of these products and has been very well received by our retail channel partners and end users. The combination of these new product launches, coupled with our team's execution during last year's active hurricane season, allowed us to win additional retail shelf space for our portable generators for the coming season, which should benefit the H2 of the year.
Demand for domestic mobile products, primarily serving the rental markets, also remained strong during the quarter, adding to the recovery that began early last year. Similar to the last several quarters, the majority of the improvement came from our national account customer base as they continued to refresh their fleets. Additionally, during the quarter, we saw increased demand for our oil and gas-related mobile equipment as higher energy prices are helping to improve fleet utilization rates for the specialty equipment rental companies that serve this market.
We remain optimistic about the further growth for mobile products with the ongoing fleet refresh cycle, rebounding oil and gas markets, and impacts from recent tax reform all underpinning higher future demand for the product category. Shipments of stationary C&I products in North America during the quarter were up substantially compared to the prior year, as we began to see the positive effects of higher baseline outage activity impacting demand. In particular, interest in backup generators for the telecom market improved as certain national account customers allocated capital to new projects focused on protecting the uptime of their wireless networks. In addition, we are seeing positive trends with our industrial distributors, as improvements in quotation and order rates are beginning to translate into higher shipments.
In particular, interest in our natural gas products continues to grow as we have recently introduced a number of higher output models, thereby further extending the use of natural gas generators in larger projects. Also during the quarter, activity associated with the state of Florida's legislation requiring that nursing homes and assisted living facilities have sufficient backup power began to have an impact across our distribution channels. In addition to engaging directly with several national account customers on a number of projects, we are also working with our distributors, dealers, and wholesale channel partners on several opportunities with other long-term care providers in the state.
Although we are optimistic about the potential for incremental business in the coming quarters as a result of the new regulations, it is also clear that the resulting demand will likely roll over into 2019 due to the lengthy permitting process and challenging labor environment, which are both contributing to extend the typical project cycle associated with these types of products. In addition to a strong domestic market, our international segment continued to add to its recent track record, with sales growth of approximately 27% and margin expansion of 350 basis points as compared to the prior year Q2. Importantly, the international segment has also expanded margins on a year-over-year basis in each of the past three quarters due to a number of factors, most notably from synergy execution, improved sales mix, and leverage of fixed manufacturing and operating expenses on the higher sales volumes.
We believe these favorable trends in financial performance will continue throughout 2018 as we work to gain market share in the regions around the world that we serve, and as we further focus on optimizing the margin profile of these businesses. More specifically, we continue to build on the strength of our international business by further expanding our presence in the important Latin American markets as we close on the acquisition of Selmec late in the Q2. Headquartered in Mexico City and with a history spanning more than 75 years, Selmec is a leading designer and manufacturer of diesel and gaseous-fueled industrial generators ranging from 10 KW to 2.75 MW.
With particular experience in telecom, data centers, and other mission-critical applications, Selmec is an excellent complementary fit with our current footprint in Latin America and should allow us to dynamically scale and leverage our existing operations and distribution in this region to offer the Latin American market a broader portfolio of products and solutions. With approximately one-quarter of our business now being transacted outside the U.S. and Canada, we believe Generac is quickly developing into a global power equipment leader with one of the broadest product lines and distribution networks in the industry. I now want to turn the call over to York to provide further details on our Q2 results. York?
Thanks, Aaron. Before discussing Q2 results in more detail, recall that effective January 1, 2018, Generac adopted the new GAAP revenue recognition accounting standard. For comparability purposes, the full retrospective method was elected under this 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 2017 figures that we're discussing this morning have been adjusted accordingly. Looking at our Q2 results in more detail, net sales for the quarter increased 25.3% to $494.9 million as compared to $394.9 million in the Q2 of 2017, including $4 million of contribution from the June 1, 2018, Selmec acquisition. Core sales growth, which excludes the favorable impact of both acquisitions and foreign currency, was approximately 23% over the prior year.
Looking at consolidated net sales by product class, residential product sales during the Q2 increased 24.1% to $246.4 million as compared to $198.5 million in the prior year quarter. As Aaron mentioned, the current year quarter experienced strong growth in shipments of both home standby and portable generators as end market demand for these products continues to be robust, given the afterglow from last year's hurricane season together with higher baseline outages. Our intense focus and operating model has allowed us to successfully execute on this recent outage-driven demand. In addition, we continue to accelerate baseline demand on an everyday basis through our initiatives to drive awareness, availability, affordability, and connectivity for automatic home standby generators.
Looking at our commercial industrial products, net sales for Q2 of 2018 increased 26.9% to $215.6 million as compared to $169.9 million in the prior year quarter, with core sales growth being approximately 21%. This core growth was broad-based globally as C&I shipments accelerated during the current year quarter. Domestically, we experienced strong growth from our industrial distributors as both quoting and order rates improved. In addition, the telecom market began to recover, and healthcare opportunities related to new regulations in Florida materialized during the quarter. The replacement cycle for our mobile C&I products remained strong, with our national rental account customers continuing to invest in their fleets. Internationally, our Latin American shipments grew organically at a solid pace, while we also closed on the Selmec acquisition on June 1st of this quarter.
Our Pramac business also experienced very strong growth driven by large project volume, market growth in mainland Europe, and the continued expansion of our business in the Asia-Pacific region. Net sales for the other products category, primarily comprised of service parts, increased 24.2% to $32.9 million as compared to $26.5 million in the Q2 of 2017. This strong growth was largely due to increased demand for replacement parts resulting from the elevated power outage activity experienced during recent quarters, as well as the growing installed base of our products on a global basis. Gross profit margin expanded 190 basis points to 35.6%, compared to 33.7% in the prior year Q2. The expansion in margins was driven by improved leverage of fixed manufacturing costs on the significant increase in sales, a more favorable pricing environment, and focused cost reduction initiatives to lower product costs and improve margins.
These improvements were partially offset by a slightly unfavorable sales mix and general inflationary pressures from higher commodities, currencies, wages, and logistics costs. Operating expenses increased $9.7 million or 11.9% as compared to the prior year. As a percentage of net sales, operating expenses excluding intangible amortization declined 150 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 driven by higher variable expenses on the higher sales volumes, an increase in employee costs, including additional incentive compensation, and increased international operating expenses due to the stronger euro. These increases were partially offset by lower promotional costs benefiting from improved end-market demand and lower intangible amortization expense.
Adjusted EBITDA attributable to the company as defined in our earnings release, was $99.6 million in the Q2 of 2018 as compared to $68.3 million in the same period last year. Adjusted EBITDA margin before deducting for non-controlling interests was 20.7% in the quarter as compared to 17.7% in the prior year. This 300 basis point increase compared to the prior year, was largely due to the previously mentioned price cost dynamics that improved gross profit margins and the favorable operating leverage on the strong organic increase in sales. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 24.8% to $381 million as compared to $305.4 million in the prior year quarter. As I previously discussed, this impressive organic growth was broad-based, driven by strong shipments of home standby generators, portables, C&I mobile products, C&I stationary generators, and service parts.
Adjusted EBITDA for the segment was $90.6 million or 23.8% of net sales as compared to $63.7 million in the prior year, or 20.9% of net sales. International segment sales increased 27.3% to $113.9 million as compared to $89.5 million in the prior year quarter, including $4 million of contribution from the Selmec acquisition. Core sales growth was approximately 16% for the segment, primarily due to robust shipments of C&I products across our Pramac, Ottomotores, and Motortech subsidiaries. As we continue to grow the international segment, Adjusted EBITDA before deducting for non-controlling interests improved $11.6 million or 10.2% of net sales as compared to $6 million or 6.7% of net sales in the prior year. Switching back to our financial performance for the Q2 of 2018 on a consolidated basis.
GAAP net income for the company in the quarter was $53.3 million as compared to $25.3 million for the Q2 of 2017. The increase in operating earnings previously discussed, together with a lower GAAP tax rate, contributed to this increase in GAAP net income. GAAP income taxes during the Q2 of 2018 were $18.4 million or an effective tax rate of 25.3% as compared to $13.9 million or 35.4% for the prior year. The large decline in GAAP tax rate is primarily due to the enactment of the Tax Cuts and Jobs Act of 2017, which became effective in December of 2017. Diluted net income per share for the company on a GAAP basis was $0.82 in the Q2 of 2018 compared to $0.41 in the prior year. The specific calculations of these earnings per share amounts are included in the reconciliation schedules of our earnings release.
Note that current quarter earnings per share were impacted by a $2.3 million adjustment to increase the value of the redeemable non-controlling interest for the Pramac acquisition, resulting in a $0.04 reduction in GAAP earnings per share. Under U.S. GAAP accounting rules, any adjustments to this redemption value are recorded directly to retained earnings. However, the redemption value adjustments are required to be reflected in the earnings per share calculation. Adjusted net income for the company, as defined in our earnings release, was $68.9 million in the current year quarter versus $42.7 million in the prior year. The significant sales growth and improved operating earnings just discussed were the primary drivers of this increase. With regards to cash income taxes, the Q2 of 2018 includes the impact of a cash income tax expense of $11.1 million as compared to $5.6 million in the prior year quarter.
The current year cash taxes now reflect an anticipated cash income tax rate of approximately 14%-15% for the full year 2018, while the prior year Q2 was based on a cash tax rate of 14% for the full year 2017. The current year cash tax rate benefits from the Tax Reform Act. However, this is fully offset by a higher level of pre-tax earnings anticipated for the full year 2018, as every incremental dollar of profit over and beyond our tax shield is taxed at the GAAP income tax rate of approximately 26% for 2018. As a reminder, our favorable tax shield of approximately $30 million through our annual intangible amortization deduction in our tax return results in our cash income tax rate being notably lower than our GAAP income tax rate.
Adjusted diluted net income per share for the company, as reconciled in our earnings release, was $1.11 per share for the current year quarter, compared to $0.68 in the prior year. Cash flow from operations was $50.7 million, as compared to $59.5 million in the prior year Q2, and free cash flow was $45.9 million, as compared to $53.7 million in the same quarter last year. This year-over-year decline in cash flow reflected incremental working capital investment related to our strong organic sales growth and the replenishment of inventory levels in anticipation of the summer storm season. On a last 12 months basis, free cash flow was $251 million. As of June 30, 2018, we had a total of $933 million of outstanding debt and $112 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $821 million.
Our net debt leverage ratio at the end of Q2 was 2.2x on an as-reported basis, declining from the 3.5x at the same time last year. Additionally, at the end of the quarter, there was approximately $192 million available on our ABL revolving credit facility. Given the recent amendments of our term loan and revolving ABL credit facilities, both our term loan and ABL now mature in the year 2023. With that, I'd now like to turn the call back over to Aaron to provide comments on our improved outlook for 2018.
Thanks, York. As our end markets continue to improve more than originally expected, and given the June 1 closing of the Selmec acquisition, we are raising our guidance for revenue growth for full year 2018. We now expect net sales to improve between 13%-14% over the prior year, which is an increase from the 6%-8% growth previously forecast. Recall that the H2 of 2017 included elevated portable generator shipments from the active hurricane season, and with no major power outages assumed in our current guidance, we estimate there is an approximately 4% growth headwind related to this strong prior year comparison. Importantly, core sales growth is now expected to be approximately 10%, which is an increase from the previous guidance of 5%-6%.
This change is primarily due to improving end market conditions for both domestic residential and C&I products, as order rates remain strong heading into the H2 of the year. In fact, we now expect H2 home standby generator shipments to increase year-over-year, as many of the initiatives we have worked on over the last several years are helping to extend the afterglow period and contribute to the new and higher baseline of demand for these products that is developing. Our top-line guidance assumes no major power outage events in 2018 and also assumes a baseline power outage severity level for the remainder of the year similar to that of the longer-term average. Should the baseline power outage environment be higher, or if there's major outage activity in the H2 of the year, it is likely we could exceed these expectations.
For historical perspective, an average major power outage event could result in $50 million or more of additional sales, depending on a number of variables. Adjusted EBITDA margins for the full year 2018, before adjusting for non-controlling interests, are now expected to be approximately 20%, which is an increase from the 19%-19.5% previously expected. The improvement in margins is a result of increased operating leverage on the higher core sales growth, as well as a favorable sales mix. We continue to very closely monitor the status of the recently announced importation tariffs and are estimating the impact on our business of the various proposals. Given the likely timing around their implementation and considering our pricing lags from supply chain and our inventory turns, we would expect these tariffs, if they are enacted, to be largely a 2019 consideration.
In order to mitigate the anticipated future impact, we are currently evaluating pricing strategies as well as supply chain, engineering, and operational changes in response to these tariffs. Overall, we are confident that we can fully offset these additional costs through these mitigation activities as well as other potential cost reduction initiatives. For full year 2018, operating and free cash flow generation is expected to remain strong and follow historical seasonality, benefiting from the solid conversion of adjusted net income to free cash flow, which is still forecasted to be over 90% for the year. We are providing an update on certain other guidance details to help model the company's earnings per share and cash flows for the full year.
Interest expense is now expected to be approximately $42 million as a result of the lower LIBOR margin spreads from the term loan and ABL refinancing transactions that closed during the Q2. As a result of the expected improved earnings outlook, cash taxes are now anticipated to be approximately $39 million-$40 million, which translates into a full year 2018 cash income tax rate of between 14%-15%. GAAP and tangible amortization expense for the year is now expected to be approximately $22 million, given the additional amortization from the Selmec acquisition. As a result of our higher net sales outlook, capital expenditures are now forecasted to be approximately 2% of net sales for the full year. In closing today, we are very pleased with our results for the H1 of the year, which we believe demonstrates the tremendous earnings power of the company.
I'm incredibly proud of our team's ability to execute as demand for our products has accelerated and continues to be very strong. With the momentum we are seeing across the entire business, I'm optimistic about our performance for the remainder of 2018 and beyond, as we establish a new and higher baseline of demand and we further execute on our Powering Ahead strategy. At this time, we'd like to open up the call for questions. Operator?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your questions have been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Again, that is star and one if you would like to ask a question. Our first question comes from Christopher Glynn with Oppenheimer. Your line is now open.
Hey, thanks. Good morning, pretty impressive quarter.
Good morning, Chris.
I had a question about the Adjusted EBITDA margin and the strong incrementals at international. Do you kind of view the 10% and runway from there as kind of sustainable at this point?
Yeah, I think on the international side, we're very proud of the 10%. We've been talking about growing the international margins as we execute on the synergies and drive the top-line growth. International had a great quarter, and you can really see the leverage of that fixed operating cost layer that they have to support that global business come through with the 10%. Expect to see continued year-over-year growth, expect to see continued strong EBITDA margins depending on how that comes through from quarter to quarter. For the full H2, we expect those strong margins to continue.
Yeah, Christopher, this is Aaron. I think it's important to note that it really does fit our thesis all along here with international. We see tremendous opportunity for Generac's products, which have generally historically only been available here in the U.S. and Canada. By putting those products into the distribution that we've acquired internationally, and have said this many times, we see a lot of upside potential. That's gas products, it's residential standby products, as well as all the wonderful synergies that we think have been available to us around sourcing and operations. We think we're executing on that, and that really is underpinning, I think, that growth in margins that you're seeing, that expansion in margins, along with, as York pointed out, the top-side growth is also giving us good leverage on that kind of larger fixed operating cost of an international business.
How would you quantify or qualify the pull of the legacy Generac products for gas and resi standby?
It's early. The world market has traditionally been a diesel market. Getting those types of products in the hands of distributors and our distribution channel partners and getting them to understand the differences and frankly, some of the, obviously, the benefits of gas that we experience here in the U.S. I mean, the U.S. market is pretty well developed that way. The growth rates for gas in the U.S. market have been, over the last 20 years, have been about double that of the traditional diesel market. We think that that same type of growth rate will play out globally, but it's going to take time. We've always said it's a long-term story, and we're in this for the long term. We had to have the distribution and we had to have the local footprints really to enable that.
We're in the very early innings of the enablement there. What we've been working on really to this point is squeezing out all the synergies around the existing product lines that these subsidiaries have. I think we've been reasonably successful in that regard. I think having them be part of a larger organization and focused kind of on a global execution has helped them to grow their top lines as well, which again, is helping leverage the operating cost structure.
While creating the market on the nat gas side.
Right.
Okay, lastly, just wondering if the levels of business you're seeing with the rental companies and their fleet refresh cycle, if there's any sense that activity is kind of pulling forward and front-loading a little bit?
Everything we see there when we talk to our customers, we are a supplier to all of the major national account customers as well as all of our smaller independent channel partners, is that the end market is strong. Their utilization rates are up, which is helping prop up rental rates, which obviously gives them a lot of confidence in continuing to invest in their fleets. I would say that I think in a typical refresh cycle, maybe we'd be later innings, but I think in this particular refresh cycle, the uniqueness of that almost two-year period of deferral of CapEx spending by many of these customers has created a situation where the refresh cycle just has to go longer. I think for us, we see it as being very solidly kind of middle innings.
We've got, obviously on the backside of that, the opportunity with oil and gas. As higher energy prices continue to be supportive of those activities, in particular, we're seeing marked interest from especially rental companies that serve those markets. That's been a welcome addition to the recovery there.
Thank you.
Thanks, Chris.
Thank you. Our next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets. Your line is now open.
Hey, good morning, guys.
Morning, Jeffrey.
Just a couple of questions on the residential business. One, just how would you characterize channel inventories for portables heading into the selling season? It seems like those have been kind of struggling to catch up and low and just maybe how would you characterize those? Then second, we picked up in the channel that you brought your 10-year warranty back, and I'm just wondering, one, what feedback are you getting? Two, just a little surprised given how strong the underlying demand is that you'd need the higher rebate offer. Thanks.
Thanks, Jeffrey. On the channel inventories discussion, I think you hit it squarely on the head. We've said we've struggled to catch up all year, and with portable generators in particular, that's been the case. It's been a very strong year for portable gens, especially coming off of the nor'easters late in Q1, which really we were still struggling at that point to replenish off of last fall's active hurricane season. The channel inventories for portable generators still, in our view, are below where they need to be. Now, we're catching up. We expect that the Q3, and our guidance reflects this, that the channel inventories will return to a more appropriate level for season. You'll see some more of that channel refill in Q3.
I also mentioned we've got some unique things going on as well in the H2 around new product rollouts and some additional shelf space wins, some placement that we got that we need to put stock in for. We're going to continue to have, I think, a pretty decent year around port gens and our guidance reflects that. On home standby, those channel inventories, it's interesting. They're lower in kind of aggregate, and in terms of the number of days of inventory, they're quite a bit lower. In particular, when you look at certain regions. We mentioned significant strength in activations and interest in the product in the Southeast and Northeast regions. Those regions are particularly low in inventory. We're working hard with our partners to get product in those markets.
I think that even in the other regions, I would say that they're maybe adequate going into season, but I wouldn't say they're by any means overfilled. On your second part of your question on the promotion, the 10-year warranty promotion that we're currently running, that's a national promo. We plan our promo schedule far in advance, but that's a national promo. While there are certain regions that are very strong, as we just talked about, that being on a national basis, continuing to raise awareness for the category is a really important element of growing the home standby kind of baseline level of demand that we've talked about. We feel that the 10-year extended warranty promo is a very cost-effective way to continue to do that. I think that's something that our channel partners in particular, it helps them get excited about the category.
It helps them maybe tip potential future owners of the product category who might be on the fence. It helps them tip them over into the buying category. We think it's an important thing to continue to promote. We have to be smart, obviously, and as we've mentioned in some of our other remarks, we feel we've been able to improve our pricing power this year on the back of a stronger market, but you still need to promote the category. In particular, a category like this where penetration rates are low, we got to get that baseline demand to continue to grow in the absence of events. We think that promoting is still an important part of that.
Okay, great. As you kind of look at the tariff pressures, any way to kind of quantify what the impact would be on 2019 from the stuff you buy that might be on the list?
Yeah, it's like a moving target. I woke up this morning and all of a sudden the $200 billion list is being contemplated going from 10% to 25%. I hesitate to give a number. I think the important element of this is that the impact, we believe there's enough mitigation strategies around combinations of pricing, resourcing, substitution of materials, potential operational changes and things of that nature, that we're going to fully offset this. Obviously it's an exercise that all companies that have any kind of importation have to go through, but it is what it is. We have to go through it and we have to figure out how to offset it. We're working very hard. We're pushing our team very hard to do that. That's obviously at the same time here, we're faced with rising demand across all of our end markets.
We're also working with supply chain to make sure we can satisfy that additional demand. There's a lot of things going on, a lot of moving pieces. I just hesitate to throw a number out, and I know others have, I don't know the timing of when they're going to go in, I don't even know what the number's going to be anymore because it keeps changing. Until things get settled on that front, I think when we get better views on what the actual numbers are, we'll share that when we feel confident we think we know it. I think the important thing is whatever it is, we're going to fully offset it.
Okay, that's fair. Thanks, Aaron.
Thanks.
Thanks, Jeffrey.
Thank you. Our next question comes from the line of Charley Brady with SunTrust. Your line is now open.
Hey, thanks. Good morning, guys.
Hey, Charley.
Hey, Aaron. The commentary around the fact that you're getting pricing and just you've come in a moment ago about offsetting mitigating the tariffs. It sounds like you're being pretty successful at putting through price. I'm just wondering, maybe a little more granularity on that. Is that across the board? Are you seeing it stronger or even more importantly, perhaps, are there areas where you're struggling a little bit more to get price? I would have thought maybe you would have had a little bit more of a headwind on that, but sounds like it's not the case.
No, I think what we're seeing here in Q2 and actually even Q1 that the environment, we do have pricing power given the increased demands for our products. We had laid this out. We saw our views on commodities. You look at the residential side of the business, the C&I side of the business. We rolled out our price increases in the beginning of the year. We also, as we rolled out our new flagship residential home standby product with Wi-Fi connectivity, we also factored in pricing into that product launch here in Q2. You couple that with the incremental pricing power that we get and the less discounting that what we're doing, all of that equates to better price cost dynamics for the H1 of the year. We feel confident that can continue.
Obviously, Charley, there are some areas where pricing can be harder to get. We've got national account customers that you've got some, I won't call it contractual, but obviously there are RFPs that were pinned around pricing, whether it be national rental accounts or whether it be some of our telecom customers. We have to work a little bit harder on those types of product lines to get cost out as opposed to putting price in. For the most part, most of our channel partners, they're either experiencing it themselves in terms of the inflationary pressures around everything from commodities to wages to all the other inputs. As York said, I think one of the successful strategies that we've employed historically here is with new product launches. Innovation.
I think that vitality of our new products is an incredibly important part of how we continue to give our customers additional value. Also in the same manner, we're able to get some pricing out of that. I think that's been a historical hallmark of our company, and we're not going to slow down on that because we think it's an important part of the value of Generac.
Thanks. Got it. On the commentary of outage activity being above average right now, can you give any sense as to, I guess, in the H1, how much above that long-term average and defined by how you folks track it and where you see the H2 going on that? I know it is to predict, but I am just trying to get a sense of when things were going tough, we were well below average. It was obviously a focal point. Now we are above average. I am just trying to gauge how much above that average we are at right now.
Fair comment. In Q1, I think we commented, especially with those Nor'easters that hit in the month of March. Q1 came in above that long-term average. Q2 actually was more in line with the long-term average. Therefore, for the H1, collectively, it would be deemed above. Again, this is our outage severity metric that we have created. This is our statistic that we track. But when you track it back to 2010, H1's been above that long-term average.
Thanks. Aaron, I just wonder on a bigger picture, longer term basis on home standby, the installed base continues to grow. At some point, these reach end of useful life, and you start entering more of a replacement cycle for that installed base. Any sense as to where we are in that? Are you seeing is it helping any of the underlying growth right now, or is it still too early in the installed base of that what's coming over is still too small?
Charley. We've often said the useful life of the products are between 15 and 20 years if they're well-maintained, and they're like a furnace or other kind of connected home appliance or system. We are starting-- the category is about 20 years old now. We're coming up on what would be roughly the 20-year anniversary of really kind of launching it more mainstream. We're starting to see very small numbers, but we are seeing replacement numbers. We do track it, and every quarter that we go out and we track it ticks up a little bit. At some point, it will be something maybe more meaningful. But today it is still very early. I do think that, per my comments before, as we continue to innovate the Wi-Fi connectability feature that we added, we've heard from certain customers that they really desire that feature.
If they have an older product, even if it's not at end of life, they may be considering an upgrade because that's an important feature for them. Some of the older products just don't have that capability, not at least cost effectively. I think that things like that, as we continue to innovate around the category and introduce new features like Wi-Fi connectability, that also should maybe speed up some of that replacement cycle that I think is out there in the future for us.
Thanks.
Thanks Charley.
Thank you. Our next question comes from the line of Brian Drab with William Blair. Your line is now open.
Hey, good morning, guys.
Good morning, Brian.
Obviously, great work managing through this step-up in demand. First question, just on the Florida and Puerto Rico impacts from last year, and I'm just thinking about how you talk about impact from major events and trying to gauge now that you're looking back on the demand, the incremental demand that you saw from these events, how big has it been? I'm trying to gauge it relative to that 50 that you talk about for a major event.
Well, it's hard to correlate exactly a sale in 2018 back to an event in 2017.
You could take Florida as an example. Brian, I think it's really hard. We've tried to do this internally because obviously we want to be able to more accurately project the impact of different events. The attribution analysis, if I can use the terminology, of trying to attribute a sale back to a particular single event is really difficult, right? Take Florida. We had Matthew come through Skirt the coast the year before. Maybe some people lost power for a brief period of time, but that second event, which may have been Irene or some of the other storms that came through, was that the tipping point for somebody? I don't know. Do you attribute that back to a storm in 2017 or do you attribute it back to something before that? Same thing is true in Puerto Rico.
Puerto Rico had some power quality issues well before the hurricane activity last year. They have a bankrupt utility company serving the island. A lot of power quality issues that have plagued the island. Was the active hurricane season with just the massive tragedy there of having power be out for so long, is that the attribution or is it all the other things added up? I think it's really, really hard for us to say with any degree of certainty. We really don't do that. We can look at what activations do year-over-year, and we can see regionally that the Southeast is up very nicely over last year. We can see that the Northeast is up as well.
We know that those increases are due to an acceleration of penetration in those markets because of the specific major events or specific events that have occurred. It's really hard to attribute that at any local level.
I think to clarify, when we say in our prepared comments, we say an average, quote unquote, "average event" could impact our sales positively by $50 million, that is meant to be talked for that year. For that year, it could impact the forecast for that year's guidance by $50 million for an average event. What you do have, though, is that you have an infinitely higher sales of home standby because you have a new and higher baseline that's established in the following years. Just to compare, Irma, there's roughly seven, eight million people without power for a week, call it, down in Florida and Georgia. That was probably an above average major event.
I think we even called out in our prepared comments that if we don't get a major event this year, that we would have a 4% headwind in growth strictly just from portable sales that we sold in the H2 of 2017. That's roughly $60 million to $70 million right there. Just in portables alone in 2017 was $65 million. You get the home standby on top of that, and you get the new and higher baseline. Again, it's a tough question to answer, Brian, but hopefully we're giving some color there.
Yeah, no, that's all helpful in thinking about it. I guess, following onto that question, if you look at the H2 of the year, you made the comment that I believe that you said you expect home standby sales in the H2 of 2018 to be up year-over-year. Can you make a broader comment on the residential segment for the H2 year-over-year? Can you grow for the whole segment?
Well, you've got the portable headwind.
Yeah, which is going to be, in the absence of another event, I think we're really pleased with obviously the strength that portables have displayed so far this year. As our prepared remarks around home standby, as you noted, we said it was going to actually be up in the back half of the year, which was not the original guide. We do have, there's still a fair amount of Port Gens that we have to comp against.
Yeah. Having said that, our new products that we're launching.
Definitely helping.
C&I space that we won is helping to offset some of that.
To utilize that, yeah, for sure.
Resi's going to be good for the H2.
Yeah. A lot better than we thought.
Yeah.
Okay, great. I don't know, if you guys could make any comment on if there's any update on what you're seeing in the regulatory environment or any changes potentially coming for assisted living facilities more broadly outside of Florida. Is there any momentum in that area?
There's a couple of states that are reviewing it, Brian, I think, on the back of what Florida did. We still believe that there's probably an opportunity at a national level to improve the regulations. The HVAC loads, the air conditioning and heating loads, really are the issue that are central to the changes that Florida made by adding a livable temperature range around their regulations. By doing that, in effect, they've made the HVAC loads become deemed critical in that regulation. We have seen a couple other states. Oklahoma has a proposal out there. There's a couple others where there's some talk, but beyond that, we think maybe others are probably going to wait for the next national code cycle, which is a three-year cycle. It'd be coming up in the next couple of years.
I think it's something that all states should consider, and certainly at a national level should be considered, given the risks associated with not having the temperature control available when power's out.
Got it. Okay. Thank you very much.
Thanks. Thanks, Brian.
Thanks, Brian.
Thank you. As a reminder, if you would like to ask a question, please press star then one on your touch tone telephone. Our next question comes from the line of Ross Gilardi with Bank of America. Your line is now open.
Hey, good morning, guys.
Hey, Ross.
Hey. Your full year guidance implies, I think, like $380 million in EBITDA, and you just did $170 million or so in the H1, and you did $100 million or so in Q2. You basically just owe a little over $100 million a quarter for the next two quarters, and I can't think of any of them. I just went back and looked, other than 2000, what was it? 2013 or 2014. Your EBITDA goes up every single year in Q2 to Q3. Q2 is not typically seasonal high point. I get the whole portable issue, it just doesn't seem, given the strength of the environment right now, you guys aren't baking in any H2 improvement from where you are in Q2. Could you talk through that a little bit?
Yeah. It's a fair comment, Ross, because we've looked at it as well. Q2, we had a very strong Q2 and a lot of demand, and we're executing on that demand. Q2, from a normal seasonality perspective, Q2 was just higher than it normally is. Again, you'd expect that after a major event in the previous year. We expect that strength to continue into the H2. You're right, because of such a strong Q2, our guidance anticipates that the H2 quarterly run rate would be more level loaded off that Q2 run rate. We don't have a major event in the H2 that we're assuming. We also are just assuming just normalized long-term average baseline outages. I think we say that there's always could be some upside there.
Basically, the assumption is that the strength from Q2 will carry into Q3 and Q4 . Could we get some extra weather that we could exceed that? Yes. Extra, more outage environment? Yes, we could exceed that.
Even if you don't get extra weather, isn't it just a natural progression? Like I said, I think 2015, in the middle of an industrial recession, your EBITDA went up pretty substantially from Q2 to Q3. I don't remember exactly what was going on that year, if there was an outage or not, but it would seem like you don't even necessarily need a major power outage for the Q3 to be higher. Just seems like that's what it usually does.
Yeah. Again, on the back of a major event, Q2 is always very strong. You'd have to look back to, what, 2013, you'd have to look back.
Yeah, usually you don't have that same ramp that you're referring to some of those other periods, Ross. It's just a little bit different pacing this year as a result of that, and I think we're reflecting that in our guidance.
Can you talk about the telecom improvement? Just remind us, I think that's a pretty consolidated customer base, and I think you're talking about a handful of customers. Is it really just one customer that's been out of the market for a long time that's driving that improvement? Remind us or give us some sense as to how far below prior peak that business is now, and what portion of C&I, just very roughly, does it account for?
Yeah. Ross, we don't comment specifically on our individual customers' plans. There are a number of customers. I would say you're right, there's a fair amount of consolidation, but there are still a number of major players there. I would say some of those major players have been advancing the hardening of their networks, as we refer to it, relative to protecting them from outages. It's an investment cycle. It does cycle. We've seen it as high. As we've said before, it was a meaningful part of our C&I business back in the kind of 2013, 2014 time periods, and it has done that before, even prior to us being a public company. We've been serving this market for nearly 30 years now. We see cycles, and it feels to us like we're in the early stages of another investment cycle here.
Some of that is being spurred by 5G investments. Some of it is simply the need to continue to protect these networks. As more and more critical communications go across wireless networks, making sure those networks are backed up and making sure they're protected is beyond just the simple annoyance of not being able to make a phone call. There's a lot of critical data and voice that's going across these networks, and I think the network operators themselves would tell you that aside from that, it's the lost revenue opportunity of being down with an outage. Outages are a fact of life. I was amazed. I was watching a baseball game the other night, and there was a half-hour power outage at Dodger Stadium. Just clear blue sky and power goes out. These things happen.
They take down the networks, the telecom networks around them, the same way they do the lights in a stadium. That provides for a very serious problem, obviously, for first responders and other people who really depend on those networks for just the critical nature of them.
What are your electrical contractor customers asking you to do in terms of product development? You guys have got this massive market share of home standby generators, and you've been adding new features for years to make the product more value-added and so forth. There's got to be a lot of other things you can sell through that channel. Your acquisition strategy has been mostly focused on diversifying C&I, and it's paying off nicely, it looks like. Is there an opportunity for you guys to make acquisitions in residential and ancillary products where you can leverage that very unique distribution channel you have with all these small contractors?
Yeah, it's a great question, and one that we've debated internally here. I think obviously one of the strengths of our residential business is that network. We've invested heavily in that network in terms of training them on the home standby category, how to sell it, how to install it, how to service it, how to monetize it in preventative maintenance contracts and things down the line. We've talked a lot about, are there other product categories that we could put into that channel that could become an acquisition target? Frankly, what we've struggled with in that kind of thought process is diluting their focus on the opportunity that is residential standby. It's such a small penetration rate today, and there's so much opportunity, we believe, to continue to grow that. It's almost like we don't want to introduce something that could dilute their focus.
A lot of our dealers, a lot of our contractors are small one- and two-man teams, their bandwidth, their capacity to add other things is somewhat limited, actually. Right now, in particular, they're very busy with new housing construction being on the rebound. There's a lot of remodeling going on. There's no shortage of potential projects for them to work on. In fact, it's the inverse. There's actually a labor shortage. There's less people going into the contractor trades today. I think we're being very sensitive and very careful about not diluting their focus by introducing a number of other products.
If we came across something that had margin profiles similar to where we're at today with home standby and something that we felt just was a can't-miss kind of thing, obviously we'd look at it, but nothing to this point has crossed our radar that would kind of shake us from the path that we're on there.
Got it. Thanks very much, guys.
You bet.
Thank you. We have no further questions at this time. I would now like to turn the call back over to Aaron Jagdfeld for closing remarks.
We want to thank everyone for joining us this morning. Look forward to reporting our Q3 2018 earnings results, which we anticipate will be sometime in early November. 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 great day.