Generac Holdlings Inc.

Good day and thank you for standing by. Welcome to the third quarter 2021 Generac Holdings Incorporated Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. And 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, you may press star zero. With that, I would now like to hand the conference over to your speaker today, Michael Harris, VP Corporate Development and Investor Relations. Thank you, and please go ahead.

Good morning, and welcome to our third 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 Reagan, 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 or SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. We experienced another quarter of exceptional demand as interest in our home standby generators, clean energy systems, and CNI products remained incredibly strong. Production levels were also the highest we have ever experienced in a quarter, with shipments of home standby generators increasing at a substantial rate over the prior year, as we continue to ramp output at our new facility in Trenton, South Carolina. This led to record revenue growth of 34%, in spite of significant operational obstacles faced across the supply chain environment that deteriorated further during the third quarter. Even with the higher output levels, demand remained very strong and broad-based, leading to higher backlog levels, particularly for home standby generators, providing us with good visibility into significant revenue growth for 2022. Additionally, we recently announced several strategic acquisitions that will accelerate our new Powering a Smarter World strategy and provide additional avenues for growth as we continue our evolution into an energy technology solutions company. Year over year, overall net sales increased 34% to $943 million, an all-time record, and also increased sequentially relative to the second quarter, which was the previous all-time record. The growth in the quarter was driven by strength in both residential and C&I products as compared to the prior year. Residential product growth was led by a 50% increase in shipments of home standby generators as production levels continued to increase significantly relative to prior year levels, as well as tremendous year-over-year growth in shipments of power cell energy storage systems, which also grew double digits on a sequential basis. Shipments of CNI products were also up dramatically in the quarter, with revenue of these products now growing materially above 2019 levels due to strength across a number of end markets and geographies. Adjusted EBITDA margins of 22.2% were lower as compared to the prior year as they were unfavorably impacted by higher logistics and commodity costs. In response to the escalating costs we were experiencing, we've undertaken a number of additional pricing actions and cost reduction initiatives to mitigate the longer-term impact to margins. Now, discussing our third quarter results in more detail, the megatrends driving consumer interest and backup power continued in the third quarter. Most notably, the home-as-a-sanctuary trend combined with more extreme weather, which again resulted in elevated power outage activity. Overall baseline outage activity for the trailing four quarters grew on a year-over-year basis in the quarter, despite a very strong prior year comparison, and remains well above the long-term baseline average. In fact, since we began tracking the impact of outage activity more than a decade ago, four of the top 10 power outage severity quarters have occurred since the second half of last year. The convergence of the heightened power outage activity broader electrification trends, and people spending more time at home has driven unprecedented demand for home standby generators. As a result, home consultations, or sales leads, increased again at a strong double-digit rate in the third quarter over the robust prior year comparison, and broad-based growth continues to be experienced as almost all U.S. regions grew on a year-over-year basis in the third quarter. It's also relevant to note that home consultations in the third quarter increased over three times the comparable 2019 levels, and on a year-to-date basis are more than four times 2019 levels. Activations of home standby generators, which are a proxy for installations, also grew at a double-digit rate compared to the prior year. We continue to experience a strong expansion of our distribution footprint as we ended the third quarter with approximately 8,100 residential dealers, an increase of 1,100 dealers over the last 12 months. California and Texas alone continue to account for nearly one-third of the year-over-year increase. Early in the third quarter, we achieved a significant milestone by starting production of home standby generators at our new facility in Trenton, South Carolina. We continue to make encouraging progress increasing production levels for home standby generators across our operating footprint, with daily build rates much higher compared to prior year levels. Despite the higher output, demand for home standby generators continues to outpace our ability to produce them, which has caused lead times to further grow to approximately 30 weeks. These significant lead times provide excellent visibility as we head into 2022, with our home standby backlog projected to be well over $1 billion entering the next year. As we consider the longer-term capacity requirements for home standby production, we have made a number of strategic decisions to further expand our footprint. Yesterday, we announced plans to expand warehousing and distribution capacity at our Trenton facility by adding 200,000 square feet, which will increase the current size of the building by nearly 50 percent. In addition, we recently made commitments to purchase additional long lead time automated manufacturing equipment that would be available to come online in 2023, further increasing our capacity for several key components to provide for needed surge production as the category continues to grow. In addition to these capacity expansion actions, last week we introduced the industry's largest air-cooled home standby generator, our new 26 kilowatt unit. Building upon the success of the launch of our 24 kilowatt unit last year, the new 26 kilowatt unit will allow homeowners to access the kind of power only previously available in larger-sized liquid-cooled generators at a significantly lower cost. As the trend to decarbonize accelerates, the electrification of everything in the home, including heating, cooking, cleaning, and ultimately transportation, will lead to much greater residential electricity consumption. The new 26-kilowatt home standby unit will be capable of providing the kind of resiliency needed with these larger electrical loads and will provide an ability to future-proof a home as these electrification trends intensify in the years ahead. With a strong outage environment and megatrends like home as a sanctuary underpinning tremendous demand for home standby generators, those same factors, along with the increasing penetration of solar installations, are also driving rapid growth for our clean energy product offering. As previously mentioned, shipments of our PowerCell energy storage systems grew significantly as compared to the prior year, and also grew at a double-digit rate sequentially. Despite numerous supply chain challenges also impacting clean energy products, we continue to experience growth well above the broader U.S. residential solar market, driven by ongoing increases in storage attachment rates and continued market share gains. In addition to strong revenue growth, key performance indicators for clean energy products continue to show favorable trends. Home consultations expanded as compared to the prior year and accelerated throughout the quarter. System activations, which are a proxy for installations and commissioning, more than doubled in the third quarter as compared to the prior year and also increased sequentially. In addition, we further built out our installer network as we entered the third quarter with approximately 2,300 trained and certified dealers, with nearly 1,000 of those dealers registered on our PowerPlay CE sales platform. Despite the industry-wide supply chain and logistics challenges, we expect clean energy revenues to approximately double for full year 2021 on a year-over-year basis. In addition, we continue to drive profitable growth within the product category, as we scale volumes and optimize the supply chain. Building on the early success we've experienced with our clean energy product offering, we formally announced several exciting new clean energy-related products during the third quarter that we believe will further grow our competitive advantage in this exciting new market. We introduced the industry's first purpose-built dedicated battery charging generator during the quarter, the Power Generator, which is a one-of-a-kind power product enabling a homeowner to create a solar plus storage system that is completely grid-independent. We also introduced our new power manager load control system that maximizes battery performance and offers homeowners the ability to control specific electric loads from a mobile device via our existing PowerView energy monitoring platform. And building off the early integration success with the recent Chilicon acquisition, we introduced the PowerMicro, a Generac-branded microinverter that allows us to fully participate in the residential solar-only market, a meaningful expansion beyond the solar plus storage space we previously addressed. In another example of our focus on continued innovation, we announced the acquisition of Apricity, an advanced engineering and product design company focused on developing energy technology solutions. The team at Apricity brings expertise in designing and prototyping energy-related products to increase reliability, add functionality, and improve performance. The company has also developed a unique smart water heater controller that is used as a grid edge device by utilities and demand response and other energy conservation programs. Bringing this talented group on board will accelerate our efforts in expanding our clean energy offerings and increase our speed to market for key clean energy and grid services products and solutions. To further build upon Generac's evolution into an energy technology solutions company, yesterday we announced an exciting agreement to acquire Ecobee, which accelerates our capability to provide a home energy ecosystem with a dual value proposition for both homeowners and grid operators. Ecobee is a pioneer in the smart thermostat market. and offers a full line of intelligent thermostats and home monitoring products that deliver significant energy savings, security, and peace of mind, and enable the monitoring and control of a significant portion of the home's electrical load. Residential HVAC systems represent the single largest energy-consuming device in a home today, and Ecobee has created an intelligent system using smart thermostats and sensors to effectively balance comfort and conservation. With over 5 million connected devices in more than 2 million homes, Ecobee customers in North America have saved more than 20 terawatts of energy, which is the equivalent of saving enough energy to take all the homes in Los Angeles off the grid for an entire year. Importantly, Ecobee adds to Generac's growing suite of residential power generation, energy storage, and energy management solutions that we believe will play a pivotal role in helping to solve the challenges of the growing supply and demand imbalances of today's electrical grid. Smart thermostat controls represent one of the largest opportunities within the grid services addressable market, involving the connection of grid edge devices to a grid services platform like our Concerto software platform, thereby enabling participation in grid services programs. Adding Ecobee's devices to our product portfolio considerably expands our served market opportunity and increases our capabilities to provide end-to-end solutions for turnkey virtual power plant projects. Adding Ecobee's innovative team of over 500 employees gives us the ability to further advance the development of an intelligent and intuitive user interface platform that would integrate and synchronize our generation and storage equipment and our existing grid-edge devices, providing seamless access and control for homeowners through a smartphone, tablet, or PC. We believe this approach will create one of the broadest home energy ecosystems available on the market today and allow for easy connection to our concerto platform, empowering homeowners to make smarter energy production, storage, and consumption decisions. while providing grid operators more efficient access to the home in aggregate or at the device level for grid support programs. I'd also like to provide a brief update on Generac Grid Services, a new group within Generac that was formed in the third quarter that builds upon our October 2020 acquisition of Invala Power Networks. Generac Grid Services was established to directly engage and serve utilities, energy retailers, and grid operators to provide an array of solutions and enable entirely new value streams that leverage a range of products from our portfolio. We took another major step toward unlocking significant value in the grid services space in the third quarter with the formal announcement of smart grid-ready capabilities across our home standby generators, our CNI natural gas generators, and our power cell energy storage systems. In addition to the peace of mind that they're receiving from Generac products, customers now have the opportunity to also obtain additional return on investment by leveraging their products to support grid reliability resiliency, and sustainability. Within the expanding grid services marketplace, we believe Generac Grid Services is a unique and differentiated market leader due to our comprehensive set of hardware plus software plus services offerings, including through our smart grid-ready capabilities for legacy products, our recent acquisition of Apricity smart water heater controllers, and our pending acquisition of Ecobee and its home energy management solutions. Our increasing integration of hardware with grid software and services includes is leading to a number of contract wins along with a significant increase in proposal requests and an overall expanding sales pipeline. These include several examples of the new revenue streams within our grid services model as we layer on higher value turnkey virtual power plant programs utilizing Generac hardware and performance contracts on top of the Concerto software as a service platform. We are in the very early innings of the evolution of the power grid, but as consumer awareness grows, and demand from utilities and grid operators materializes, we remain incredibly excited about the potential long-term growth trajectory of Generac grid services. The excitement around our expanding energy technology solution capabilities extends into the CNI product range as well, where offerings such as energy as a service, microgrid solutions, and mobile energy storage systems are helping drive the long-term growth trajectory and an increasing mix of energy technology revenues. Our core CNI business experienced strong momentum in the third quarter, as a number of end markets and geographies continue to recover strongly off the COVID-weakened prior year quarter. Specifically, CNI product sales grew 47% as compared to the prior year and 31% on a core basis. We also have a considerable backlog that is growing for CNI products that provides good visibility for meaningful growth heading into 2022. In addition to strong quoting and order activity in our North American distributor channel, shipments to telecom national account customers increased dramatically again during the quarter, as compared to the prior year, as capital spending by several of our larger telecom customers continued at elevated levels and have led to further increase in project 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 tower 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. We also experienced very strong growth within our national rental account customers as shipments of mobile products continue to recover at a significant rate off the COVID-driven lows of 2020. We still expect shipments of mobile products to improve dramatically for the full year 2021 as the prior year as national rental account customers invest heavily in fleet equipment with utilization and rental rates continuing to improve. We remain optimistic about the long-term demand outlook for mobile products, given the important megatrend around the critical need for infrastructure improvements, which could benefit from the potential economic stimulus plans being pursued through the Federal Infrastructure Spending Bill. Additionally, we continue to build great momentum with our CNI Beyond Standby initiatives. We are experiencing ongoing strength in project quoting for our natural gas generators used in applications beyond traditional emergency standby power generation. such as their use in energy as a service, microgrid solutions, and other distributed generation applications. During the third quarter, we announced a five-year agreement with Enchanted Rock to build and supply the advanced natural gas generators and control systems that are used in ultra-low emission, dual-purpose microgrids that Enchanted Rock designs and operates. These solutions provide commercial, industrial, and governmental customers with affordable and reliable backup power and supply electric grid operators with critical grid stability services that accelerate the adoption of wind and solar without sacrificing overall grid reliability. The microgrid solutions are based on Generac's rich burn gaseous engine technology and our newly acquired deep sea electronics control systems, which provides quick start utility grade backup power in a much cleaner format when compared to traditional diesel generator solutions. We remain very optimistic regarding customer and grid operator interest in beyond standby applications of our CNI natural gas generators. being driven by the need for enhanced grid stability and resiliency that these large blocks of power can offer, as well as the tangible and meaningful return on the investment opportunity for asset owners. Our international business continues to see strong momentum as well, with net sales growth of 61% on a year-over-year basis during the third quarter and 32% core net sales growth when excluding the benefit of the deep sea and off-grid energy acquisitions and the impact of favorable foreign currencies. The core sales growth was driven by strength across all major regions that continue to experience a sharp increase in demand off the prior year COVID lows and have also recovered well above 2019 levels. Larger project quoting and overall order activity continue to recover at a strong pace in key international markets, which drove growth in our international backlog during the third quarter, with the order strength continuing thus far in the fourth quarter. In addition, the segment's third quarter EBITDA margin expanded to 14.1%. from 7.9 percent in the year-ago period due to the higher margin profile impact from the deep-sea and off-grid energy acquisitions and improved operating leverage in the base business on higher sales volumes. With regards to off-grid energy, this acquisition closed on September 1st and brings a diverse range of energy storage solutions that provide cleaner and more flexible energy for industrial and mobile applications. Off-grid provides us an entry point into the rapidly growing market for industrial-grade energy storage systems, and accelerates our hybrid generator and CNI energy storage product roadmap. Off-grid continues to see robust demand for its products in its core European markets, and we're working to bring these solutions to the rest of our geographic footprint, given our strong global relationships with rental equipment customers. Our integration efforts are off to a strong start, with some legacy customers across Europe having already placed orders for off-grid products, highlighting early momentum in the sales synergies that we expect to realize. In closing today, We have tremendous momentum in our business as we close out the current year and head into 2022 with incredible home standby demand and expanding energy technology solutions portfolio, a growing grid services sales pipeline, and strong global demand for our CNI products. This provides support for yet another year of significant revenue growth with recent pricing and cost initiatives driving an improving margin profile. Day-to-day execution and navigation of the supply chain challenges clearly remains a near-term priority for our teams. But we're also keeping a clear focus on our new long-term powering a smarter world strategy with our ultimate purpose to lead the evolution to a more resilient, efficient, and sustainable energy solutions. Through the combination of aggressive organic investment and a series of strategic acquisitions over the past three years, Generac is uniquely positioned with our products, our services, our distribution, our brand, and importantly, our expertise to deliver the solutions necessary to facilitate the transition to the next generation electrical grid. Importantly, we retain significant financial flexibility to further invest and expand our capabilities and continue to advance 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 third quarter results and our updated outlook. York?