Generac Holdlings Inc.

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full year 2020 earnings call. At this time, all participant lines are in a listen on the mode. After this speaker's presentation, there will be a question and answer session. During this time, you will need to press star 1 to ask a question. If you wish to withdraw, press the pound key. And also, please be advised that today's conference is being recorded If you require any further assistance, please press star zero. I would like to hand the conference over to Mike Harris, Vice President and Corporate Development on Investor Relations. Thank you. Please go ahead, sir.

Good morning and welcome to our fourth quarter and full year 2020 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Yagfeld, President and Chief Executive Officer, and York Regan, 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. The fourth quarter was a tremendous finish to 2020 for Generac, with all-time record performance for both the quarter and full-year net sales, adjusted EBITDA, adjusted EPS, and free cash flow. Fourth quarter shipments, margins, and profitability were all well ahead of our previous expectations. The revenue outperformance was primarily due to higher shipments of home standby generators from better than expected production output. We're also pleased that shipments of power cell energy storage systems met our aggressive expectations during the quarter. The ongoing elevated level of power outages combined with the emerging home-as-a-sanctuary trend continue to drive unprecedented levels of demand for home standby generators across the entire U.S., We continue to aggressively ramp production levels for home standby throughout the fourth quarter to all-time record daily build rates. Despite this expanding production, the ongoing robust demand created substantial backlog for these products at the end of the year, far exceeding anything previously experienced in the history of the product category. Year over year, overall net sales increased approximately 28% on a core growth basis as compared to the prior year quarter. This growth was primarily driven by the dramatic increase in sales of home standby generators followed by the continued ramp of power cell energy storage systems. In addition, the higher power outage activity also drove elevated shipments of portable generators and aftermarket service parts, and chore products also improved at a strong rate as compared to the prior year. Partially offsetting this significant strength was a decline in shipments of CNI products, given the ongoing impacts of the COVID-19 pandemic. Gross margin expanded 180 basis points compared to the prior year, and adjusted EBITDA margin increased 380 basis points over the prior year, to an impressive 25.7%, which was the highest margin reported since the fourth quarter of 2013. Before discussing fourth quarter results in more detail, I wanted to provide some full-year 2020 financial highlights, as well as share some key accomplishments that we achieved during the year. First and foremost, I want to highlight the company's response to the COVID-19 pandemic, as I'm extremely proud of our team's efforts in responding to the crisis as we focused on maintaining our operations to the fullest extent possible. This was particularly important considering that our products and services are both essential and critical to help keep a variety of networks and infrastructure up and running, including hospitals, healthcare clinics, 911 call centers, and wireless networks. Equally as important, we accomplished this while at the same time implementing a wide range of preventative measures to address the health, safety, and well-being of our employees, customers, suppliers, and the communities across the world where we operate and do business. Through the tireless execution of our nearly 7,000 employees globally during 2020, Generac achieved another year of record financial results across the board, as several metrics far exceeded the previous record levels seen for the full year 2019. Revenue grew 13% for the full year, with adjusted EBITDA coming in at $584 million, an expansion of 290 basis points to 23.5%, and we generated $427 million of free cash flow during the year. Our ability to execute on the step function increase in demand for residential products that has emerged from the new home-as-a-sanctuary megatrend was an important accomplishment during 2020. In addition, the building out of our clean energy market opportunity with the significant ramp in shipments of PowerCell energy storage systems was a key highlight. We also expanded our product and services portfolio with the acquisitions of Energy Systems, our industrial distributor located in Northern California, and Mean Green, a leading manufacturer of an innovative line of battery-powered turf care products. We also made the very strategic acquisition of Invalo Power Networks, which enables our entrance into the developing market for grid services. We launched important new products during the year with the introduction of the 24-kilowatt home standby generator, the market's most powerful air-cooled unit with built-in energy monitoring. We also introduced the industry's largest rich burn industrial natural gas generator set at one megawatt of output, allowing us to target new market opportunities. All of these key accomplishments, as well as our execution on a number of other strategic initiatives, enable us to make important progress on our continuing evolution to an energy technology solutions company. Our prior year accomplishments provide us with tremendous momentum as we head into 2021. The guidance we are initiating this morning calls for significant revenue growth of between 25 to 30 percent, highlighted by unprecedented home standby demand, continuing expansion of the clean energy markets, and recovering CNI markets. Adjusted EBITDA margin is expected to expand to 24% to 25% for the full year 2021, despite near-term supply chain concerns related to capacity constraints, increasing cost pressures, and logistics delays across the business as we enter the new year. York will provide more details on our 2021 guidance in the outlook portion of our prepared remarks today. Now let me provide a few more details on our accomplishments across the business for the fourth quarter and for full year 2020. Several key metrics that we monitor closely for home standby demand include continued to be exceptionally strong during the fourth quarter. The combination of in-home and virtual consultations once again increased dramatically compared to the prior year. Broad-based strength was experienced across the U.S. during the fourth quarter, similar to the trend seen in recent quarters, with the vast majority of states showing triple-digit growth, which we believe provides further validation for the emerging home-as-a-sanctuary trend. Activations also grew at a strong rate compared to the prior year, led by significant increases in the south central, southeast, and northeast regions. The power outage severity environment also continued to be quite favorable and trended well above the long-term baseline average, benefiting from a record Atlantic hurricane season, early winter storms, and continued power shutoffs in California. We also ended the fourth quarter with approximately 7,300 residential dealers, an increase of approximately 800 dealers over the last 12 months. This includes the addition of a significant number of new dealers in California during the year, as we ended 2020 with approximately 550 dealers in the state. Importantly, thus far in the first quarter, these key demand metrics for home standby have continued to trend much higher relative to prior year levels. Home consultations are tracking at approximately double the prior year levels through early February. We believe this increase can be attributed to several factors that are leading to the product category becoming more mainstream, as homeowners have an increasing awareness of the need for power security as they continue to work from home, learn from home, entertain from home, and shop from home. With demand for home standby generators at all-time highs, we continue to aggressively ramp our supply chain and production output, and we achieve progressively higher record daily build rates throughout the fourth quarter. We expect to further expand capacity for these products with our announcement yesterday of plans to open a new manufacturing assembly and distribution operation in Trenton, South Carolina. The facility will support increased demand for home standby generators and certain other energy technology products and serve as a distribution center to customers in the southeastern part of the country. creating approximately 450 new jobs over the next two years. The facility is expected to be operational by mid-year, and once fully ramped, is projected to increase home standby capacity by approximately 75% relative to our previous normal levels as we entered 2020, with the ability to further expand the facility well beyond its current size in the future. Our operations teams did an amazing job during 2020, ramping production output of home standby generators to record daily build rates by the end of the year, But despite the significant increase in output, lead times for home standby generators continue to expand from the approximately 18 weeks at the end of 2020 to approximately 20 weeks today. As a result, the substantial backlog for these products continues to grow so far here in the first quarter, despite our normal seasonal low point for residential products, as home consultations and orders remain very robust. Now I want to provide an update this morning on our rapidly expanding energy storage systems effort and recent entrance into the grid services markets. We made tremendous progress during 2020 with our continuing transformation into an energy technology solutions company as we significantly ramped deliveries of our PowerCell energy storage system and with our entry into the market for grid services through the EMBALA acquisition last October. The secular growth opportunity within the US market for renewables, energy storage, energy monitoring, and energy management systems remains very compelling and has considerable momentum as we head into 2021. As previously mentioned, Shipments of our PowerCell energy storage systems met our aggressive expectations during the fourth quarter, as revenue for these products continued to ramp as they increased approximately 75% on a sequential basis, and were a key contributor to the company's year-over-year growth. Overall for 2020, shipments of PowerCell energy storage systems increased significantly during the first year of commercial launch, particularly during the second half, and were in line with our previous guidance of approximately $115 million for the full year. The tremendous growth in energy storage from essentially a startup business was due to the important advances we have made in growing our capabilities around marketing, distribution, product development, and sourcing of these products. We further developed and refined our targeted marketing and home consultation processes and have been very encouraged by the trends with sales leads for PowerCell systems as they continue to be strong during the fourth quarter and have increased further here in the early parts of the first quarter. System activations, which are a proxy for installations and commissioning, also continued to ramp notably during the fourth quarter, with this strength continuing so far through the early part of 2021. An important element of expanding our sales and marketing efforts for clean energy is the progress we continue to make building out the distribution network for these products, as we trained approximately 4,200 energy storage consultants or contractors in 2020. We continue to receive positive feedback from our growing dealer base regarding the ease of installation, the whole home power and capacity of the power cell systems, and the qualified sales leads being generated for them. We have also continued to advance our supply chain capabilities through increased volume and reduced system costs and achieved our first full quarter of profitability during Q4. We also had several important new product introductions last year, and we have a very strong pipeline of innovative new clean energy-related products that will be coming to market over the next several quarters. This includes deep integration with our legacy generator products and includes the launch later this year of a purpose-built generator solution that can be combined with a solar and storage system to allow an end user to operate independently of the power grid. Additionally, we will be launching the ability to more easily and cost effectively add a power cell storage system to an existing solar installation. And later in 2021, we expect to launch a new load management system that will be paired with our existing PowerView energy monitoring platform to allow a homeowner to more fully control their power generation and consumption. We believe this system will be industry leading in terms of the technology and cost and will enable far greater control at the circuit level than is available today. When added as part of a solar and storage installation, a homeowner could effectively tailor their system to optimize for lowest cost or longest duration or some combination depending on their preferences or certain other factors. An example would be to allow the system to react to a power outage by prioritizing those loads deemed critical by a homeowner to extend the duration of their available energy storage. We believe these product launches will further enhance our competitive position and differentiation in the energy storage monitoring and management markets as we focus on whole house storage solutions with load management capabilities that provide the energy independence and flexibility we believe consumers really want in these systems. The solar plus storage market continues to expand rapidly and we expect to see significant year over year growth during 2021 as shipments of power cell energy storage systems are anticipated to increase substantially as we're expecting them to grow approximately 50 to 75 percent as compared to 2020 levels. Recall early in the fourth quarter that we closed on the acquisition of Embala Power Networks, a leading distributed energy resources technology company based in Denver, Colorado. Embala's best-in-class software platform, called Concerto, gives utilities, grid operators, and energy retailers the ability to connect and utilize distributed energy resources, also known as DERs, to help support the operational stability of the power grid, thereby enabling us to participate in the nascent and growing market opportunity for grid services. DER assets, which include our legacy residential and CNI generators, power cell energy storage systems, and load management devices, can be connected to the Concerto platform and can be aggregated into a decentralized and virtual power plant network, or VPP. A VPP provides flexible capacity to address peaks in electricity demand, variability in supply due to increasing use of renewables, and when resiliency is needed as a result of power outages. While still very early in the integration process, we have made progress in developing a roadmap for integrating Embalus software into our existing generator products and energy storage systems as part of an overall plan to provide a full suite of solutions for utilities, energy retailers, grid operators, and end users. As the market for grid services continues to develop, we believe the integration of Embalus technology will enable us to not only improve our value proposition to end users with our legacy products, but will also allow us to participate and develop new revenue streams in the years ahead. The solutions will be built around our products that generate, store, and manage power, and that can be aggregated and controlled, resulting in the potential for revenue from sales of software platforms, turnkey operations services, and ultimately performance services that can deliver megawatts of power. All of these efforts are targeted at enabling the equipment we provide to be connected more seamlessly as DERs in grid services applications, and in turn, improve the value proposition of these assets, which we believe will lead to increased demand for our products. Now, shifting gears, let me provide an update on CNI. As expected, the COVID-19 pandemic continued to have an adverse impact on the overall market for global CNI power generation and related equipment, given major declines in GDP growth rates around the world. While uncertainty remains around the pandemic, we are encouraged that the year-over-year revenue decline moderated at certain end markets began to show signs of recovery. As expected, shipments of mobile products to national rental account customers continued to decline significantly during the fourth quarter, primarily due to the impact of the pandemic. As we dealt with the challenging demand environment for mobile products throughout 2020, we focused our efforts on cost reductions and other restructuring actions, which we began implementing during the second quarter of last year. As we enter 2021, we expect shipments to improve from prior year levels as national account rental customers increase their spending on fleet equipment. We remain optimistic about the long-term opportunity for mobile products as an expected fleet replacement cycle begins and the compelling megatrend that remains intact around the critical need for infrastructure improvements, which could potentially benefit from economic stimulus. Shipments to national telecom customers increased at a significant rate during the quarter as compared to the prior year, with the magnitude of the increase pacing ahead of our prior expectations. We continue to see indications from several of our large telecom customers of an improving outlook, and we expect that to translate into very strong growth in shipments during 2021. Recall that demand trends for these customers can vary from quarter to quarter based on the timing of their capital spending and their project planning cycles. Historically, however, demand for telecom backup power tends to increase after periods of elevated power outage activity, similar to what was experienced with the outage environment during the second half of 2020. In addition, revenue growth during the current year is expected to benefit from the power security mandate in California, which requires a minimum of 72 hours of backup power at all cell tower locations. We estimate that this new requirement in the state, which went into effect at the beginning of this year, could lead to purchases of between 100 to 200 million in new equipment from wireless operators over the next three years. Also, shipments to other national account customers are expected to show a considerable ramp in 2021 as we gain traction with our LEED gas initiatives through increasing quote activity and improving project close rates for our natural gas generators which are used in applications beyond traditional emergency standby power generation, including their use as distributed generation assets. Lastly, net sales of CNI stationary generators through our North American distributor channel were lower in the quarter as expected due to the timing of shipments in the fourth quarter of 2019, which created a difficult prior year comparison. As mentioned on our last call, project quoting activity has largely recovered since the onset of the pandemic during the second quarter, contributing to a higher backlog and improved overall order outlook for this channel. And as a result, we're expecting growth to resume during 2021. We're also expecting growth from the energy systems business, our industrial distributor located in Northern California that we acquired on July 1st of last year, as our investments and integration activities begin to produce results in this large and rapidly growing power generation market. Internationally, the ongoing global pandemic continues to have a negative impact on CNI product demand during the fourth quarter as well. As GDP growth rates slowed materially around the world in 2020, Revenues for our international segment in the fourth quarter declined approximately 6% on a core basis when compared to the prior year. This decline was driven by continued weakness in a number of key regions around the world, but overall international revenue during the fourth quarter was largely in line with our expectations. Similar to our domestic C&I products business, the international year-over-year decline in the fourth quarter was at a notably lesser rate relative to recent quarters as signs of recovery began to appear in certain regions. While COVID-19 impacts are still being felt, larger project quoting and order activity is increasing, and we expect the international segment to return to solid growth during 2021. Also, it's important to reiterate that our international teams remain focused on several critical global initiatives around increasing the penetration of natural gas generators for residential and CNI applications, expanding our share in the wireless telecom backup power segment globally, and entering the emerging energy storage market for both residential and CNI applications. In closing this morning, in recent years, we have continued to make important progress on involving our business model with a focus on clean energy products, solutions, and services aligned with the changing legacy electric utility model. In 2019, we began providing energy storage, monitoring, and management systems as clean energy solutions for residential use. And last year, we entered the market for grid services involving distributed energy optimization, and control software that'll help support the operational stability of the power grid. We've also been focused over the last several years on connecting the legacy standby generators we manufacture, including building out a digital platform that creates tremendous value for our customers and our distribution partners over the product lifecycle. As the leader in backup power solutions, we believe we are in the unique position to enable the potential utilization of these products as distributed energy resources on a very large scale. thereby providing us with a distinct advantage as the nascent market for grid services expands over the next several years. Going forward, we intend to further build out our capabilities as an energy technology solutions provider through organic investment and continued acquisitions. We expect to expand our energy storage capabilities beyond residential applications into CNI markets and eventually globally, and further expand our capabilities with energy monitoring and management devices and grid services. These are incredibly exciting times at Generac, as we've now built an incredible foundation for growth, and we have the financial flexibility to be a major player in developing the energy grid of the future. I'd now like to turn the call over to York to provide further details on the fourth quarter results and some outlook details for 2021. York?