Good day, ladies and gentlemen, and welcome to the Generac Holdings Inc. third quarter 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 be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. At this time, I would like to introduce your host for today's conference, Mr. York Ragen, Chief Financial Officer. Sir, you may begin.
Thank you. Good morning, and welcome to our third quarter 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 our 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 US 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. We are pleased with our overall financial results for the third quarter of 2015, as net sales increased 2% to $359 million as compared to $352 million in the prior year, as both residential and C&I products experienced low single-digit growth with the benefit of recent acquisitions. Third quarter results also met our most recent guidance expectations, which called for a strong sequential quarterly improvement in both sales and margins as net sales increased 25% and adjusted EBITDA margins improved 440 basis points compared to the second quarter of 2015. Despite the ongoing low power outage environment, shipments of home standby generators increased significantly relative to the first half of the year as field inventories returned to more normalized levels during the quarter.
Regarding our C&I products, the quarter benefited from an expected strong seasonal increase in mobile heater shipments from the recent MAC acquisition, along with increased shipments of stationary equipment to industrial distributors. However, the significant decline in capital spending levels within the oil and gas sector continued to have a negative impact on year-over-year growth for our mobile products during the third quarter. In addition, we were active on our recently announced share repurchase program as we used $64 million to repurchase shares in the quarter, which we believe is an attractive use of capital for shareholders given our long-term growth opportunities. As assumed in our previous guidance, the power outage environment continued to remain challenging.
However, In-Home Consultations and installations of home standby generators improved seasonally at a stronger rate than expected, leading to a faster reduction in field inventory levels, which improved the effectiveness of our sales, marketing, and promotional programs in the quarter. As a result, shipments of home standby generators improved significantly on a sequential basis and exceeded our expectations. In addition, despite the lower power outage environment, shipments of portable generators increased slightly on an organic basis as compared to the third quarter of 2014 as cross-selling synergies from the Powermate acquisition were further realized and as we began the first shipments of our new iQ2000 inverter generator, the quietest, most intelligent portable generator on the market. We remain optimistic on the long-term growth opportunities for residential standby and portable generators.
As we've commented many times previously, we believe that growth in the home standby category occurs in a step function manner, with the penetration rate for these products accelerating during periods following major outage events and slowing again as the impact of those events subsides. Each successive step that the category takes is representative of a new and higher baseline rate of demand resulting from increased awareness and expanded distribution. We believe the recent performance of the product category demonstrates this pattern continues to hold despite the decline in year-over-year shipments of home standby generators in recent quarters after the robust growth period following the major outage events in 2011 and 2012. In fact, the current baseline level of demand is still much higher relative to the prior baseline period of lower outages, which occurred in 2010.
Specifically, residential product shipments on a trailing last 12-month basis have grown organically at an approximately 12% compounded annual growth rate as compared to the 2010 period, despite the lower baseline level of power outage severity over the past three years. We believe this growth is a testament to the under-penetrated nature of home standby generators, along with the significant investments we have made during the past three years, including our innovative sales and marketing programs to increase the awareness of the product category, as well as our focus on new product introductions and expanding distribution. While the timing of an improvement in the power outage environment is obviously beyond our control, we will continue to focus on a variety of strategic initiatives to increase the awareness, availability, and affordability of home standby generators.
These initiatives include specific projects and activities targeted towards generating more sales leads, improving close rates, and reducing the total overall cost of a home standby system. Residential product net sales for the third quarter included 2 months of contribution from the Country Home Products acquisition that closed on August 1st. Country Home Products, or CHP, is a leading manufacturer of high-quality, innovative, professional-grade engine-powered equipment used in a wide variety of property maintenance tasks for larger acre residences, light commercial properties, municipalities, and farms. The acquisition provides additional scale to our existing platform of engine-powered tools, which includes portable generators, power washers, water pumps, and inverter generators. Integration efforts for the acquisition are well underway, and we are making encouraging progress in evaluating and pursuing a variety of synergies.
These include cross-selling opportunities with our existing distribution, most notably with our national retail customers, as well as certain cost synergies as we leverage our global sourcing and manufacturing capabilities. Regarding our C&I products, the significant decline in oil and gas prices that began towards the end of last year continues to have a negative impact on capital spending for mobile equipment that is primarily used in upstream oil and gas applications. In fact, the price of oil, which had shown some signs of stabilization above the $50 a barrel level after the second quarter, dropped further during the third quarter and has remained well below the $50 level since that time. Accordingly, shipments into this market during the third quarter were below our expectations as we continue to see the negative effect of lower energy prices play out with regard to the impact on the broader general rental markets.
Our key national rental customers have been actively repositioning their underutilized equipment from oil and gas related applications to other rental opportunities, resulting in a deferral of new equipment spending and playing a role in the decline in the overall demand for mobile equipment. Recall that starting in the second quarter of 2014, we experienced a significant increase in demand for mobile equipment used in the oil and gas sector, with this strength carrying through the end of the prior year. The contrast of this heavy oil and gas related demand in the prior year and the significant pullback in the current year continues to create a very challenging year-over-year comparison for our C&I products. We remain steadfast in our views regarding the long-term opportunity related to domestic energy production and the need for mobile products that are essential for these activities.
However, the adverse impacts from the drop in oil and gas prices, including the recent additional weakness, continues to have a negative impact on industry fleet purchases. Accordingly, we are taking a cautious approach to our outlook for this end market as we further evaluate the impact of lower energy prices on the demand for capital equipment. As previously mentioned, we experienced a strong seasonal increase in mobile heater shipments during the third quarter from the MAC acquisition, which closed in early October 2014. Recall that MAC is a leading manufacturer of premium grade commercial and industrial mobile heaters within the U.S. and Canada. Shipments for these products can be highly seasonal, with peak volumes typically experienced during the third quarter as rental equipment companies, dealers, and end users prepare for the upcoming winter season.
Although a key use for these products are within the oil and gas markets, MAC's broad product line is also used in construction markets, the airline industry, and other general rental applications. The third quarter of 2015 was our first peak season experience with MAC, and we are pleased with the resiliency of demand for their mobile heaters in light of the softer oil and gas environment. We remain excited about the cross-selling opportunities available to us as we combine MAC's heater product line with Magnum's broad relationships in the equipment rental market, which will allow us to further penetrate the energy, construction, airline, and general rental markets over the long term.
We also continue to make progress in building out and expanding our capabilities for larger industrial generators, an area we have been intensely focused on for the past two years after acquiring the Baldor generator business in late 2013. This includes significantly expanding our product line to include a broader, more competitive offering of larger output systems, as well as improving our distribution capabilities to better enable our industrial distributors to sell these more complex systems. As a result of these efforts, shipments of larger output generators have increased at an encouraging rate throughout 2015. We have also continued to experience growth for our industrial gas generators as we further leverage our core competencies with natural gas engines and expand the power range of gas use products available.
We remain committed to a number of important initiatives targeting an improvement in the specification and closure rates for our industrial distributors that we believe will provide greater opportunities for Generac's future growth in this market. Our Tower Light acquisition, which closed in August 2013, reached the two-year anniversary of our ownership during the quarter. Tower Light, with headquarters outside Milan, Italy, is a leading developer and supplier of a broad lineup of mobile light towers throughout Europe, the Middle East, and Africa, with distribution in over 60 countries. Our product line today includes the industry's widest range of LED-based lighting towers, as well as several hybrid lighting solutions that drive significant improvements in fuel efficiency, an important consideration in many high-cost diesel fuel areas of the world.
Through their broad product offering and diverse geographic reach, Tower Light is having a strong year despite challenging economic growth conditions in several of its key geographic markets. However, this performance is being masked within our financial results due to the strength of the US dollar relative to the prior year. The company is working on several initiatives to drive growth going forward, including a number of new product introductions and an increasing distribution presence in under-penetrated areas of the world. Tower Light is a well-run business with higher margins and follows our acquisition strategy of targeting companies that diversify our business with new products, customers, and end markets while also expanding our geographic reach. I would now like to turn the call back over to York to discuss third quarter results in more detail. York?
Thanks, Aaron. Net sales for the third quarter of 2015 were $359.3 million, as compared to $352.3 million in the third quarter of 2014. Sequentially, net sales in the current quarter increased 24.6% as compared to $288.4 million in the second quarter of 2015. Looking at our net sales by product class, residential product sales during the third quarter of 2015 increased to $185 million, as compared to $183.7 million in the prior year quarter. Contributions from recent acquisitions, including Country Home Products, which closed on August 1st, were mostly offset by a decline in shipments of home standby generators during the quarter. The year-over-year decline in home standby shipments was primarily driven by the continuation of a record low power outage environment that was significantly below the prior year, and to a lesser extent, by a modest level of inventory destocking in certain channels.
As expected, shipments of home standby generators improved significantly during the third quarter relative to the first half of 2015 as field inventories returned to a more normalized level during the seasonally stronger back half of the year. Lastly, shipments of portable generators increased modestly during the third quarter as compared to the prior year due to cross-selling synergies achieved from the Powermate acquisition, new product introductions, and some incremental demand driven by power outage threats. Looking at our commercial industrial products, net sales increased to $148.2 million in the third quarter of 2015 as compared to $146.4 million in the prior year third quarter.
Strong seasonal shipments of commercial mobile heaters from the October 1st, 2014 MAC acquisition contributed to this increase. Increased sales of larger output stationary equipment through our industrial distributors are being more than offset by a significant decline in shipments of other mobile equipment going into oil and gas markets. Within our telecom vertical, shipments to national account customers during the third quarter declined only modestly compared to the prior year, as the more challenging year-over-year comparisons have annualized. Currency impact on C&I product sales sold in Latin America and EMEA markets was approximately $2 million during the current year, third quarter. On a constant currency basis, sales increased modestly year-over-year at our Ottomotores and Tower Light subsidiaries. Net sales for the other products category were $26.1 million in the third quarter of 2015 as compared to $22.1 million in the prior year.
The increase was primarily driven by additional service parts sales resulting from our growing base of stationary and mobile products in the market, and to a lesser extent, the addition of aftermarket parts sales from recent acquisitions. Gross profit margin for the third quarter of 2015 was 36.3% compared to 37% in the prior year third quarter. The decline was driven by a number of factors, including unfavorable product mix, unfavorable absorption of manufacturing overhead related costs, and the impact from recent acquisitions. These declines were partially offset by improved pricing, along with the favorable impact from lower commodity costs and benefits from overseas component sourcing due to the stronger U.S. dollar. Overall, unfavorable mix and acquisitions impacted gross margins negatively by 90 basis points, while price cost impacted gross margins positively by 20 basis points.
Operating expenses for the third quarter of 2015 increased $3 million, or 5%, as compared to the third quarter of 2014, primarily as a result of the addition of recurring expenses associated with recent acquisitions, including a $1 million increase in amortization of intangible assets over the prior year. Partially offsetting the increase was a decline in certain other selling general and administrative expenses during the quarter. Operating expenses as a percentage of net sales, excluding amortization of intangible assets, was 15.6% for the third quarter of 2015 as compared to 15.4% in the prior year period. adjusted EBITDA was $81.2 million, or 22.6% of net sales in the third quarter of 2015, as compared to $83.1 million or 23.6% of net sales in the same period last year.
This decline in adjusted EBITDA margins compared to the prior year was attributable to the 70 basis point decline in gross margins, along with the modest increase in operating expenses as a percent of net sales. Sequentially, EBITDA margins in the third quarter improved 440 basis points over the second quarter. This sequential increase was driven by a 300 basis point improvement in gross margins, primarily as a result of favorable product mix and, to a lesser extent, favorable price cost, in addition to a 140 basis point improvement in operating expenses from the improved leverage on higher sales volumes. GAAP net income for the third quarter of 2015 was $34 million, as compared to $36.5 million for the third quarter of 2014.
Included in the current year other expense income section is a $2.4 million loss on change in contractual interest rate as a result of an increase in our term loan interest rate spread of 25 basis points for an anticipated period of four quarters. GAAP income taxes during the third quarter were $19.2 million, reflective of a 36.1% effective tax rate as compared to $18.4 million or a 33.5% rate for the prior year. This increase in GAAP effective tax rate was attributable to a decline in our Section 199 manufacturer's deduction during the third quarter of 2015 compared to the prior year. Adjusted net income, as defined in our earnings release, was $63.4 million in the current year quarter versus $57.9 million in the prior year. This increase over the prior year is primarily the result of lower cash income taxes in the current year.
The third quarter of 2015 includes the impact of a cash income tax expense of $500,000 as compared to $6.5 million in the prior year quarter. This year-over-year decline in cash income taxes was primarily the result of a lower expected cash income tax rate for the full year 2015 of approximately 4% as compared to the full year 2014 rate of approximately 14% expected for the prior year third quarter. The cash income tax rate of approximately 4% expected for full year 2015 is a reduction relative to our previous expectation of approximately 6%, primarily due to a modest reduction in expected pre-tax earnings. As a reminder, our favorable tax shield through annual intangible amortization in our tax return results in our expected cash income tax rate being significantly lower than our currently projected GAAP income tax rate of approximately 36% for 2015.
As we drive profitability over time, cash income taxes can be estimated by applying a projected longer-term GAAP income tax rate of 36% on pre-tax profits going forward, then deducting the approximately $50 million of annual cash tax savings from the tax shield each year through 2021. Diluted net income per share on a GAAP basis was $0.49 in the third quarter of 2015, compared to $0.52 per share in the third quarter of 2014. Adjusted diluted net income per share, as reconciled in our earnings release, was $0.92 for the current year quarter, compared to $0.83 per share in the prior year.
The increase was due to the combination of $0.08 from lower cash income taxes, $0.03 from lower interest expense, $0.01 from lower diluted share count from the share repurchases during the quarter, partially offset by a $0.03 impact from lower operating earnings. Free cash flow, defined as net cash provided by operating activities less capital expenditures, was $29.4 million in the third quarter of 2015 as compared to $47.8 million in the same period last year. The year-over-year decline was primarily the result of higher working capital investment as inventory reductions were converted into receivables that will primarily be collected in the fourth quarter. This use of cash for working capital during the quarter was partially offset by a decline in cash income taxes and, to a lesser extent, lower capital spending levels versus prior year.
With regards to primary working capital, the Country Home Products acquisition added approximately $11 million of primary working capital to our balance sheet as of September 30th, 2015. At quarter end, we had a total of $1.05 billion of outstanding debt, net of unamortized original issue discount, and $46.5 million of consolidated cash and cash equivalents on hand, resulting in consolidated net debt of $1.01 billion. Our consolidated net debt to LTM adjusted EBITDA leverage ratio at the end of the third quarter of 2015 was 3.6 times on an as-reported basis. Additionally, at the end of the quarter, there was approximately $149 million available on our ABL revolving credit facility. As already mentioned, we repurchased 2.15 million shares of common stock during the third quarter for $64.4 million under our recently approved share repurchase program.
The share repurchase program, announced on August 6th, authorizes the company to repurchase up to $200 million of common stock over a 24-month period. In total, between the Country Home Products acquisition and share repurchases, we deployed approximately $140 million of cash during the quarter. We believe this to be a very attractive use of capital for shareholders and demonstrates our confidence in the long-term growth prospects and strong free cash flow generation capabilities of our business. With that, I'd now like to turn the call back over to Aaron to provide additional comments on our updated outlook for 2015.
Thanks, York. Full-year revenue and adjusted EBITDA are expected to be approximately $1.3 billion and $270 million, respectively. This guidance assumes that power outages during the fourth quarter remain at the very low levels experienced thus far in 2015 and also assumes that energy prices remain at current levels. Should the power outage environment improve during the fourth quarter, results could exceed these expectations. Looking at our guidance by product class, we expect 2015 net sales for residential products to decline between 8%-9% as compared to the prior year as a result of the challenging outage environment. However, this represents an improvement from the previous expectation of down approximately 11%, given the improved end market demand.
With regards to C&I products for 2015, we now expect net sales to decline between 15%-16% as compared to the prior year, which compares to our previous expectation of down approximately 10%. The reduction from prior guidance is primarily due to strong and incremental headwinds in the oil and gas market. As we discussed during the second quarter earnings call, free cash flow generation during the first half of 2015 was impacted by higher than expected inventory levels. We began to monetize a portion of this inventory investment during the third quarter and expect to make further progress during the fourth quarter. As a result, we now anticipate generating well over $100 million of free cash flow during the second half of 2015.
It's important to note that when looking at the seasonality of our cash flow generation over the past several years, the company generates a significant amount of its total free cash flow during the second half of any given year, particularly during the fourth quarter. In closing this morning, despite a weaker demand environment that persists in key portions of our business, we view the current softness to be temporary in nature, and we remain optimistic on the long-term growth prospects for our business. We continue to remain focused on matters that we can control, including driving awareness for our products, developing and expanding our distribution, launching innovative new products, and controlling costs. In addition, we will leverage our strong liquidity position going forward to further diversify our revenue base and expand our geographic presence, as well as continuing to opportunistically return capital to shareholders. This concludes our prepared remarks.
At this time, we'd like to open up the call for questions. Operator?
Ladies and gentlemen, at this time, if you have a question, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Brian Drab from William Blair. Your line is open.
Hey, good morning, Aaron. Good morning, York.
Good morning, Brian.
Good morning.
You mentioned the inventory level has normalized. Can you maybe comment a little bit more specifically on that? Where is inventory in the channel at the end of 3Q relative to where it was at the end of 3Q last year? Do you expect that de-stocking would have any impact on your 4Q results this year?
Brian, we talked a lot about this at the end of the second quarter, because obviously second quarter was adversely impacted by the field inventory position. As we indicated and as we expected, we saw the balance of that de-stocking take place here in the third quarter. More specifically, where we ended the third quarter in terms of our view on field inventories, in terms of rough numbers, very close to where we were last year, just in terms of total inventory balance for home standby. Activations, the end market installations of product are slower this year than they were last year, as we've talked about. In terms of days of inventory, it's a little bit more, we don't think that's going to impact the fourth quarter, we think that we've appropriately guided around that in the comments we've made this morning.
Okay, thanks. Then on the C&I side and the rental channel, can you give me a sense for what percentage of C&I sales went through the rental channel in the third quarter, and how is that playing out, and how is the oil and gas situation affecting that? I know we haven't typically broken that out separately. We talked about how last year, oil and gas was about 10% of our 2014 sales, with our new guidance, we think that's going to be down about 40%-45% year-over-year. That obviously has an impact. We haven't necessarily broken it out specifically on a quarter-to-quarter basis. More commentary, I guess the second part of your question was what again, Brian?
I guess the one thing that I was looking for, have you said in the past what percentage of C&I sales are going through the rental channel? I think you've talked about that in recent quarters, haven't you?
Yeah, I think we've said roughly about 15% of the consolidated sales.
Okay.
Consolidated total sales run through that. Again, that was prior to this year. This year it would be lower as a result of the pullback in oil and gas prices.
Again, that's more on the mobile side of the business.
Yeah. I think we've commented more on a general basis in terms of what it was. That 15% is in reference actually to prior year, the 2014 total consolidated net sales.
Okay.
A large % of the mobile business is sold through rental, and that's how you should look at it.
Okay. Maybe I'll follow up a little bit more on that later, but just two quick ones here. On the second quarter call, you said the outage activity was down 40% year-over-year in first half 2015. Did you give us an updated number today for first nine months?
We didn't, but it's about the same.
Okay.
It remains in that kind of 40% down. Our guide for Q3 kind of anticipated that, and that's kind of where it played out.
Okay. Acquisition revenue, anything more specific you can tell us about absolute dollars contributed to C&I segment and resi segment from acquisitions in the third quarter?
Yeah. If you looked at our as-reported growth was about 2% headline number. The organic piece of that was actually down about 7%. Acquisitions had about a 9% impact there. If you break that out organically between residential products and C&I, residential organically was down around 6%, C&I was down just north of double digits.
Okay, perfect. Thanks, guys.
Thanks, Brian.
Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is open.
Hey, guys. Just another one on kind of free cash flow. Can you talk about what really drove the receivables up in the quarter? And then maybe a little more precision around this well over $100 million of free cash flow you expect to produce in the second half.
Yep. Hey, Jeff, it's York. Just the receivable number, if you look at where sales went up sequentially, about 25%, receivables went up about 29%. They're about in line, and those are more heavily weighted towards the back part of the quarter. I guess if you calculate the DSOs there, they're not out of whack. We weren't extending terms for sales and trading off sales for terms. I'm not worried about the receivable position. What I'm actually pleased about too then on the flip side is on the inventory side, we reduced inventories around $25 million. That obviously goes into receivables, and then we'll collect that in the fourth quarter. Typically, if you look at the seasonality of our free cash flow, fourth quarter is typically a big quarter for us. From a free cash flow standpoint, this year will be no different.
It'll probably be even more so this year because we did have that higher inventory levels coming out of the second quarter that we're monetizing, that we'll monetize in the fourth quarter. Feel good about our guide there relative to the free cash flow in the fourth quarter.
Okay. can you talk about, you had some near misses on some of these hurricanes, Patricia, Joaquin, how that does or doesn't impact your business in terms of it, quote, "Being an awareness event," even though there's not a lot of power outage?
Yeah, it doesn't have much impact. There's a little bit of pre-activity with the Joaquin event, and a lot of pre-activity is focused on portable gens. There's a little bit of that which we called out in our prepared remarks today that impacted some of the growth that we saw in portable generators in the quarter, but it's a very small amount. like Patricia, it's not a populated area, so not even any really pre-storm type of activity. Unfortunately, that was such a short-lived event. Those types of storms, any kind of tropical storm, they don't like mountainous ranges. Unfortunately, you get the mountains pretty fast inside of Mexico there. not a tremendous amount of uptick, Jeff. Obviously, it gives us a platform to continue to remind people about from an awareness standpoint around home standby.
unless you actually lose power, it doesn't have a major impact.
Okay, just finally, telecom. Sounds like you're hitting easier comps, any kind of green shoots or expectations for improvement into 2016 there?
Obviously, we're gathering our guidance here for 2016 and talking to our customer base there. We'll give a more finite read on that, I think once we get around the bend here with our full 2016 guidance. At least for the fourth quarter, we've kind of maintained basically the same kind of pacing that we've been seeing here as of late, which is one of somewhat muted CapEx spending. There's a possibility that these guys, from a calendar standpoint, they tend to maybe burn a little bit of budget before the end of the year. We're not sure if that's going to exist this year. Our guidance is, I think, properly reflecting our views on that.
As far as green shoots for 2016, I think we'll withhold our commentary till we provide full 2016 guidance, and we'll have a better read on it at that point.
Okay.
Our next question comes from Jerry Revich from Goldman Sachs. Your line is open.
Hi, good morning.
Good morning, Jerry.
Morning, Jerry.
I'm wondering if you could talk about how conversion rates have tracked for your direct mail and infomercial activities, and can you comment on PowerPlay dealer adoption over the course of the quarter as well?
Yeah. Those programs that you mentioned, Jerry, they continue to be very effective, even more so in this quarter, as we said, with the de-stocking that took place and the improved end market demand around In-Home Consultations, which is the front end of that process, kind of a leading indicator for us. That comes out of the spend that we do to drive leads mainly around our infomercial-related spend. Also we've recently, this year in particular, branched out further more on digital campaigns, as well as some of the kind of traditional mail stuffers. The cost per lead, if you will, has remained actually relatively constant across. It varies seasonally. I think the one thing we are learning is the pacing of that seasonally, kind of when to dial up spending and when to dial back.
We watch very closely our cost per lead, cost per IHC, the conversion rates of those leads into IHCs, that kind of helps us pace our spending around the different media things that we choose. We obviously evaluate the different media spend items kind of in relation to one another in terms of where we get our best bang for the buck. In my opinion, there's still more to be done there. In light of the fact that we haven't had any kind of major events in three years, we're really quite happy with that. I think the one thing, we've recently done some updated brand awareness studying internally here, and we do this on an annualized basis or every other year in the category and also the brand. I'm talking home standby now.
We continue to see very nice increases in general awareness of the category, and more specifically, of the Generac brand within the category. We think that those are really positive things for us when we do finally get those outage events once again, and they'll happen again. We're kind of a little bit unsure of how positive that kind of uptick may be the next time around, given that we've been doing a lot to seed the market with a lot of those types of awareness-building things. I would say all indications today are this is a positive thing that we're going to continue to do. We got to keep it fresh. We've been changing up the things that we do and trying some new things.
By and large, I think we're nicely offsetting some of these headwinds that are being naturally created by not having any major outage events.
Okay. Aaron, over the past couple of years, your standby sales, it looks like, have been up in the fourth quarter versus the third quarter. Does the magnitude of in-home consultations that you folks have had in the third quarter support a similar trend this year? Can you quantify at all how much in-home consultations have improved for you?
Yeah. IHCs, they kind of picked up in the second quarter into the third quarter, and that's kind of our pacing here. What we saw as home standby shipments for the third quarter, we feel is probably pretty relative to what we're going to see in the fourth quarter. We're not anticipating any major lift off of that. If you recall, last year, we did see a very nice build in home standby sales, but there were some underlying events that occurred, even though they were somewhat localized in kind of the Michigan area around Detroit, and also the Toronto area experienced some fairly significant outages, that drove IHC levels even higher into the fourth quarter and created a situation where that market was very good for us, and we called that out last year. Really outperformed our expectations.
That'll be a tough comp.
That's going to be a tough comp for us in Q4, we're not anticipating that in the guidance we've offered today.
Okay. Thank you.
You're welcome.
Our next question comes from Christopher Glynn from Oppenheimer. Your line is open.
Thanks. Good morning.
Morning, Chris.
Chris.
Hey, guys. Just to kind of put the channel inventory conversation on the terms that we talked about last quarter, I think you said entering the third quarter, they were flat year-over-year on the channel, and then that was improved from up about 10% entering the second. Is that kind of flat dynamic entering the third? That is kind of a static situation now, is that correct?
It is. Just to clarify on that, Chris, the first quarter was up just slightly when we ended the first quarter year-over-year. Second quarter was up considerably.
Yeah. Coming into third quarter, the clarification is that it was up slightly as well. You commented flat, but it was actually up slightly.
Yeah.
Coming into the fourth quarter now, the field inventory is flat but higher on a days basis.
Sequentially on the fourth quarter, I guess you just kind of answered it for residential, but it looks like fourth quarter pretty similar to the third quarter overall. Could you comment on any kind of nuances relative to that comment that are obvious to you guys internally?
I think our comments there is IHCs and activations typically move up seasonally in the second half of the year. We saw that ramp start in the third quarter. We think that the pace for the third quarter is going to extend into Q4. That's how we've modeled it.
I think I would preface those remarks by saying that we are in an ultra-low outage environment, and so any kind of outage activity could impact that positively, although we've not contemplated that in the guidance we're issuing today. It is something to remember. We get around the corner here three years in a row without any major events, 10 years in Florida without a hurricane, and these are pretty low numbers. These patterns tend to roll in cycles. We've seen it before. They typically run a couple of years, two to three years, and kind of feels like just statistically speaking, we should be getting around the horn here and probably we would expect to see probably something in the future, just mathematically from a probability standpoint. Again, we don't control that.
All we can do is be ready for it and get our business in a position to react when it does happen.
Okay. Then the upside on residential in the third quarter relative to your expectations, that was just kind of elbow grease and traction around the PowerPlay and the amp and the different things that you guys work so hard on?
It was. Even though outages kind of remained pretty much in the same, that kind of 40% down year-over-year, actually in Q3, maybe even ticked down a bit over the first half average, we saw some, again, nice receptivity to some of the awareness building things that we do. Some of our sales promotions and things had better effectiveness in the third quarter than in the second quarter, mainly as a result of that de-stocking that we've talked about. I think the channel was just in a better place. First quarter was, just to put it in perspective, there's a psychology here a bit when you look at We've got 5,300 dealers, that dealer base coming out of a really strong Q4, Q1 was just really quiet in terms of end market demand. That really kind of shell-shocked the dealers.
We ended up a little bit higher inventory position there. Then obviously Q2, that exacerbated the issue around uptick in the normal seasonal patterns we would've expected around kind of load in for the season. By normalizing field inventories here in the third quarter, we saw that there was, I think the end market and our distribution, our channel was in a little bit better buying mood, relative to kind of the pace of installations out there and the pace of activity around In-Home Consultations and some of the things we do.
Again, there is a psychology piece of this, and it kind of ebbs and flows a bit and trying to kind of nail it one quarter to the next can be a little bit challenging because there's just not a lot of visibility there other than some of the things like IHCs that we have as leading indicators. Even that is really just one data point. I think it was just to answer your question more directly, just a lot of the initiatives that we've got working on, and being diligent about continuing to push our messaging to get PowerPlay adoption at the dealer level, which was another question asked earlier. We continue to see improved adoption of the PowerPlay selling system in dealers. All of those things contributed, I think to a stronger Q3 on res than we originally were anticipating.
Yeah, that's really interesting and helpful. Your mention of the distribution being in a better buying mood relative to the pace of installations, would you characterize that as all in balance with one another?
It is. Yeah, definitely. The psychology of a small business, those 5,300 guys are, that's the majority of our sales. They're all small businessmen. Small business people. From the standpoint that these are big decisions for them to take a chance even on buying one or two units for a season. If they're not in a buying mood because they just don't see the activity, if the phones aren't ringing, if they're not seeing the leads, which was the case kind of coming out of the first quarter and into the second quarter, it can really dampen their buying kind of mood, again, to use the same word. We saw that improve in Q3, I think that goes to the heart of what is in the improvement in Q3's numbers, the outperformance in Q3's home standby numbers in particular.
Thank you.
Yep.
Our next question comes from Charley Brady from SunTrust. Your line is open.
Yeah, thanks. Morning, guys.
Morning, Charley.
Morning, Charley.
Have you guys mentioned expectation for gross margin for the year?
We didn't flat out mention.
Not gross margin
gross margins, when you look at the updated outlook, we talked about $270 million of EBITDA, that would be just south of 21% EBITDA. The gross margin assumption underlying that wouldn't be any different than our previous guidance.
Okay.
Where there's a slight degradation is just OpEx leverage on the slightly lower sales volume.
Got it. Okay, thanks. Can you just talk a little bit about Australia? You've got, I guess, I don't know if it's a partnership or a distributor agreement, but I didn't hear you mention anything about what's kind of happening with that kind of potential growth engine.
Yeah. The Australia market continues to be an interesting space where we think, frankly, we viewed that as a should be a good home standby market. It's an island surrounded by water that gets severe weather every now and again. It has higher home values that are similar to-- actually, the home values in Australia, on average, are higher than that of the U.S., which is a unique situation in and of itself. We've called that out. Charley, we had a partnership in place a number of years ago from a distribution standpoint. That's had mixed results, to be very frank. The partnership's actually done a little bit better with some of our engine-powered tool business than it has with home standby.
I think the challenges of an installed home product and using a distributor who is a little more focused on outdoor power equipment really kind of manifested itself in that not turning out quite to our satisfaction. Now we continue to focus on it. The other challenge, when we announced that partnership, the Australian market's gone through a bit of a pullback economically with the drop in commodities and mining in particular. It's not been the market that it was back when we signed that deal. We remain kind of committed to really developing the home standby category on a much more global basis, but distribution remains probably some of our biggest hurdle there.
Our M&A pipeline continues to contemplate geographic expansion, which the important piece of that would be distribution, and it would be more likely companies that are more adept at dealing with installed stationary products as opposed to either mobile products or engine-powered tools. It's not to say that our M&A pipeline doesn't have any of that in it. It's just our focus near term here is expanding our geographic reach and our stationary products, and that would also be in terms of the impact it could have positively on Australia as well as other regions.
Great. Thanks, guys.
Thanks, Charlie.
Our next question comes from John Quigley from Canaccord. Your line is open.
Hey, good morning, guys.
Good morning, John.
Hey, York. On the distributor base, it sounds like you guys have battle tested that number 5,300. You talked about their order patterns getting back to normal maybe in Q3. When you go back into that Q1 and Q2 period, did you see a lot of churn? The folks you have, you think they're sticking with you? How do you feel in the constitution of that base as we're past what seems to be a bad patch?
No, I'll tell you, our dealer base, obviously it's an area of intense focus for us because it's an important channel for a lot of reasons. There's always been historically a fair amount of churn in that channel. It's just small contracting businesses, by their very nature, have somewhat of a specific half-life. I think the average length of time in business is about seven years. Those businesses consolidate, they vaporize, people go out of business, they sell their business, they retire. Again, these are small businesses that generally only a few employees, usually not a lot of access to working capital. We do a lot to help them. I would say that the churn that we've seen is not any different than what we've seen historically.
In fact, we added 100 dealers on a net basis here in the quarter over last quarter, which was, I think, again, in light of the backdrop with outages here, the fact that we continue to grow that base. Now we're only a little bit off of our peak from several years ago. I'm very pleased with the fact that we've held in there on that base. We also, it's not just holding in there, but actually getting better alignment with that base. The programs that we've put in place with PowerPlay, many of our programs around training, not only the technical training around the product, of course, but the sales training that we do. And now more recently, the focus on installation training.
Today, that average ticket, when we look across our book of business there on all the PowerPlay proposals that get generated, we're still in that kind of $7,000-$8,000 range, really closer to $8,000 in terms of all-in cost, and that's a fully installed, that includes permitting, fuel hookups, everything. It's still just too high. We really just need to bring that down. From my vantage point, we've got a lot of opportunity to continue to work with distribution to make them more efficient at installing products. It also improves our bandwidth when times do get in times of heavy demand. One of our constraints in expanding more quickly is the fact that that distribution base doesn't expand rapidly.
It expands over time. If you have a spike in demand from a major event, we get constrained on both sales and installation bandwidth. Anything we can do on our side to help make those dealers more efficient in both selling and closing sales as well as installing products behooves us positively when we do get spikes in demand. We're very focused on that. We're very focused on the partnership that we have with our distribution. We're very focused on building our brand. As I said before, we've done a number of studies here over the years that we continue to monitor kind of the impact that the things that we're doing to create awareness in the category and more specifically around our brand are having in the marketplace, and we're very happy with that. We believe the Generac brand is becoming very synonymous with the category.
We see that in parts of the country, not only with our dealers, but end users who refer to their product as a Generac as opposed to a home standby. In fact, we even get calls on some of our competitors' products when there's problems with those products. They call us because they think the category is a Generac, and they look it up on the internet, and they end up calling us to ask for service. Obviously we're flattered with that, but we can't really help them, so we send them back to wherever they need to be, otherwise we can sell them a new system. We're very happy with our progress on those events and also the progress that we've made with distribution.
My last question here, it could be considered unfair, but I'll ask it anyway. There's a lot of talk about your underlying earnings power, and we've seen that seasonally change. You came back pretty strong in Q3 after a tough Q1 and Q2. Do you think Q1 and Q2 are representative of some of the worst markets that you can imagine? I know you've got some new businesses with Country Home Products and MAC and things like that, but what do you think about the underlying earnings power here with $50 million plus in a weak quarter and we've seen $80 million to well over $100 million in a good quarter. I know it's unfair, but what are your thoughts on that? I know many of us are talking about it. Thanks, guys.
Yeah. It's great that you guys are talking about it, I don't think it is unfair because we're talking about it. This company, we peaked at over $400 million in EBITDA a couple of years ago, so the earnings potential for the company is dramatic, in my opinion, and I'm biased of course. The things that we've done since that point, not only in the acquisitions we've done, as you pointed out, John, also I think in the things that I just talked about in terms of alignment with distribution, the programs we've put out there, the efforts that we put forth in growing that residential standby market and some of the things that we've done to grow awareness of the category and our brand.
My previous comments that we're not exactly sure how some of that stuff, when it does get back to an environment of stronger outage activity, I'm not exactly sure how that's going to play out. I can only say it's going to be positive, I just don't know how positive. In terms of how much the earnings power can expand, I know that I've seen it in my history here. We get into periods like this where we have cycles, there are down cycles. I have to admit, I've seen very few cycles like we've experienced this year where basically all of the end markets we serve have been down. I think the one qualification I would make would be around oil and gas, which kind of took a second leg down from the second quarter to third quarter.
Pricing on oil seemed to stabilize above $50 a barrel then now has come back down and there's talk that it could be headed into the 30s. I think the mobile equipment business is going to be searching for a bottom here as we exit 2015. I think though that there are some other good things that are going to come on that, we'll talk more deeply about the 2016 guidance on the next call. I flat out feel that this company has tremendous earnings potential. The leverage that we get when we expand the top line is dramatic. You guys have seen what our EBITDA margins have done. Even in times when you take into account the dilutive impact that some of these acquisitions have had on EBITDA margins, the core of this business has just tremendous upside.
I think that it's one of the reasons we initiated the repurchase program because we just feel the shares are undervalued at the current prices, we feel the best use of our capital is to buy back shares because we believe so much in the future of the business and the earnings potential of the business down the line. I think everything that we're doing is reflective of our confidence in the business. It's reflective of our capital deployment strategies that we've talked about ad nauseam with investors and with the analyst community, obviously internally here with our board. Again, I'm biased, I'm answering your question, whether fair or unfair, but that's my answer.
At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Aaron Jagdfeld, President and CEO, for closing remarks.
Thank you. We want to thank everyone for joining us this morning. We look forward to our fourth quarter report and full year 2015 earnings results, which we anticipate will be in the mid-February timeframe of next year. With that, we'll end the call. Thank you very much for your time this morning.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.