Generac Holdlings Inc.

Good day and thank you for standing by. Welcome to the first quarter 2021 Generac Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Michael Harris. Please go ahead.

Thanks, Alicia. Good morning and welcome to our first quarter 2021 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. Our first quarter results were incredibly strong, as net sales, adjusted EBITDA, and adjusted EPS were all-time records for Generac, despite Q1 historically being the low point for the year seasonally for our business. First quarter revenue, margins, and profitability were all significantly ahead of our previous expectations. The revenue outperformance was very broad-based and was highlighted by increased shipments of residential products primarily due to home standby and portable generators. Home standby build rates were ahead of plan for the quarter and demand further accelerated due to continuing traction with the home as a sanctuary megatrend, as well as being driven by significantly higher power outage activity in recent quarters, including the major event in Texas, which also led to a sharp increase in demand for portable generators. Revenue from CNI products also outperformed expectations during the quarter domestically with our industrial distributors, national telecom customers, and rental customers, as well as internationally, mostly in the European region. Also, in terms of profitability, adjusted EBITDA margin came in considerably higher than our previous forecast, driven mostly by greater operating leverage from the significantly higher revenue achieved during the quarter. Year over year, overall net sales increased 70% to $807 million, and also increased sequentially from the fourth quarter of 2020, which was our previous all-time record. Growth in the quarter was broad-based, led by a dramatic increase for residential products that more than doubled compared to prior year, as shipments for home standby generators were much higher due to record production levels. Shipments of portable generators also increased driven by the major outage event in Texas and higher outage activity overall in recent quarters. Deliveries of chore products and clean energy products, such as our power cell energy storage system, also grew at a significant rate as compared to the prior year, and shipments of CNI products returned to strong growth in the quarter. Gross margin expanded 370 basis points compared to prior year, and adjusted EBITDA margin increased 840 basis points over the prior first quarter to 26.5 percent, which was the highest EBITDA margin reported since the fourth quarter of 2013. Before discussing our first quarter results in more detail, I'd like to spend a few minutes on the major outage event that occurred in Texas in mid-February. This was a very unique winter event with unusually cold weather in a state that represents our second largest addressable market opportunity for home standby generators, and highlighted yet another example of the vulnerabilities of the current electrical utility model. This was a high-profile power outage, in fact, the fifth largest event recorded since we began tracking outages more than a decade ago, with rolling blackouts across the state that lasted for several days and impacted over 4.5 million utility customers at its peak. With the backdrop of the ongoing home-as-a-sanctuary trend, we believe the outage in Texas was a dramatic reminder of the pain of losing power in today's day and age, and further amplified the importance of having power security for your home or your business. Driven by this event, we experienced yet another dramatic acceleration in demand for home standby generators from the already elevated levels, increasing our lead times to approximately 28 weeks for our most popular models as of today. As a result, we have further increased our capacity expansion plans for home standby as we target even higher production levels in the second half of the year through a faster ramp of our new South Carolina facility and further expansion of capacity at our Wisconsin facilities. When combined with the broad-based strengthening of demand across the rest of our business, including a significant recovery in C&I products, which are also benefiting from the major Texas event, we are significantly increasing our full-year revenue and earnings outlook for 2021. We'll provide additional details regarding our updated guidance in the outlook portion of our prepared remarks this morning. Now, discussing our first quarter results in more detail. Several key metrics that we monitor closely for home standby demand continued to be exceptionally strong and rose even further during the first quarter, benefiting from the major event in Texas. The combination of in-home and virtual consultations once again increased dramatically compared to the prior year, with year-over-year appointments more than five times higher during the first quarter as compared to the first quarter of 2020. The strength was broad-based across the U.S., with the vast majority of states showing triple-digit growth once again, which we believe provides further validation of the need for backup power given the home is a sanctuary megatrend. Activations, which are a proxy for installations, grew again at a strong rate compared to the prior year, and we're also broad-based in strength across all U.S. regions. The power outage severity environment continues to be very active during the quarter and trended well above the long-term baseline average driven by the Texas event, but also ice storms in several states, severe storms in the Pacific Northwest, outage events in California, and smaller-scale rolling blackouts in other states due to severe cold temperatures. In addition, we continue to expand our distribution footprint as we ended the first quarter with approximately 7,700 residential dealers. a sequential increase of about 400 new dealers as compared to the fourth quarter of 2020, and approximately 1,200 dealers higher over the last 12 months, which includes the addition of a number of new dealers in California and Texas. Early here in the second quarter, these key demand metrics for home standby have continued to trend much higher relative to last year, as home consultations are running more than double the prior year's level through April. We continue to believe that the ongoing strength in the product category can be attributed to several factors, which are leading to home standby generators becoming more mainstream as homeowners have an increasing awareness of the need for power security as they continue to work more from home, learn from home, entertain from home, and shop from home. Now I want to provide an update on our rapidly growing clean energy product offering. The secular growth opportunity within the US market for renewables, energy storage, energy monitoring, and energy management remains very compelling and has gained further momentum so far here in 2021. As previously mentioned, Shipments of our power cell energy storage systems grew at a significant rate as compared to the prior year, and demand paced ahead of our expectations during the first quarter. In addition to the strong demand, key performance indicators for our clean energy-related initiatives continue to show favorable trends. In-home and virtual consultations grew rapidly as compared to the prior year, and were very encouraging sequentially as compared to the fourth quarter. System activations, which are a proxy for installations and commissioning, also grew at a tremendous rate during the first quarter as compared to the prior year, and orders for clean energy products were very strong on a sequential basis during the first quarter, and this strength has continued here in April. We also have had encouraging success further building out our installer network as we've trained and certified approximately 2,000 dealers as of the end of the quarter, with approximately 800 dealers registered on our PowerPlay CE selling system. As we discussed during the last earnings call, we have an exciting pipeline of innovative clean energy products, which are expected to come to market throughout the current year. New product launches include deep integration of our Power Cell storage systems with our legacy generator products, the ability to more easily and cost-effectively add a Power Cell system to an existing solar installation, and the launch of a new purpose-built generator that can be combined with solar and storage to allow an end user to operate independently of the power grid. Additionally, later this year, 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 these product launches will further enhance our competitive position and differentiation in the energy storage, monitoring, and management markets as we focus on whole home storage solutions with load management capabilities that provide both the energy independence and flexibility that we believe consumers really want in these types of systems. The solar plus storage market continues to expand rapidly within the U.S., and we are making good progress and building considerable momentum for our energy storage products. Accordingly, we are increasing our full-year revenue outlook as a result of higher demand and our expanded distribution in this growing market. We now expect shipments of clean energy products to increase between 75 to 100 percent as compared to the prior year levels of approximately $115 million, which is an increase from the previous forecast of 50 to 75 percent growth. In addition, we achieved a second consecutive quarter of profitability for clean energy products during the first quarter, and we expect this trend to continue sequentially for the remainder of the year as we further scale power cell system volumes. Recall that in October of last year, we acquired Embala Power Networks, a leading grid services technology provider. And I'd like to provide a quick update on the progress we're making in developing a roadmap for integrating Embala's Concerto software platform into our existing generator and energy storage products. As the market for grid services continues to develop, We believe integrating Embala's technology will enable us to improve our value proposition and users with our legacy products, as well as allowing us to develop various new revenue streams in the years ahead. These will include the existing software as a service platform that Embala offers, as well as a variety of operational services that enable a more turnkey solution, and ultimately performance services that could deliver megawatts of power to various potential customers. During the first quarter, we began marketing our initial solutions, which involve our legacy products delivered with built-in capabilities to connect to the EMBALA platform. These EMBALA-ready Generac assets, known as Distributed Energy Resources, or DERs, can be available to bundle together to form a virtual power plant or VPP solution. We're excited to currently offer this initial capability with our CNI natural gas generators, and as the year progresses, we'll begin to introduce this feature with our home standby generators and our PowerCell energy storage systems. Also, over the last several quarters, the EMBALA and Generac commercial sales teams have been working closely together on potential projects with utilities, energy cooperatives, and energy aggregators, which has led to a considerable increase in quoting and proposal activities during the first quarter. In addition to the great performance of residential products to start the year, CNI products were also very strong as revenue returned to growth during the first quarter and increased at a strong rate compared to the prior year broadly across a number of markets and geographies. as demand continues to recover at a faster pace than we had previously expected. Net sales of CNI stationary generators through our North American distributor channel returned to solid growth in the quarter, with project quoting activity continuing to recover from the beginning of the pandemic last year, and once again growing at a solid rate as compared to 2019 levels. This is leading to an improved overall order outlook for this sales channel, and as a result, we're expecting attractive growth during the year. We also are expecting solid growth from the energy systems business. This is our industrial distributor in Northern California that we acquired last July, as our investments and integration activities are producing results in this large and rapidly growing power generation market. Shipments to telecom national account customers increased significantly during the quarter as compared to the prior year, and we're well ahead of our expectations. Several of our larger telecom customers have materially raised their capital spending outlooks for the year, leading us to now expect a substantial increase in telecom shipments during the current year relative to our prior forecast. The catalyst for the additional spending on backup power in this important vertical can be attributed to a number of factors, including the elevated power outage environment over the last several years, the power security mandate in California requiring a minimum of 72 hours of backup power at all tower locations, and the build-out of wireless carriers' next-generation networks. The long-term demand outlook for telecom backup power remains very compelling, driven by the increasingly critical nature of wireless communications networks as this infrastructure shifts to the next generation 5G architecture. Additionally, we gained further traction in the quarter with our LEED gas initiatives through increased quote activity and improved project close rates for our natural gas generators that are used in applications beyond traditional emergency standby power generation, including their use as distributed generation assets. This is an emerging part of our CNI business that already had good momentum entering the year, and the major outages in Texas have created additional demand for these products. Shipments of mobile products to national account rental customers were lower during the first quarter, but exceeded our previous expectations as the rate of decline slowed relative to recent quarters, and we expect a return to growth for these products during the second quarter. As we mentioned during our last call, we expected shipments of mobile products for full year 2021 to improve from prior year levels as national rental account customers increased their spending on fleet equipment due to improving utilization and rental rates. Several of our large national rental customers have recently increased their capital spending plans even further, and as a result, we're increasing our outlook for these products as it appears a fleet replacement cycle has begun. We remain optimistic about the long-term opportunity for mobile products with the compelling megatrend around the critical need for infrastructure improvements, which could finally benefit from economic stimulus plans recently announced by the current administration. Outside of North America, we returned to growth during the first quarter with revenue increasing at a solid core rate of 10%, compared to the prior year, primarily due to growth in the European region that is recovering from the impacts of the pandemic. While COVID-19 impacts and restrictions are still being felt in several international regions, larger project quoting and overall order activity is recovering at a faster pace than previously expected, leading to a significant increase in our international backlog at the end of the first quarter. As a result, our revenue outlook for the international segment has further improved as we now expect strong growth for the full year. with adjusted EBITDA margin expected to expand considerably year over year, benefiting from improved operating leverage on higher sales volumes. Lastly, our international teams continue to make encouraging progress on several important global initiatives around increasing the penetration of natural gas generators for residential and CNI applications and expanding our share in the market for telecom backup power in key regions around the world. In closing this morning, 2021 is developing into a year where our megatrends and macrosecular themes appear to have significant momentum and are moving in the same direction as we are anticipating tremendous growth for our residential products and a significant rebound in demand for CNI products as compared to the prior year. A key focus for our teams is expanding capacity across the business, both within our own facilities as well as ramping our supply chain to enable our ability to continue to scale. Our operations and supply chain teams have been working aggressively to address ongoing sourcing and logistics delays, component availability constraints, and the increasing cost pressures we have been experiencing. We have largely mitigated the impact of these issues up to this point, but the situation remains fluid. That being said, we believe we have appropriately risk adjusted our latest guidance to reflect potential disruptions and additional inflationary pressures that will likely continue to materialize as the year progresses. Lastly, I have to give a shout out to our more than 7,000 employees at Generac that have helped us successfully navigate the pandemic while still providing an incredible level of service to our customers and our partners around the world. The hyperscale growth that we are experiencing is a reflection of their commitment to the execution of our strategy and their dedication to our success. When you combine the strength of our team with our financial strength, we believe Generac is incredibly well positioned to aggressively invest in a number of strategic initiatives to further accelerate our strategy and build out our capabilities as we continue our evolution into an energy technology solutions company. And now I'd like to turn the call over to York to provide further details on our first quarter results and our updated outlook for 2021. York? Thanks, Aaron.