Good day, ladies and gentlemen, and welcome to the first 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 operator's assistance during today's conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Mike Harris, Vice President of Finance. Sir, please go ahead.
Good morning, and welcome to our first quarter 2018 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer, and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time by Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call.
Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.
Thanks, Mike. Good morning, everyone, and thank you for joining us today. Overall first quarter results provided a great start to 2018, with robust year-over-year organic sales growth leading to strong improvements in margins and cash flow. Specifically, overall net sales increased 20% compared to the prior year, with core sales growth of approximately 17% when excluding the favorable impact from foreign currency. This sales growth drove an overall 230 basis point improvement in gross profit margin, 400 basis point improvement in Adjusted EBITDA margin, and a significant improvement in operating and free cash flow as compared to the prior year. The fundamental demand environment for residential home standby generators and portable generators continued to expand, benefiting from another quarter of elevated power outages, which contributed to strong growth in both In-Home Consultations and end user activations.
Shipments of domestic, commercial, and industrial products also experienced significant growth during the quarter, driven mainly by the ongoing replacement cycle for mobile products. Sales once again grew organically within the international segment, which resulted in a year-over-year improvement in margins as well. Additionally, with the improving demand trends in several of our end markets, we were opportunistic buyers of Generac shares during the quarter, investing $26 million under our current buyback program. First quarter results continued to benefit from the increased awareness of the home standby product category, primarily from the afterglow demand generated by the active 2017 hurricane season and elevated baseline outage activity experienced during the prior year. Accordingly, shipments of home standby generators during the first quarter increased significantly compared to the prior year.
In addition, baseline power outage activity remained strong during the first quarter of 2018 from a series of storms that impacted the Northeast region and led to a peak of nearly five million utility customers without power. Importantly, the higher outage environment in recent quarters is allowing us to make further progress with optimizing our targeted marketing and PowerPlay in-home selling solution to generate more sales leads, improve close rates, and engaging new dealers. Increased awareness drove significant increases of in-home consultations, or IHCs as we call them, during the quarter, a good leading indicator of future home standby demand. We also saw an all-time high in the overall count of residential dealers at the end of the quarter.
In addition, end user activations for home standby generators remained very strong during the quarter, with activity in the Southeast and Northeast regions growing substantially compared to the prior year levels. Shipments of portable generators also grew substantially compared to prior year and were higher than expected due to the Northeast storm activity and benefited additionally from retail channel replenishment resulting from the elevated outage environment experienced in recent quarters. Demand for domestic mobile products, primarily serving the rental markets, continued to experience a strong recovery. Recall that we started to see the beginning of a strong cyclical rebound in this market last year after the severe downturn experienced during 2015 - 2016, and this continued during the first quarter of 2018 with significant year-over-year growth in shipments.
Additionally, new orders for these products further accelerated during the quarter with optimism around a continued fleet refresh cycle, the prospects of an oil and gas market rebound, and tax reform impacts all contributing to the increased demand. We continue to believe the current fleet replacement cycle is primarily being driven by the overall age of existing rental equipment, with oil and gas-related capital spending still in the early stages of recovery. However, with oil prices further rising in recent months, we believe a meaningful recovery in the purchase of mobile equipment for use in the domestic energy sector could begin to gain traction. Also, utilization rates for several of the product categories hit hardest during the oil and gas downturn continue to trend favorably, which gives us confidence that the mobile products category may have further room to grow in the future.
Shipments of stationary C&I products in North America during the first quarter were up slightly as compared to the prior year. However, we expect improving year-over-year growth trends in the near term given strong project quotation levels and order trends experienced so far in 2018. Historically, major outage events and periods of elevated baseline activity have been a catalyst for our domestic C&I products by increasing the awareness of having backup power for businesses, institutions, and other critical infrastructure. In the past several months, we have begun to see early signs of interest resuming in the telecom market, as certain national account customers are placing more importance on protecting the uptime of their wireless networks.
During the first quarter, the state of Florida passed legislation requiring that nursing homes and assisted living facilities have sufficient backup power to maintain safe environmental temperatures for a minimum number of days following a utility outage. We are currently engaged directly with several national account customers on a number of projects, as well as working with our distributors, dealers, and wholesale channel partners on developing a pipeline of opportunities with other long-term care providers in the state. While still in the early stages, we are optimistic about the potential for incremental business in the coming quarters as a result of this new regulation. In addition to a strong domestic market, our international segment once again experienced solid organic sales growth of approximately 5% and margin expansion of 70 basis points as compared to the prior year first quarter.
We remain encouraged by the ongoing improvement in the financial performance of our international businesses, which have demonstrated attractive, broad-based core sales growth over the past several quarters. Importantly, the international segment has also expanded margins on a year-over-year basis in each of the past three quarters due to a variety of factors, most notably from the 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 focus on gaining market share in the regions around the world where we operate, as well as further optimizing the margin profile of these businesses. Recall that in February, we announced the signing of a purchase agreement to acquire Selmec.
Founded in 1941 and headquartered in Mexico City, Selmec is a leading designer and manufacturer of diesel and gaseous-fueled industrial generators ranging from 10 kilowatts to 2.75 megawatts. We believe Selmec's experience in standby energy solutions, specifically for telecom, data center, and other mission-critical applications, is an excellent complementary fit within Generac's Latin American strategy. In addition, Selmec offers a market-leading service platform and specialized engineering capabilities together with well-developed integration, project management, and remote monitoring services that provide for higher margins
. Acquiring Selmec should allow us to dynamically scale our existing Ottomotores business, leveraging both the distribution and operational footprints of the combined businesses to offer the Latin American market a broader portfolio of products and solutions. The specific date for closing this transaction is still undetermined pending regulatory approval, but is likely to occur during the second quarter of 2018.
Importantly, once closed, we will include Selmec in our guidance, which is expected to be accretive to the international segment's margins and only slightly dilutive on a consolidated basis. I'd now like to turn the call over to York to provide further details on our first quarter results. York?
Thanks, Aaron. Before discussing first quarter results in more detail, I'd like to point out that effective January 1, 2018, Generac adopted the new revenue recognition accounting standard that all companies are required to follow. For comparability purposes, the full retrospective method was elected under this standard, which requires application to all periods presented, and the prior year first quarter of 2017 results that we are discussing this morning have been restated accordingly. The adoption of this standard did not have a material impact on our financial statements. Looking at our first quarter results in more detail, net sales for the quarter increased organically 20.3% to $397.6 million as compared to $330.5 million in the first quarter of 2017. Core sales growth, which also excludes the impact of foreign currency, was approximately 17% over the prior year.
Looking at our consolidated net sales by product class, residential product sales during the first quarter increased 23.5% to $190.5 million as compared to $154.2 million in the prior year quarter. As Aaron mentioned, the quarter saw strong growth in shipments of both home standby and portable generators as end market demand for these products continues to be robust as a result of the elevated power outage environment. Looking at our commercial industrial products, net sales for the first quarter of 2018 increased 16.2% to $175.1 million as compared to $150.8 million in the prior year quarter, with core sales growth being approximately 11%. This core growth was primarily generated by very strong shipments of domestic mobile products driven by the continued fleet replacement cycle from our rental account customers.
Our international segment, which is predominantly C&I related, benefited from nice organic growth from our Pramac, Ottomotores, and Motortech businesses. Net sales for the other products category, primarily made up of service parts, increased 25.5% to $32 million as compared to $25.5 million in the first quarter of 2017. Strong growth was primarily due to increased demand for replacement parts as a result of the elevated level of power outage activity experienced during recent quarters as the install base of our products continues to grow. Gross profit margin expanded 230 basis points to 35.2%, compared to 32.9% in the prior year first quarter. Attractive margin growth was driven by a more favorable pricing environment and a more favorable sales mix relative to prior year.
The improved leverage of fixed manufacturing costs on the significantly higher organic sales volumes were mostly offset by higher commodity levels, resulting in costs being largely neutral to gross margins versus prior year. Operating expenses increased $5.7 million or 7.4% as compared to the prior year. As a percentage of net sales, operating expenses excluding intangible amortization declined 180 basis points versus the prior year 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 an increase in employee costs, including higher incentive compensation recorded during the quarter and the impact from a stronger euro as compared to the prior year. These increases were partially offset by lower promotional costs benefiting from the higher power outage environment, as well as lower intangible amortization expense.
Adjusted EBITDA attributable to the company, as defined in our earnings release, was $70.2 million in the first quarter of 2018 as compared to $45.7 million in the same period last year. Adjusted EBITDA margin before deducting for non-controlling interests was 18.1% in the quarter as compared to 14.1% in the prior year. This 400 basis point increase compared to the prior year was largely due to the previously mentioned improvement in gross profit margin and improved leverage of fixed operating expenses on the strong organic increase in sales.
I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 21.5% to $300.2 million, as compared to $247.2 million in the prior year quarter. The current year first quarter results reflected strong growth in shipments of residential products as we executed on the demand that was generated by increased outage activity.
In addition, C&I mobile products grew significantly as rental customers continued their fleet replacement cycle. Also contributing to the year-over-year sales growth were increases in service parts sales. Adjusted EBITDA for the segment was $65.5 million, or 21.8% of net sales, as compared to $41.9 million in the prior year, or 16.9% of net sales. International segment sales increased 16.9% to $97.4 million, as compared to $83.3 million in the prior year quarter, with core sales growth of approximately 5%.
The overall growth compared to the prior year was primarily due to the favorable impact of the stronger euro, along with broad-based organic growth from the Pramac, Ottomotores, and Motortech businesses. Adjusted EBITDA for the segment before deducting for non-controlling interests improved to $6.3 million, or 6.5% of net sales, as compared to $4.8 million, or 5.8% of net sales in the prior year.
Now switching back to our financial performance for the first quarter of 2018 on a consolidated basis. GAAP net income for the company in the quarter was $33.6 million, as compared to $12.2 million for the first quarter of 2017. The increase in operating income just discussed, together with a lower GAAP tax rate, contributed to this increase. GAAP income taxes during the first quarter of 2018 were $11.4 million, or a 25.3% effective tax rate, as compared to $7.8 million, or a 39.1% tax rate for the prior year.
The large decline in the GAAP tax rate is primarily due to the enactment of the Tax Reform Act, which became effective starting with the first quarter of 2018. Diluted net income per share for the company on a GAAP basis was $0.42 in the first quarter of 2018, compared to $0.20 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 year earnings per share were impacted by a $7.7 million adjustment to increase the value of the redeemable non-controlling interest for the Pramac acquisition, resulting in a $0.12 reduction in GAAP earnings per share. Under U.S. GAAP accounting rules, any adjustments to the 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 the earnings release, was $46.1 million in the current year quarter versus $24.7 million in the prior year. The significant sales growth and improved operating margins just discussed were the primary drivers of this increase.
With regards to cash income taxes, the first quarter of 2018 includes the impact of a cash income tax expense of $5.4 million, as compared to $3.1 million in the prior year quarter. The current year cash taxes reflected an anticipated cash income tax rate of approximately 13% for the full year 2018, while the prior year first quarter was based on a cash tax rate of 15% for the full year 2017. The current year cash tax rate benefits from a lower effective tax rate as a result of the Tax Reform Act, partially offset by a higher level of pre-tax earnings anticipated for the full year 2018.
As a reminder, our favorable tax shield of approximately $30 million through annual intangible amortization in our tax return results in our cash tax rate being notably lower than our GAAP income tax rate of between 25%-26% for 2018.
Adjusted diluted net income per share for the company, as reconciled in our earnings release, was $0.74 per share for the current year quarter compared to $0.39 for the prior year. Cash flow from operations was $29 million as compared to a negative $5.2 million in the prior year first quarter, and free cash flow was $23.3 million as compared to negative $8.1 million in the same quarter last year.
The improvements in cash flow were driven by a variety of factors, including the increase in operating earnings as compared to the prior year and lower working capital usage during the current year quarter, partially offset by higher capital expenditures. As of March 31, 2018, we had a total of approximately $940 million of outstanding debt and $146 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $794 million.
Our net debt leverage ratio at the end of the first quarter was 2.4 times on an as-reported basis, a healthy decline from 3.7 times as compared to the same period last year and compared to 2.5 times at the end of 2017. Additionally, at the end of the quarter, there was approximately $234 million available on our ABL revolving credit facility. Finally, we repurchased 560,000 shares of our common stock during the first quarter for $25.7 million under our current share repurchase program.
Under the program, a total of $250 million of common stock was authorized for repurchase over a 24-month period, and to date, a total of 2.7 million shares of common stock have been repurchased for approximately $106 million. 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. We are raising our guidance for revenue growth for full year 2018. As we now expect net sales to improve between 6%-8% over the prior year, which is an increase from the 3%-5% growth previously forecast. Recall that the second half of 2017 included elevated portable generator shipments from the active hurricane season. With no major outages assumed in our current 2018 guidance, we estimate there is an approximately 4% growth headwind relative to this strong prior year comparison. Core organic sales growth is now expected to be between 5%-6%, which is an increase from the previous guidance of 2%-3%. This increase is primarily due to improving end market conditions for both domestic, residential, and C&I products.
Importantly, as previously mentioned, this guidance does not include the Selmec acquisition and does not include any impacts from major power outage activity for the remainder of the year. Our top-line guidance also assumes no material changes in the current macroeconomic environment and 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 in 2018 continue to be higher, or if there is a major outage event during the year, it is likely that 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 still expected to be between 19%-19.5%.
This guidance assumes a benefit from improved operating leverage on higher core sales growth and cost savings from our profitability enhancement program, both which are largely expected to be offset by additional inflationary pressures and to a lesser extent, unfavorable sales mix. Consistent with historical seasonality, we expect sales and EBITDA margins in the second half of the year to be higher relative to the first half. However, given the improved overall demand environment entering 2018, the increase in second half sales and margins are not expected to be as pronounced when compared to the first half.
Specifically regarding the pacing of net sales, the remaining quarters of the year are expected to be more level loaded relative to normal seasonality, with the quarterly run rate in the second half of the year only modestly higher relative to the second quarter.
For full year 2018, operating and free cash flow generation is still expected to be strong and follow historical seasonality, benefiting from the solid conversion of adjusted net income to free cash flow, which is expected to be over 90% for the full year. In addition, we are providing an update on certain other guidance details to help model the company's earnings per share and cash flows for full year 2018. Interest expense is now expected to be approximately $44 million, given the current rising interest rate environment. Stock compensation expense is now expected to increase to approximately $13 million for the year. Additionally, as a result of the expected improved earnings outlook, cash taxes are now anticipated to be approximately $29.5 million-$31.5 million, which translates into a full year 2018 cash income tax rate of approximately 13%.
The remaining guidance items we discussed during the last call are not expected to change. Lastly, it's worth noting that we achieved organic sales growth of 11% during 2017, as several areas of our business began to recover throughout the year. As discussed this morning, certain key end markets have further strengthened relative to our initial guidance. We believe these favorable tailwinds and the positive top-line momentum in our business positions us to achieve continued attractive sales growth and overall financial performance for 2018. While it's clear that we'll have to navigate through an inflationary environment as the year progresses, we believe the robust demand environment for our products will continue to provide for improved operating leverage in the business and also gives us increasing confidence in our outlook for the year. This concludes our prepared remarks, and 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 the number 1 on your touch-tone telephone. If your question has 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. Our first question comes from the line of Charlie Brady with SunTrust. Your line is open. Please go ahead.
Hi. Thanks. Good morning, guys.
Thank you.
Hey, with regard to the portable products in the rental channel, can you just talk a little bit more about where you see, as far as the age of the equipment and how long you think that replacement cycle has to go? It's been going on for a while now. It sounds like it's continuing to be pretty strong, and it sounds like you're not seeing really expansion yet. It's really all driven by replacement. Can you just maybe speak to that a little bit?
Yeah. I think, obviously, Charlie, it's a great question, and we ask that of ourselves and our teams here on our mobile products business a lot because trying to gauge just we know it's a cyclical business. We know there's a lot of variables that go into what drives the cycle, everything from fleet replacement to strength in construction, both road and commercial, to, as we've called out, the domestic energy production sector. I guess to answer your question directly, that fleet replacement cycle we keep referring to, I would say last year we were obviously early in that cycle. The equipment at age, there had been a period of a couple of years there in 2015 and 2016 where, in particular, our national account customers had kind of hit the pause button on capital spending.
What that did is it deferred kind of the normal. We generally would see with a lighting tower or a generator, about a fifth of the fleet turnover every year. The average life cycle on those products, four to five years, something like that. A little bit longer for certain customers, a little shorter for others. Call it roughly 20% of the fleet would turn over every year. If you go two years with low capital purchases, clearly there was some pent-up demand there. We saw that snap back pretty hard last year. That was kind of the early innings of the recovery. What we've been very pleased, though, is throughout the beginning of this year and really even as we enter the second quarter here, we've been very surprised at just how strong it's remained. Then you ask your question, what drives that?
Is this still the fleet refresh cycle, or is it something more? We keep thinking that oil and gas is going to start playing a role in the equipment purchases there. Frankly, we look at the utilization rates in the specialty rental channels where a lot of that equipment goes, and the utilization rates are starting to recover. They're not fully where they are in the general rental business, though. We still think that there's legs with the rebound, in particular as it relates to oil and gas. I would say we're probably middle innings on the fleet refresh cycle. I think we're pretty bullish on that business overall. In fact, a part of our lift on the guidance this morning is related to mobile products.
Thanks. That's helpful. Just with regard to the Florida legislation, just to be clear, is your guidance factoring in any strength or sales coming out of that legislation yet?
We had kind of a line of sight on this from late last year after the storm. Actually, our February guidance, our full-year guidance that we gave initially, did include some lift. Again, as we said in the prepared remarks, historically, whenever you get an active hurricane season like we had last year, typically that bodes well for our C&I business. It's a longer sales cycle. There's planning, there's permitting, there's budgeting, and so you don't see the visceral reaction you get in the residential market. The C&I market generally will be several quarters afterwards before it kind of lights up, and we're starting to see that now. To be clear, we did have some of that Florida legislation pending. It was pending legislation at that point.
We had it in our guidance in February, we took it up for the remainder of the year. Once it became clear that that was going to become law, which it did, now as we've started to really have some serious conversations with both partners at the national level, people who own and operate those facilities on a national level. Also, frankly, it's a very fragmented market. There are a lot of facilities, a lot of small facilities across the state, so it's a lot of conversations. There's a lot of engineering work to be done. We've found that we can be very useful and helpful in providing a lot of that engineering work and connecting those firms to resources, whether they be our distributors, our industrial distributors.
I think the other advantage we may have there is that because of our broad approach to the market from a distribution standpoint with electrical contractors as well as wholesalers and other channel partners, I think, in particular, the small bed facilities may not buy from an industrial distributor. Their needs are smaller. They're looking for a smaller product. They can just as easily get that product direct from an electrical contractor who could be a dealer of ours. We've opened up the product offering to those channel partners in a way that I think puts us in a position to see some nice lift from that's what we included in our upward guidance this morning.
Thanks. Just one more from me on the inventory level and the channel on portable generators. Has the replacement of the portable generators, obviously from the sell-out in Q1 storms, where's that level today? Is it back to normal, or is it still being replaced?
We've been constantly trying to catch up, really since the hurricane season. The amount of portable generators that we put in the market over the last several quarters is amazing. We're running flat out in our facility here in Jefferson, Wisconsin. We've got our supply chain ramped up very hard. Every time we think we're getting ahead of it, then we get one successive storm after another in the Northeast in the month of March. Really what I would say if we were to kind of quantify where inventories are at today, at least from a qualitative standpoint, they're low in channel, and they're low in our own warehouses.
Now we're replenishing, and we're coming into a very critical part of the season here in Q2, where what we've historically seen happen is that people will get a lot of confidence in ordering for the upcoming season if they've had a good season last year. We would expect some pretty strong order patterns here in Q2, and our guidance reflects that around portable gens and really probably even into Q3. We're scrambling to get stock, and we're building as much as we can, and it's good to see that market come back, and we went through a period of protracted low outages and seeing it come back to this level. We've also been successful in getting a little more market share this year. Line reviews are coming out right now, and we're starting to kind of calibrate ourselves around some of the wins that we got.
On a net basis, we're up year-over-year. We're going to be up. It's really a question of timing around when those products get placed. Are they placed ahead of season, in season, or after season? We're working with the major retail partners now, but we're on a net plus there. We're pretty bullish on our performance last year really led us to the point of winning some additional business this year. That's a net positive.
Thank you. Our next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets. Your line is open. Please go ahead.
Hey, guys. Good morning.
Morning, Jeff.
Good morning, Jeff.
I guess as you assess Hurricane Irma and some of the hurricanes last year, what are you seeing relative to expectations on home standby follow-through and carryover? Just any early feedback that you're getting also on home standby visibility activity from some of these East Coast storms. Thanks.
Obviously, the active season last year, Jeff, as we had said, in particular, I think we made the comment, I believe it was on our fourth quarter call, that we had never seen in-home consultation levels that we saw after those storms. That's a big leading indicator for us, and what we weren't sure of is just how that would translate in follow-through here in the first half of certainly the first quarter of 2018. We've been really happy with that. I will say this, when you look at it regionally, obviously we said in the prepared remarks that activations in the Southeast and Northeast are up dramatically year-over-year. There's a couple of regions like the Midwest, where, because of the really poor weather conditions, really through, I'll be honest, I think the snow just melted here a couple of days ago in Wisconsin.
The really tough weather conditions, in particular in the upper Midwest, have made it difficult to put products on ground. Activations were a little bit more muted in the Midwest region in the first quarter. Even in the last few weeks, we're starting to see that come back pretty aggressively. We are really bullish that the spillover effect of very active hurricane season in 2017 is going to continue to drive the regions that were directly impacted by that. We also see this kind of afterglow effect around the rest of the regions. More specifically, your question about the Northeast. Again, IHCs and home consultations are elevated, and they've remained so. It's been a great test of our PowerPlay selling systems.
I mean, the amount of dollars we're putting through that system, the amount of quotations, the visibility that we're getting to, not only individual dealer performance, but regional performance around win rates and around just raw activity going into the areas, really gives us a lot of confidence, and again, is a big part of the overall story in raising our guidance. Dealer count also being up all-time-high here at the end of the quarter. Those are all good things for us, and I think they're directly related to the higher outage environment. We're very bullish on it, Jeff.
Okay, great. Just one more. Margins certainly were better than my model, and maybe that speaks to home standby mix. I noticed with the revenue change, you're not changing your EBITDA margins. Just talk about puts and takes there and any contingency or conservatism in the guide around that. Thanks.
Yeah, Jeff, this is York. On the margin guide, we did hold our margins to that 19%-19.5% EBITDA range for the full year. As you can imagine with where steel is going and all this discussion about the uncertainty with tariffs and the weaker U.S. dollar that we're experiencing and wage pressures and whatever, there's a lot of inflationary pressures that a lot of companies are experiencing. We've evaluated that. We've included some incremental inflationary pressures relative to the previous guide. The operating leverage we're getting by adding roughly $50 million in sales to our guidance, which is that extra 3%, is really helping it to offset that. I think we're pleased that we're able to hold that margin guidance despite some of the inflationary pressures we're seeing.
Okay, thanks, guys.
Great. Thanks, Jeff.
Thank you. Our next question comes from the line of Ross Gilardi with Bank of America. Your line is open. Please go ahead.
Good morning, guys. I apologize if you addressed any of this. I just jumped on from another call. Your ability to raise prices in home standby, Aaron, in this environment and in C&I to compensate for higher input costs. Can you address that a little bit?
It's obviously a question on, I think, the minds of anybody who's running a company today with the inflationary pressures we're seeing. We went to the market with some price earlier this year. There's kind of an annual cadence around C&I, so I'll start with that market. C&I is, a lot of the major players in that industry will come out at the beginning of the year or at the end of the previous year with some couple percentage points of price. What we've seen on top of that kind of normal cadence, and we followed suit with that kind of in December, January. We've seen now some of the major players in that industry, in the C&I space, come back, and they're taking a second bite at the apple here. We're evaluating how we want to do that.
Obviously, we know that these input costs are going to continue to rise. At the same time, we like our position as one of the value providers in the marketplace. I think we're going to end up having to do something there and are evaluating what that would look like on the C&I side. Residential is interesting. One of the things we talk about with residential is the importance of affordability. Affordability is kind of an important leg of the stool when it comes to growing the penetration rate for home standby. That being said, straight price increases typically don't take the same model and just layer on a price increase. We generally take a different tact when it comes to residential products and in particular, home standby.
This year, as an example, the way we approached price, we have a new model that's just now coming off the production line and starting to get into the marketplace. It's a model that has Wi-Fi connectivity as standard in every product. Obviously there's a bit of a cost for that, and obviously we worked hard to offset some of that cost, but there's still a net cost. That, coupled with the inflationary pressures of materials, wage inflation, and other things, we went and recalibrated our entire product line, based on some of these new features in the new product line with a different price. It has a different price point going into the market. We still think that there's a lot of value for homeowners, and we think that in particular, some of the additional features we've given people, like the connectivity, are quite valuable.
In that case, that was a way to get price in the market, was to introduce new products and new innovative features. What we have to evaluate, which I think is your question, is do we go back again? Now that the inflation, we can get a better line of sight on what's going on, in particular with some of the tariff discussion, other things, we just are kind of waiting to see what's going to happen there. We may need to go again. I guess on the one hand, everybody in our industry has the same kind of concerns, right? Everybody uses a lot of steel, aluminum, and copper when you build a generator. Many of us have similar supply chains in terms of where their sourcing comes from.
I look at that and I say, boy, if inflationary pressures rise that fast, then we'll have to address the price. We may have to go after it again a second time. I don't think there's any question that we'd be able to get that. I think we've got a lot of cover for that. Talking to our customers, our distribution partners, they understand it. They're seeing it in their own businesses in a lot of different ways. I think unfortunately, where all this is going to manifest is probably higher prices at the street level at the end of the day.
Got it. Thanks, Aaron. In holding your EBITDA margin guide you were saying that operating leverage can offset raw materials, I think amongst some other comments. Are you making any assumptions on weather patterns in the second half of the year when you say that? Is the operating leverage you're counting on basically in your order book right now?
The operating leverage as we remarked in our comments, is really calibrated around the upward guide that we did this morning. On that level. I will say this, on your comment about weather and how much of that do we have baked into our guide. The thing with this business that I've always said is it's kind of an interesting element of our business in that we don't include any major events in our guidance. There could be additional leverage, there could be additional top line. As we said, a major event can add upwards of $50 million or more into the top line. I'll also say this, the baseline power outage environment, which is an important kind of item that we use to calibrate the remainder of the year kind of view on residential.
We're picking a level that's closer to the long-term average, quite a bit below where it's been, specifically well below where it was in Q1. We're actually saying in our guidance this morning that we're looking for a lower power outage environment for the balance of the year, and that yet still translated to a higher guide, an increase in our guidance. Is that upside? I don't know. We're trying to take a conservative approach to how we forecast outages. We've been down this road before. We just don't know when they're going to happen or where they're going to happen. We do know over the long term they do happen, and they do impact that business. We leave it to you guys and to others who watch the company to kind of pick a point on a curve and say, where are you going to be?
That would only be an additional tailwind in terms of additional leverage from a margin standpoint.
Got it. Thank you, Aaron.
Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Please go ahead.
Hi, this is Corinne Jenkins on for Jerry.
Hi. Good morning.
Good morning. Can you please frame where the mobile genset business is relative to the 2014 oil and gas peak? What's the lead time on orders today, and how much do you expect production to ramp in the second half of the year?
Yeah. They're good questions. 2014 was a very unique year with not only the fleet refresh cycle kind of in the late innings, but also oil and gas. We're still off of that peak. In particular, as I mentioned before, we really haven't seen utilization rates in the specialty rental markets that serve oil and gas. We haven't seen them kind of hit their stride yet. We believe there's room to run yet as it relates specifically to oil and gas. The product lines that we serve that market with, both the specialty lighting towers, the specialty gas and diesel generators for that market, and heaters, really have not come back to the levels nowhere near what they were in 2014 for those specific product categories. As far as lead times for products, they are starting to stretch.
We've always said that that's a business, the mobile products business, you want to have some inventory on the ground because projects come up time and again. You want to be able to capitalize when a project does happen, a new project hits the street. Unfortunately, what we're seeing is lead times are going out because we're running three shifts in our factories there. I wouldn't say we're approaching full utilization, but we're pretty close in terms of capacity at our facility there. Actually, our biggest constraint is engine availability. The world market for the diesel engines that go into products like that, smaller displacement diesel engines, also go into the same type of small construction equipment. Skid steers and backhoes and things like that, which also obviously is a very robust demand environment right now.
That's putting pressure on the major engine manufacturers, and they're obviously recalibrating their own factory scheduling to fix that. Fortunately, we got in early. We could see this happening, and we've been down this road before in terms of cycles. I think we're in pretty decent shape with engine supply. We've taken some additional steps there. We're flat out trying to make as much product as we can. Lead times are going out.
Great. Thank you.
Thank you. Our next question comes from the line of Brian Drab with William Blair. Your line is open. Please go ahead.
Good morning, congrats on a great start to the year.
Thanks, Brian.
Good morning, Brian.
Hey, is there any way that you could size that Florida opportunity with the assisted living facilities? Is it closer to $20 million or is this like a $50 million-plus opportunity, and does it carry into 2019? What's the timing, do you think, in the end around these guys becoming compliant with the regulation?
Yeah. It's a great question, Brian. We've done a lot of math on this to try and quantify the size of the market opportunity there. There's a lot of factors that go into that. The existing facilities that are there, what do they already have? In some cases, they already have some type of backup strategy. There's not a lot of great information when a facility has backup power versus not. Is that backup power adequate to carry HVAC loads, which is really the critical change to the legislation here that happened. If we just step back and we look at it, we would estimate the overall size of the prize there, including installation. This is at a retail price point, it's probably somewhere in the neighborhood of a couple hundred million dollars.
Now, when you strip away the generator and transfer switch components of that at wholesale levels, is that a $100 million-$125 million opportunity? That's probably a reasonable estimate. Then, you put a market share on that. We believe we should get our rightful share at a minimum, and then maybe there's a little bit more because of the breadth of our distribution, because we have a better position with natural gas, which was also allowed under the regulation, which was a change from previous regulations. I would say that if you're to size that, is it somewhere between, I think you hit the numbers, somewhere between $20 million and $50 million. In terms of timing, I think it's interesting. There may be a problem with trying to get all that equipment built and installed by the state's deadline. Certainly, it's not going to happen by July 1st.
Then there's extensions that the state has agreed to grant, as long as facilities can show a credible plan to the state regulators, to AHCA, as it's referred to in Florida. If they can show state regulators a credible plan, they'll give them a potential extension till the end of the year. We think that this is something that could eclipse the full year and get into 2019 just simply because of the amount of equipment. You've got to get permitting. Florida is a notoriously long cycle market when it comes to everything from a home standby to a C&I product. It just takes a long time to get permitting done, to get the contractors lined up, and to get the work performed. We believe that could push this opportunity around the horn.
We think our guidance appropriately reflects that. Again, some of our guidance had this piece already in the initial full year for us in February. We've raised that since because it's now become obviously very clear that this is a new law, and it's going to have a positive impact, at least in our industry.
Okay, great. That's obviously really helpful. I'm wondering, just as you're going through the variables of that calculation, you mentioned share. As I was looking at this, I'm trying to figure out, do I use your C&I share or do I use your resi share? It seemed like you used a hybrid of those. If you get to something in between, around $35 million would be the midpoint of what you talked about, and that would be something like 25%-30% share. It sounds like, I guess, we're leaning more towards the C&I share, obviously, will you use resi generators in some of these applications?
We can. The small bed facility, six beds or fewer, can certainly use a residential style generator. Because of that, Brian, we used a hybrid share number that we believe is reflective of where the larger facilities are going to use very clearly a commercial and industrial generator. Our share is more akin to that. There are a lot of small bed facilities where we think a light commercial or residential product could be used, therefore that's transacted through a much broader channel, we have much greater share there. You're right, we hybridize the share for the purposes of estimating the impact.
Okay. That's really helpful. I'm pretty sure I'm not going to get you to quantify this, if there's any way that you could help me think about this, it'd be great. The baseline outage activity, get a sense for how you're constructing that guidance. How far above the long-term average has outage activity been over whatever period you choose, over the last 12 months would be helpful. I'm trying to get a sense for obviously how far it's dropping in your guidance. To what level is it dropping?
It's a good question, Brian. We haven't quoted specific numbers around that, but Q1 was meaningfully higher than the long-term average. Really, think of it as double the long-term average. We're dropping it based on the way we're guiding for the balance of the year. We're reverting more to that long-term average. Obviously, we had a strong year last year, a strong couple of quarters here. We strip out major events when we look at this, and we didn't qualify any of the events that occurred in Q1 as major. It does bring the average up slightly when you look at the long-term. It's still meaningfully below what happened in Q1 and meaningfully below what happened last year. We think that maybe that indicates there's a sufficient conservatism in our guidance. Again, because we don't know, you can't predict outages.
We feel it's the proper way to do that.
Absolutely. Okay. One more if I could. The Motortech, Pramac update. Could you give a little more detail on how that's going in Europe? I saw the 5% core number international. Is that going as expected so far?
It is. We've actually really pleased with our international businesses. The core growth rate in really all those acquisitions has done very well for us. Some of that is the strength of Europe overall. Some of it is some of the markets specifically, like Motortech, that they're focused on combined heat and power, OEMs, demand response OEMs, and other gas power generation OEMs, and that market is growing faster than traditional markets. Pramac has been just a tremendous grower for us, tremendous acquisition. As we've said in these comments, our biggest area of focus with international businesses is to improve the margins. We knew what we were buying, eyes wide open. We went after this with a lot of vigor to give ourselves a much larger global footprint both from a distribution and manufacturing standpoint. We knew that doing that was going to be dilutive on margins.
We knew that in particular, in a case like a Pramac or an Ottomotores, these companies are generally packagers of products. They're not true manufacturers, I would say. They're really packagers. What we are here in the U.S., the Generac, in particular our C&I business, which is what is most akin to these businesses, we're really a vertically integrated manufacturer. There's a lot of value-added work streams that we put into the product. Everything from manufacturing our own gas engines, to winding our own alternators, to engineering and designing our own controls, transfer switches, all of the components that are critical to the systems we think are really important. The key in these acquisitions has been, part of the thesis, is to take and do that in these other businesses.
To leverage by growth, to leverage what is a relatively high fixed operating structure because of the coverage that they have. Pramac has 16 sales branches. These are offices with people staffed across the globe to get access to the 180-plus countries that they sell into. There's a high cost to that. The better that we can leverage that, we can make improvements at the gross margin line by making them a better vertically integrated manufacturer, we can improve at the bottom line by leveraging the operating expense structure of these businesses by growing. Those have been the two things we've been very focused on, and it's working. I mean, the last several quarters show it's working. We're seeing some nice improvement there. We have a long way to go.
We said we want to double the EBITDA margins of these businesses, we've got a line of sight to that. We think we have a solid plan to get there, we're working that plan, we've been on our trajectory.
Yes. Okay.
focus on gas as well. It's been another area of positivity there.
Thank you. I'm showing no further questions, and I'd like to turn the conference back over to President and Chief Executive Officer, Aaron Jagdfeld, for closing remarks.
We want to thank everyone for joining us this morning, and we look forward to reporting our second quarter 2018 earnings results, which we anticipate will be sometime in early August. With that, we'll bid you a good day. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.