Generac Holdlings Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter 2021 Generic Holdings Incorporated earnings 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 then 1 on your telephone keypad. If you require any further assistance, please press star then 0. At this time, I would like to turn the conference over to your host, Mr. Mike Harris, Vice President, Corporate Development, and investor relations. Sir, please begin.

Good morning, and welcome to our second quarter 2021 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Yagfel, President and Chief Executive Officer, and Yorick 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 Orange 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 Erin.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our second quarter results were incredibly strong with broad-based revenue growth of 68% and with all-time records once again for the company this quarter for net sales, adjusted EBITDA, and adjusted EPS. We're particularly proud of achieving this tremendous top-line growth along with the record levels of adjusted earnings despite the ongoing significant cost pressures, logistic challenge, and various capacity constraints we faced in the quarter across the supply chain. I'd like to thank our teams for their ongoing commitment to our customers. Their dedication and tireless execution have helped us to largely overcome the incredible supply chain challenges that have become commonplace in today's post-pandemic operating environment. Second quarter revenue, adjusted EBITDA, and adjusted EPS were all ahead of our expectations. The revenue outperformance was highlighted by higher shipments of home standby generators as build rates for the quarter were ahead of our previous guidance due to strong operational execution. Demand for home standby generators remains incredibly robust due to a variety of factors, including continued traction with the Home is a Sanctuary megatrend, as well as significantly higher power outage activity over the past several quarters. Revenue from global CNI products also outperformed expectations during the quarter, both domestically and internationally, highlighted by national telecom and rental customers and growth within the European region. The revenue outperformance in these areas was partially offset by lower-than-expected shipments of portable generators, primarily due to supply chain constraints, which has led to lower preseason stocking levels with our retail channel partners. Adjusted EBITDA dollars were also ahead of our previous forecast, driven mainly by the higher shipping levels, but EBITDA margin was slightly below our expectations, giving the higher input costs in the quarter. Year over year, overall net sales increased 68% to $920 million and also increased sequentially at a strong rate relative to the first quarter of 2021, which was the previous all-time record. The growth in the quarter was driven by broad-based strength across the business as both residential and C&I products grew dramatically as compared to the prior year. The growth in residential products was led by robust shipments of home standby generators, which nearly doubled over the prior year due to record production levels. Additionally, shipments of power cell energy storage systems experienced tremendous growth, both over the prior year and sequentially, as demand for clean energy solutions continues to rise alongside the rapidly expanding solar plus storage market. Shipments of CNI products also grew significantly in the quarter as demand continued to recover off the prior year COVID lows, at an accelerated rate across a number of markets and geographies and are now solidly above 2019 levels. Adjusted EBITDA increased 77 percent as compared to the prior year, with the corresponding margin increasing 120 basis points and adjusted EPS increasing 71 percent. Now, discussing our second quarter results in more detail, despite strong prior year comparisons due to the emergence of the home as a sanctuary megatrend and elevated outage levels, home consultations or sales leads for home standby generators remained strong during the second quarter and increased approximately 50 percent as compared to the second quarter of 2020. Consistent with the trends seen over the past year, the strength is broad-based across the U.S. with nearly all states experiencing growth again in the quarter, with more than half of all states showing triple-digit growth led by Texas. Activations of home standby generators, which are a proxy for installations, also grew again at a strong rate compared to the prior year, with broad-based strength across all U.S. regions, including exceptional growth in the Northeast and South Central regions. Overall outage activity, as measured on a trailing four-quarter basis, continued to be much higher relative to the prior comparable period and was well above the long-term baseline average, helping to drive awareness of the home standby category. In addition, we continued to expand our distribution footprint as we ended the second quarter with more than 8,000 residential dealers, adding over 300 new dealers in the quarter. The build-out of distribution remains a critical focus area as we have added approximately 700 dealers since the start of the year and 1,300 dealers over the last 12 months, which includes the addition of a number of new dealers in California and Texas that represent nearly one-third of the increase. Early in the third quarter, these key demand metrics for home standby have continued to trend even higher relative to prior year levels, including home consultations increasing at a strong double-digit rate. We believe 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 and as they are working, learning, shopping, entertaining, and in general, spending more time in their homes. Earlier this month, we achieved a significant milestone by starting production of home standby generators at our new manufacturing facility in Trenton, South Carolina. This facility will provide much needed capacity to further ramp our daily home standby build rates in an effort to reduce lead times, which remain elevated at approximately 28 weeks. With the successful startup of Trenton, combined with a number of other capacity expansion activities, We're now anticipating higher production levels relative to previous expectations. And as a result, we have moderately increased our shipment outlook for these products during the second half of 2021. In addition, we remain on track to an approximate doubling of our current build rates by the end of the second quarter of 2022, which is nearly four times greater than our previous baseline output levels at the beginning of last year. I also want to provide an update on our rapidly growing clean energy product offering. As previously mentioned, we experienced a dramatic increase in shipments of power cell energy storage systems during the second quarter, which was aided in part by a softer prior year comparison as the overall solar market was negatively impacted by a sharp drop in installations due to the onset of COVID-19 pandemic. Shipments of power cell systems also experienced strong growth sequentially as we gained further traction in the rapidly expanding solar plus storage market. In addition to the strong revenue growth, key performance indicators for clean energy continue to show favorable trends. In-home and virtual consultations expanded at very strong rates as compared to the prior year, and sequential trends were also encouraging. System activations, which are a proxy for installations and commissioning, grew at a tremendous rate during the second quarter as compared to the prior year, and also improved on a sequential basis. In addition, we further built out our installer network during the quarter, and we ended the first half of the year with approximately 2,200 trained and certified dealers, with nearly 900 of those dealers registered on our PowerPlay CE selling system. As we indicated on the previous quarter's earnings call, demand for clean energy products has been outpacing supply, which is limiting our growth rates for the category. Throughout the second quarter, strong end market dynamics around energy storage, coupled with our marketing and distribution initiatives, resulted in further strengthening of demand for clean energy products. In addition, our teams made important progress during the quarter with our supply chain execution regarding Power Cell energy storage components. As a result, we're increasing our full-year revenue outlook and now expect clean energy shipments to approximately double as compared to the prior year. In addition, we're driving profitable growth within the product category as we scale volumes and optimize the supply chain. As we've also discussed on recent calls, we have an exciting pipeline of innovative clean energy products expected to come to market over the next several quarters. These launches include generator integration with our power cell storage systems, the ability to more efficiently add a power cell system to an existing solar install, the launch of a new DC output generator that can be combined with solar and storage to allow an end user to operate independently of the power grid, and 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. In addition, we're making our PowerCell systems smart grid ready, which will enable them to be used in virtual power plant applications using EMBALA's Concerto software platform. We believe these product launches will further enhance our competitive position and differentiation in the energy storage, monitoring, and management markets as we look to further build out our clean energy offerings into a complete ecosystem of products and solutions for installers and end users. Consistent with this approach, in early July, we entered the large and growing microinverter market for solar applications with the acquisition of Chilicon Power. Based in Los Angeles, California, Chilicon is a designer and provider of grid interactive microinverter and monitoring solutions for the solar market. We call it the solar plus storage attachment rates are currently between 20 and 25 percent, which essentially means we weren't participating in 75 to 80 percent of the market that is focused on solar-only installations. This strategic acquisition will dramatically increase our served market and help us deepen our relationships with solar channel partners and installers as we expand our clean energy product suite to include microinverters. Industry sources estimate the global market for microinverters and optimizers used in residential applications to be approximately $2.5 billion for 2020. and is projected to grow to approximately $4.5 billion by the end of 2023. We have a proven track record of developing leading energy solutions, and we intend to apply the same playbook that we have previously used for other acquisitions in this space with a focus on scaling the business through our innovative lead generation capabilities, our omnichannel distribution approach, the implementation of a variety of cost-out actions, and by leveraging Generac's extensive supply chain expertise. I'd also like to provide a brief update on Embala Power Networks, a leading grid services technology provider that we acquired last fall. We are making good progress with the deep integration of Embala's Concerto software platform with our existing products, and today we now have this smart grid ready functionality available for all of our CNI natural gas generators, home standby generators, and our power cell energy storage systems. Also over the last several quarters, Embala has been working closely with Generac's commercial sales teams on potential projects with utilities, cooperatives, and energy aggregators, which has led to a considerable increase in quoting and proposal activities for the business so far in 2021. As the market for grid services continues to develop, we believe combining our equipment hardware with Imbolis software is a critical first step by making Generac's products smart grid ready, thereby allowing them to operate as distributed energy resources, known as DERs. These DERs can be aggregated into a virtual power plant or VPP solution. and bundled with turnkey services that should enable us to improve our value proposition to end users, utilities, and grid operators, allowing us to develop various new revenue streams in the years ahead. These will not only include the existing software as a service platform that Embala currently offers, but could also include a variety of vertical operational services that enable a more turnkey solution, and ultimately even performance services that could deliver megawatts of power to various potential customers. The recent heat waves experienced in the US this summer are an important example of the growing need for utilities and grid operators to expand their use of grid services and DER assets. At one point in late June, EMBALA enabled the deployment of hundreds of megawatts of its connected fleet to maintain grid stability, predominantly in the Pacific Northwest and Northeast, in response to the extreme temperatures that created enormous demand spikes for power in those regions. In these instances, the combination of grid services software, and systems, along with DER assets, were used for flexibility response purposes to supplement traditional power plants. We believe systems such as EMBALA's concerto platform and DER assets, like those provided by Generac, will become critically important going forward for utilities and grid operators, who will be tasked with providing stability and resiliency across their networks as more renewable power, which is highly variable, is brought online, and as end users dramatically increase their consumption with the electrification of everything from heating and cooling to to transportation over the next decade. In addition to the great performance of our residential products in the second quarter, our CNI products also had a tremendous quarter, as demand across a number of markets and geographies continued to recover at a faster pace than we had previously expected. Net sales of CNI stationary generators through our North American distributor channel grew again in the quarter at a solid rate, with quoting, project activity, and order volumes further recovering from the pandemic-related lows of last year, with growth well ahead of 2019 levels, and we expect attractive growth for this channel for the full year. We're also experiencing encouraging growth with the energy systems business, our industrial distributor in Northern California that we acquired last year, as our investments, integration activities, and overall increased focus are producing excellent 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 as capital spending by several of our larger telecom customers accelerated, and led to a further increase in projected shipments during the current year. The catalyst for the additional spending on backup power in this important vertical continues to be driven by an 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 power locations, and the build-out of wireless carriers' 5G networks. The long-term demand outlook for telecom backup power remains very compelling, driven by the increasingly critical nature of wireless communications as this infrastructure shifts to the next generation architecture. Shipments of mobile products to national rental account customers were also higher during the second quarter as compared to the very soft prior year, which was negatively impacted by the pandemic. We still expect shipments of mobile products for full year 2021 to improve dramatically from prior year levels, as national rental account customers significantly increased their spending on fleet equipment, with utilization and rental rates continuing to improve. Longer term, we remain optimistic about demand for mobile products with the compelling megatrend around the critical need for infrastructure improvements, which could finally benefit from economic stimulus plans being pursued by the current administration. Additionally, we continue to gain important traction with our lead gas initiatives through increased quoting activity and improved project close rates for our natural gas generators used in applications beyond traditional emergency standby power generation, such as their use in microgrids or other distributed generation applications. Quoting activity and the sales pipeline is growing significantly for these project opportunities, and revenue for these applications increased at a substantial rate during the second quarter as compared to the prior year, and the outlook has further increased for full year 2021. This is an emerging part of our CNI business that had good momentum entering the year, and with the major winter-related outages in Texas and the extreme heat waves occurring this summer, we're seeing increased interest and demand for these solutions. To support the growing opportunities we see in our CNI business, we announced the closing of Deepsea Electronics on June 1st, an advanced controls designer and manufacturer headquartered in the United Kingdom. We believe Deepsea's high level of technical expertise and the added engineering bandwidth their team will give us will be critical to helping us develop and accelerate our product roadmap for the future, bolstering our electronics and controls capabilities and supporting further innovation to meet dynamic needs of the evolving energy technology solutions market. As we advance the use of our products and applications beyond standby power, the need for complex systems levels controls for distributed generation, storage, and other DER assets used in microgrid applications will serve as a key enabler of the decentralization of the power grid in the future. Similar to our domestic CNI products, demand internationally has also rebounded strongly in recent quarters, with shipments increasing at a core rate of 45% in the second quarter compared to the prior year. This growth was primarily due to strength in the European and Latin American regions, which experienced a sharp increase in demand as end markets recovered off the pandemic-induced prior year lows. While some COVID-19 impacts and restrictions are still lingering in several international regions, larger project quoting and overall order activity continue to recover at a faster than expected pace. This is leading to growth in our international backlog at the end of the second quarter, with the order strength continuing early on here in the third quarter. Stronger organic growth combined with the deep-sea acquisition are both driving our revenue outlook for the international segment higher than previously expected for the full year. In addition, adjusted EBITDA margins are expected to expand considerably in the second half of the year, primarily benefiting from the impact of the inclusion of deep-seas results as well as from improved operating leverage on the higher sales volumes. In closing this morning, we believe our recent strategic acquisitions are important examples of our ability to leverage our strong financial position to further expand our capabilities and advance our strategy as we continue our transition into an energy technology solutions company. We remain focused on developing innovative solutions that enable, protect, and improve the efficiency of next-generation power, communications, transportation, and other critical infrastructure. And going forward, we intend to continue investing aggressively in a number of strategic initiatives, both organically and through acquisitions that we believe can help to accelerate these efforts. And now I'd like to turn the call over to York to provide further details on our second quarter results and our updated outlook for 2021. York? Thanks, Aaron.