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spk01: Good day, and thank you for standing by. Welcome to the fourth quarter and full year 2021 Generac Holdings, Inc. 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'll need to press star 1 on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Michael Harris, VP Corporate Development and Investor Relations. You may begin.
spk11: Good morning and welcome to our fourth quarter and full year 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 Ordinance employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from 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.
spk16: Thanks, Mike. Good morning, everyone, and thank you for joining us today. The fourth quarter was a great finish to an outstanding 2021 for Generac, with all-time record performance for both the quarter and the full year for net sales, adjusted EBITDA, and adjusted EPS as we achieve record quarterly production levels and continue to experience exceptional demand for our products and our solutions. Additionally, we completed the strategic acquisition of Ecobee during the quarter, which represents a major step forward in our efforts to provide a broader residential energy ecosystem that includes intelligent monitoring and management solutions, as well as an increasingly sophisticated user interface platform. Fourth quarter revenue was well ahead of our expectations, driven by higher shipments of home standby generators, as build rates for the quarter exceeded our plan due to strong operational execution. Shipments of CNI products also outperformed expectations during the quarter, with broad-based strength continuing across all channels and regions. Despite the substantial increase in production levels, our backlog continued to grow in the fourth quarter across the business, highlighted by home standby generators, providing us with substantial visibility into 2022 being another year of exceptional revenue growth. Year over year, overall net sales for the fourth quarter increased 40% to $1.07 billion, an all-time record, and also increased sequentially over the third quarter, which was the previous all-time record. Notably, fourth quarter core sales growth of 35% accelerated relative to the third quarter's core growth rate of 30%, highlighting our strong execution and the progress we continue to make in ramping capacity despite ongoing supply chain challenges. Growth in the quarter was broad-based, with both residential and CNI products growing at a low 40% rate compared to the year-ago period. Residential sales growth was once again driven by a substantial increase in home standby generator shipments and continued momentum in power cell energy storage shipments, as well as the impact from recent acquisitions. The CNI sales increase was led by our telecom and mobile channels domestically, growth across all major regions internationally, and the contribution from recent acquisitions. Adjusted EBITDA margins of 20.7% were lower year-over-year as they reflected the impact of higher input costs driven by ongoing supply chain challenges and the overall inflationary environment, as well as the impact of additional operating expense from acquisitions. Partially offsetting these cost headwinds were the initial impact of multiple pricing actions implemented over the past year, and we expect even greater realization of these price increases along with cost reduction initiatives and other favorable margin impacts as 2022 progresses. Before discussing our fourth quarter results in more detail, I want to provide some full-year 2021 financial highlights, as well as share some key accomplishments that we achieved during the year. First and foremost, I want to thank our team of over 9,500 employees globally for their hard work and perseverance throughout an incredibly challenging operating environment in 2021. Our teams 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. As a result of our team's collective efforts, Generac achieved another year of record revenue, adjusted EBITDA, and adjusted EPS in 2021, far exceeding the previous record levels seen last year. In fact, revenue increased by approximately $1.3 billion, representing 50% growth year over year and marking the highest annual growth rate in our history as a public company. This performance came on top of very strong revenue growth over the three previous years that averaged in the mid-teens and was highlighted by tremendous growth in home standby generator shipments, an approximate doubling of clean energy revenue, and strong and broad-based growth in our global CNI products. Adjusted EBITDA for the full year was $861 million, with a very strong adjusted EBITDA margin of 23.1% that was similar to the prior year despite a variety of supply chain challenges, considerable inflationary headwinds, and significant investments for future growth. In the third quarter of 2021, we achieved an important milestone by starting production of home standby generators at our newest facility in Trenton, South Carolina. And we continue to make excellent progress in ramping production levels at this new facility as well as at our existing facilities in Wisconsin. Additionally, the further build-out of our clean energy market opportunity was a key highlight during the year as we significantly grew shipments of our power cell energy storage systems through the expansion of our supply chain, increased targeted marketing efforts, growth in our distribution network, and the introduction of several exciting new products. We also broadened our energy technology solutions portfolio with several strategic acquisitions, highlighted by Deepsea Electronics, Chilicon Power, Apricity Code, Off-Grid Energy, Tank Utility, and Ecobee. 2021 was also a heavy year of new products, as we introduced our market-leading 26-kilowatt home standby generator, our Generac-branded microinverter that we call Power Micro, the industry's first dedicated engine-driven battery charging system we call Power Generator, and our innovative power manager load control device. We also introduced a host of new CNI products this year, including a hybrid mobile power solution pairing a mobile energy storage system with a traditional mobile generator, a mobile battery-powered light tower, and our first CNI battery storage system for the North American market through the off-grid acquisition. We also announced smart grid-ready capabilities for all our home standby generators, power cell energy storage systems, and our natural gas CNI generators. Smart grid-ready technology is important to advancing our turnkey approach to grid services and enabling these products to be utilized in programs that provide grid resiliency and an incremental ROI for the asset owner. Finally, during our 2021 Investor Day last September, we debuted our new enterprise strategy we call Powering a Smarter World, which focuses on improving energy resilience and independence, optimizing energy efficiency and consumption, and protecting and building critical infrastructure. We also published our inaugural Environmental, Social, and Governance Report, highlighting the alignment of our new strategy to key ESG-related external frameworks and standards. These accomplishments provide us considerable momentum as we head into 2022. The guidance we are initiating today is for another year of significant revenue growth between 32% and 36%, which is expected to be driven by further increases in home standby production throughout the year, strong growth in clean energy markets, continued broad-based global demand for CNI products, and contributions from recent acquisitions. Notably, this full-year 2022 guidance projects an approximate doubling of Generac's revenue as compared to 2020 levels, with organic growth accounting for the vast majority of the increase. In addition to this significant top-line growth, we expect to maintain attractive margins while continuing to make aggressive investments in next-generation energy technology solutions. We credit these accomplishments to the agility and dedication of the Generac team as we overcome short-term operational challenges, and remain focused on our long-term purpose of leading the evolution to more resilient, efficient, and sustainable energy solutions. Now, discussing our fourth quarter results in more detail, demand for home standby generators in the fourth quarter continued to benefit from important megatrends, which further expanded consumer awareness of the category. The home-as-a-sanctuary trend remains a key driver of demand, along with the impacts of more extreme weather resulting in elevated power outage activity over the past several quarters, including three major outages over the past 18 months. The combination of these factors, along with broader electrification trends, continues to drive incredibly strong demand for home standby generators. As a result, home consultations or sales leads increased again in the fourth quarter over the robust prior year comparison and for the year grew at a strong double-digit rate and were nearly four times the full year 2019 levels. Activations of home standby generators, which are a proxy for installations, also grew at a significant rate compared to the prior year, and our distribution footprint ended the fourth quarter with 8,100 residential dealers, an increase of approximately 800 dealers over the last 12 months. As we have discussed, we continue to make encouraging progress increasing production levels for home standby generators, most notably at our new facility in Trenton, South Carolina, as daily build rates at all our facilities were dramatically higher when compared to prior year levels. Build rates also grew sequentially as we added a new production line at both the Trenton and Jefferson Wisconsin facilities during the quarter. As a result of the higher output levels, lead times have declined by approximately four to five weeks from 32 weeks at the end of the third quarter. However, home standby order rates have remained very strong, leading to a further increase in our backlog, which currently is still well over a billion dollars and provides excellent visibility into 2022 revenue growth. Output levels are projected to increase further throughout the year as additional capacity comes online. However, demand has remained strong, and although we expect to exit the year with improved lead times, we anticipate that we will still end 2022 with a significant backlog for home standby generators. Many of the same factors underpinning tremendous demand for home standby generators, along with the increasing penetration of solar installations, are also helping drive rapid growth for our clean energy products. As previously mentioned, shipments of our power cell energy storage systems grew significantly in the quarter as compared to the prior year. and also grew at a strong double-digit rate sequentially. Despite industry-wide supply chain and logistics challenges impacting our clean energy solutions, full-year 2021 clean energy-related revenue approximately doubled as end-user demand remains robust for our power cell energy storage systems. In addition to strong revenue growth, key performance indicators for clean energy products continued to show favorable trends in the fourth quarter. Home consultation and system activations both increased at a strong rate over the prior year, and also increased sequentially. In addition, we further built out our clean energy installer network as we ended the fourth quarter with nearly 2,500 trained and certified dealers, with approximately 1,000 dealers registered on our PowerPlay sales platform. The solar plus storage market continues to expand rapidly, and we expect to see significant year-over-year growth again during 2022. Shipments of PowerCell energy storage systems are anticipated to increase substantially during the year, and we expect clean energy revenues to grow aggressively as compared to the 2021 levels. We are also very excited about beginning shipments of the previously mentioned new product introductions for clean energy, which are expected to contribute incrementally in 2022. This includes our new PV microinverter product offering called Power Micro, with shipments expected to begin toward the end of the second quarter and ramping further during the second half of the year. A key component of future growth for our clean energy offerings is establishing and developing our distribution network, including partnering with large national solar providers. We recently announced an expansion of our partnership with Sunova that adds even more of Generac's industry-leading technology to its current suite of offerings. In addition to energy storage systems, Sunova customers will now have access to the industry's only fully integrated lineup of home standby generators, microinverters, and load control devices delivered from a single equipment provider. The scope of the new agreement includes integrating both companies' software platforms, enabling the joint participation in grid services programs across the U.S. Additionally, Sunova's consumer-friendly financing solution will now be made available to Generac-certified dealers for all their customers' financing needs, including home standby generators. We're very excited about our expanded partnership as it grows distribution capacity for our residential products, increases financing opportunities for potential home standby customers, and facilitates additional growth in grid services. I'd now like to provide an update on the Ecobee acquisition, which closed in December, and which helps to accelerate Generac's evolution into an energy technology company. We believe we can leverage Ecobee's existing technology and capabilities to develop a home energy management platform, which will be core to our growing residential energy ecosystem of the future that benefits both homeowners and grid operators. This platform will enable homeowners to make smarter energy production, storage, and consumption decisions, while also integrating with our Concerto software platform to provide grid operators more efficient access to a home's distributed energy resources. Importantly, while still very early, we are already starting to see near-term commercial synergies from the acquisition, as the initial integration with our existing commercial sales channels has been encouraging, including expansion into Generac's residential and clean energy dealer networks, as well as key retail relationships. In addition, Ecobee has a sizable dedicated sales team directly engaging utilities and grid operators with their Ecobee energy program, which is aimed at developing demand response and load control opportunities. Our Generac Grid Services team has begun working closely with this group to coordinate and expand these efforts to develop our sales pipeline together by leveraging Ecobee's more than 2 million connected homes as a valuable install base of potential distributed energy resources. I'd also like to provide a further update on Generac Grid Services, a group recently formed within the company that builds upon our October 2020 acquisition of Embala Power Networks. Generac Grid Services has been making excellent progress in expanding its sales pipeline, including meaningful opportunities beyond traditional software-as-a-service contracts. The fourth quarter saw significant progress in new deals closed and in the final stages of negotiation, increasing our top-line visibility for 2022. The Grid Services team continues to integrate Generac's products and solutions into the Concerto software platform, with the resulting hardware cross-selling opportunities expanding the sales funnel even further. We believe this creates a unique advantage for Generac in the market for grid services, given our increasingly unmatched set of energy technology assets and industry-leading DERMS platform, helping us to maintain momentum with utilities, grid operators, and energy retailers, while raising our profile with key decision-makers in the utility industry. We also recently announced a key win for Generac Grid Services to build virtual power plants, or VPPs, by recruiting and enrolling Generac solar PV and battery storage system owners to for Southern California Edison's PowerFlex program. This initiative gives SoCal Edison's residential customers the opportunity to earn incentives by allowing some of their carbon-free electricity stored in their power cell energy storage systems to be dispatched for grid stability purposes. Public sector support for grid services opportunities has been increasing, highlighted by the numerous programs within the recently passed Infrastructure Investment and Jobs Act that target grid flexibility and resilience, and encourage utilities and grid operators to develop and manage virtual power plants using distributed energy resources. Now, let me make some comments on our CNI business, which grew rapidly in the fourth quarter as key end markets and geographies continued to recover off the softer prior year impacted by the pandemic. Global CNI product sales increased 43 percent on an as-reported basis compared to the prior year and 30 percent on a core basis, which was well above 2019 levels during the quarter. Our domestic CNI products saw growth across all channels in the fourth quarter, led by national telecom and rental equipment customers. We also have a record backlog for CNI products, which increased further during the fourth quarter and has continued to build here in the first quarter, providing good visibility for another year of meaningful growth in 2022. Shipments of CNI stationary generators through our North American distributor channel grew again at a solid rate, and the channel continued to experience strong quoting and order activity, along with improving close rates and market share gains in the quarter. We're also experiencing strong growth with our energy systems industrial distributor business in Northern California that we acquired in 2020, as our investments and overall increased focus in this important backup power market are producing excellent results. In working to build on this success, in the fourth quarter, we acquired the power generation group of Pape Material Handling, our industrial distributor based in Southern California. further expanding our presence in the large and growing West Coast market. Shipments to telecom national account customers increased dramatically again during the fourth quarter as compared to the prior year, benefiting from elevated levels of capital spending by several of our larger telecom customers. The catalyst for the investment in backup power in this important vertical continues to be driven by an elevated power outage environment, the power security mandate in California requiring a minimum of 72 hours of backup power, and the build-out of 5G networks. The long-term demand outlook for backup power in the telecom sector remains very compelling, driven by the increasingly critical nature of wireless communications. We also experienced very strong growth with our national rental equipment customers as shipments of mobile products continue to recover at a significant rate off the pandemic-driven lows of 2020. These customers are investing heavily in fleet equipment, and we remain optimistic about the long-term demand outlook for mobile products, given the megatrend around the critical need for infrastructure improvements. We expect that the Infrastructure Investment and Jobs Act passed in late 2021 will support a higher level of capital spending by rental equipment companies over the next several years. Additionally, we're experiencing ongoing strength in project quoting and improved close rates 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 projects. Order rates for generators used in these applications increased dramatically during the full year 2021. We believe the increased interest in these products is being driven by the need for enhanced resiliency and grid stability that these large blocks of power offer for grid operators, while simultaneously providing a tangible and meaningful return on investment for the asset owners. Internationally, we continue to see strong momentum as well, with shipments increasing 47% year-over-year on an as-reported basis during the fourth quarter, with 26% core net sales growth when excluding the benefit of the deep-sea and off-grid energy acquisitions and the impact of foreign currency. The core sales growth was driven by strength across all major regions and has recovered well above the levels from 2019. Overall, quoting and order activity continued to accelerate at a strong pace in key international markets in the fourth quarter, driving growth in the international backlog and higher visibility for 2022. We have also seen a growing interest in home standby generators in certain international markets, highlighting the potential for the product category's addressable market to grow significantly beyond the still underpenetrated U.S. market. Cleaner-burning natural gas CNI generators are also experiencing positive momentum internationally as we work to educate the global market on the benefits of natural gas fuel generators over their traditional diesel solutions. The international segment's fourth quarter EBITDA margin expanded to 13.9% from 6.8% in the year-ago period due to the accretive margin profiles of the deep-sea and off-grid energy acquisitions, improved overhead absorption on higher volumes, and and realization from pricing actions which were implemented throughout 2021. The integrations of the deep sea and off-grid energy acquisitions are progressing well as we continue expanding the reach of their energy technology solutions through our global distribution channels. Off-grid is seeing very strong market interest for its mobile energy storage systems in new regions and with legacy Generac customers, and we are very excited to bring this innovative battery storage solution to the North American equipment rental market in 2022. The DeepSea acquisition has substantially expanded our global controls and electronics engineering teams and provides important capabilities that are core to the growth of our portfolio of grid-connected energy-as-a-service and microgrid solutions. In closing today, 2021 was a year of tremendous progress for Generac as we significantly expanded our capacity and further accelerated our evolution to an energy technology company with a number of key strategic investments across product categories and regions. We believe this growth has resulted in market share gains in every part of our business during 2021, and I'm extremely proud of the hard work of our teams to achieve such strong results despite the incredibly challenging operating environment. As we look forward, we believe we are just getting started on our newly introduced Powering a Smarter World enterprise strategy. Through the combination of aggressive organic investment and strategic acquisitions, we have built a portfolio of power generation and storage systems, monitoring and management devices, and platform and controls capabilities that provide for resiliency, as well as participation in grid services programs, thereby creating enormous value for an increasingly broad range of stakeholders. With these solutions in tandem with our services, our distribution, our brand, and importantly, our expertise, Generac is uniquely positioned to be a leader in the ongoing modernization and evolution of our electrical grid to be more flexible, cleaner, and smarter. I now want to turn the call over to York to provide some additional details on our fourth quarter and full year 2021 results and our new outlook for 2022. York. Thanks, Aaron.
spk14: Looking at fourth quarter and full year 2021 results in more detail, net sales increased 40% to $1.07 billion during the fourth quarter of 2021, an all-time record, as compared to $761 million in the prior year fourth quarter. The combination of contributions from the Deep Sea, Chilicon, Off-grid, tank utility, and Ecobee acquisitions and the unfavorable impact from foreign currency had an approximate 5% impact on revenue growth during the quarter. Net sales for the full year of 2021 increased 50% to approximately $3.74 billion, also an all-time record for the company. Briefly looking at consolidated net sales for the fourth quarter by product class, residential product sales grew to $706 million as compared to $499 million the prior year, representing a 42% increase despite a strong prior year comparable. Contributions from the Ecobee and Chilicon acquisitions and the impact of foreign currency contributed approximately 2% of revenue growth for the quarter. Home standby generator sales made up of the majority of the residential product growth, increasing by approximately 50% over the prior year as we continue to make significant progress in expanding production capacity for these products despite the challenging supply chain environment. Shipments of power cell energy storage systems also grew at a significant rate as compared to the prior year, as overall solar market growth, rising storage attachment rates, and our expanding distribution continue to drive growth for our clean energy solutions. An increase in shipments of portable generators and shore products also contributed to growth in the quarter. Commercial and industrial product net sales for the fourth quarter of 2021 increased 43% to $284 million as compared to $199 million in the prior year quarter. Contributions from the deep sea and off-grid acquisitions and the unfavorable impact of foreign currency had a combined impact of approximately 13% on net sales growth during the quarter. The very strong core revenue growth was driven by an impressive growth across all domestic CNI channels and all major regions internationally. While this growth rate was aided by the softer prior comparison impacted by the COVID-19 pandemic, our CNI revenue was up approximately 19% on a core basis as compared to 2019 levels, which highlights the strong demand that we are seeing across most CNI markets. Domestically, the CNI growth was driven by a significant increase in shipments to telecom national account customers, resulting from the much higher capital spending as these customers continue to harden their wireless networks. We also experienced strong growth in mobile product shipments to our rental channel customers as they continue to invest in their fleets, given strength in their end markets. Also contributing to the increase was solid growth with our industrial distributors, as well as higher shipments of natural gas generators used in beyond-standby applications. Internationally, the increase in CNI products was broad-based from a geographic standpoint, with growth in all major regions as global CNI markets continue to experience a sharp increase in demand off the softer prior comparison impacted by COVID and have recovered well above 2019 levels. Net sales for other products and services increased 21% to $77 million as compared to $64 million in the fourth quarter of 2020. Recall this product category is primarily made up of aftermarket service parts, product accessories, extended warranty revenue, remote monitoring and grid services subscription revenue, and other service offerings. Contributions from the Ecobee and Tank utility acquisitions and the impact of foreign currency contributed approximately 4% of revenue growth during the quarter. Strength in aftermarket service parts continues to be a core driver of sales growth in the category, as heightened power outage activity and a larger installed base is driving increased demand. We are also experiencing higher levels of extended warranty revenue on a larger and growing base of extended warranty contracts. Also contributing to the increase were higher levels of remote monitoring and grid services subscription revenue, as well as increases in other services. Gross profit margin was 34% compared to 39.4% in the prior year fourth quarter, as the challenging supply chain and overall inflationary environment drove input costs significantly higher during the quarter. Specifically, the lagging impact of rising steel prices, inbound logistics costs, and labor rates, along with the Trenton plant startup, all pressured margins in the current year quarter. The early realization of initial pricing actions partially offset these margin pressures. Importantly, Our backlog as of the end of the year contains multiple rounds of additional price actions that will be increasingly realized in the coming quarters. Operating expenses increased $58 million, or 44.8%, as compared to the fourth quarter of 2020, but declined approximately 100 basis points as a percentage of revenue, excluding intangible amortization and transaction-related costs. The overall increase in OPEX dollars was primarily driven by the impact of acquisitions and related transaction costs. higher employee and marketing spend, additional variable expenses from the significant increase in sales volumes, and increased amortization expense. Adjusted EBITDA before deducting for non-controlling interest, as defined in our earnings release, was an all-time record of $220 million, or 20.7% of net sales, in the fourth quarter, as compared to $196 million, or 25.7% of net sales in the prior year. For the full year of 2021, Adjusted EBITDA before deducting for non-controlling interest came in at an all-time record of $861 million, resulting in a strong 23.1% margin that was similar to the 23.5% margin the prior year, despite the challenging operating environment and acquisitions that impacted margins during 2021. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 39% to $896 million in the quarter and as compared to $645 million in the prior year, with the impact of acquisitions contributing approximately 2% of the revenue growth for the quarter. Adjusted EBITDA for the segment was $197 million, representing a 21.9% margin, as compared to $188 million in the prior year, or 29.1% of net sales. The lower domestic EBITDA margin in the quarter was primarily due to the significantly higher input costs and the impact of acquisitions, partially offset by the early realization of pricing actions implemented throughout the year. For the full year 2021, domestic segment sales increased 52% over the prior year to $3.16 billion. Adjusted EBITDA margins for the segment were 25.1% compared to 27.0% in the prior year. International segment sales increased 47% to $171 million in the quarter as compared to $116 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 26% compared to the prior year. Adjusted EBITDA for the segment before deducting for non-controlling interest was 23.7 million, or 13.9% of net sales, as compared to 7.8 million, or 6.8% of net sales in the prior year. The significant expansion in international EBITDA margins was primarily due to strong margin contributions from the deep-sea and off-grid energy acquisitions, improved overhead absorption, and operating leverage, as well as the impact of pricing actions. For the full year 2021, international segment sales increased 45% over the prior year to $573 million. Adjusted EBITDA margins for the segment before deducting for non-controlling interest were 11.5% in net sales during 2021, a 640 basis point increase compared to the 5.1% margin in the prior year. Now switching back to our financial performance for the fourth quarter of 2021 on a consolidated basis, as disclosed in our earnings release, GAAP net income for the company in the quarter was $143 million as compared to $125 million for the fourth quarter of 2020. GAAP income taxes during the current year fourth quarter were $20.6 million or an effective tax rate of 12.4% as compared to $39 million or an effective tax rate of 23.8% in the prior year. The decline in effective tax rate was primarily due to certain discrete items related to acquisitions and a higher stock compensation deduction during the current year. Diluted net income per share for the company on a gap basis was $2.04 in the fourth quarter of 2021 compared to $1.97 in the prior year. Adjusted net income for the company, as defined in our earnings release, was an all-time record $162 million in the current year quarter, or $2.51 per share. This compares to adjusted income of $136 million in the prior year, or $2.12 per share. Cash income taxes for the fourth quarter of 2021 were $29.7 million, as compared to $34.9 million in the prior year quarter. The current year now reflects a cash income tax rate of approximately 19.7% for the full year 2021, compared to our previous expectation of approximately 20.0% to 20.5%, the decrease primarily driven by a higher level of stock compensation deduction than previously expected. This full-year cash tax rate for 2021 compares to the prior year rate of 17.9%. The increase in the current year cash tax rate versus the prior year is primarily due to a significant increase in domestic pre-tax income, which is taxed at a higher statutory rate, along with an increase in non-deductible goodwill from acquisitions. Cash flow from operations was $62 million as compared to $218 million in the prior year fourth quarter, and free cash flow, as defined in our earnings release, was $42 million as compared to $191 million in the same quarter last year. The decline in free cash flow was primarily due to a much higher working capital investment in the current year quarter, partially offset by an increase in operating earnings and lower capital expenditures relative to the prior year. The higher working capital investment was primarily driven by further elevated inventory levels at the end of the year, resulting from extended logistics in transit times, ongoing supply chain constraints, increasing production rates, and continued investments in the ramping of our new Trenton facility. We repurchased 350,000 shares of common stock during the fourth quarter for $126 million under our current share repurchase program. and we have approximately $124 million remaining under this authorization as of December 31, 2021. At year end, we had approximately $550 million of liquidity comprised of approximately $150 million of cash on hand and $400 million of availability on our ABL revolving credit facility, which matures in May of 2026. Also, total debt outstanding at the end of the year was $980 million, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the fourth quarter was only 1.2 times on an as-reported basis. In addition, our term loan doesn't mature until December 2026, and we do not have any required principal payments on this facility until the maturity date. And it has a low cost of debt of LIBOR plus 175 basis points. We also have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026. Further enhancing our overall liquidity is our strong cash flow profile. And for the full year 2021, free cash flow was $306 million. Uses of cash during 2021 included $744 million for acquisitions, including earn-out and non-controlling interest buy-outs. $126 million for share repurchases, and $110 million for capital expenditures. Our strong balance sheet and free cash flow generation give us the flexibility to grow our business, execute on our strategy, and invest in future shareholder value-enhancing opportunities. With that, I will now provide further comments on our new outlook for 2022. As Aaron previously highlighted, key demand metrics for most of our product categories continue to trend strongly during the fourth quarter, leading to a further increase in backlog as we exit 2021. Looking into 2022, we expect significant growth in home standby generator shipments as we ramp capacity in our Trenton, South Carolina plant. We also expect strong growth from our clean energy products as the solar plus storage market continues to grow rapidly and as we launch several important new products, including Power Micro, throughout the first half of the year. We expect CNI products to continue to benefit from strong, and broad-based global demand highlighted by domestic telecom, mobile, and energy management customers and several key international markets. In addition, our 2021 energy technology acquisitions are expected to contribute meaningfully to our overall growth, in particular, the Ecobee, Deepsea Electronics, and Off-Grid Energy acquisitions. In summary, we have tremendous momentum and significant visibility into our demand profile as we enter 2022. As a result of this positive top-line outlook, we are initiating guidance for 2022 that anticipates significant revenue growth as compared to the prior year. Net sales are expected to increase between 32% to 36% as compared to the prior year on an as-reported basis, which includes an approximate 5% to 7% net impact from acquisitions in foreign currency. This revenue outlook assumes shipments of residential products increase at a low 40% rate during 2022 and revenue for CNI products is expected to grow at a high teens rate compared to the prior year. Importantly, this guidance assumes a level of power outage activity during the year in line with the longer-term baseline average. As a result, consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year, such as a Category 3 or higher landed hurricane. Given we are expected to be producing at capacity, for home standby generators throughout the year, the upside of a major power outage event would be more limited to incremental portable generator shipments during 2022, meaning any extra lift for home standby generators from a major power outage event would most likely result in incremental revenue in 2023. As Aaron previously explained, we expect to significantly reduce our backlog and lead times for home standby generators during 2022, but given the strong demand for these products, we still expect to carry a notable amount of home standby backlog into 2023. As we ramp capacity for home standby and clean energy products, we're expecting a certain level of quarterly seasonality during 2022, with net sales in the first half being approximately 47 percent weighted and sales in the second half being approximately 53 percent weighted. Specifically related to the first quarter, we expect first quarter 2022 shipments to be similar to fourth quarter 2021 levels, with increasing residential shipments being offset by seasonal impacts for CNI products. Looking at our gross margin profile as we enter 2022, we anticipate cost pressures from ongoing supply chain challenges, component shortages, higher logistics costs, and an overall inflationary environment to further impact gross margins in the first quarter, resulting in a sequential decline in gross margins from fourth quarter 2021 to first quarter 2022. We expect many of these inflationary pressures to progressively ease as we move through 2022 for a variety of reasons. Steel prices have come off their recent peaks, and we expect freight costs will recede during the year as supply chain bottlenecks improve. Also, the realization of multiple pricing actions that we took in 2021 will have a meaningfully positive impact on gross margins, particularly in the second half, supported by our significant backlogs that contain higher pricing levels. In addition, the impact of plant startup costs will continue to lessen as production at the New Trenton, South Carolina facility further ramps. Also, we expect to realize certain cost reduction initiatives that began in 2021 to combat the significant increase in input costs, including important projects to improve the cost structure for certain high-volume product lines. These tailwinds should be increasingly realized on a quarterly basis as we progress through 2022. For the full year 2022, we expect pricing, easing input cost pressures during the second half, and cost reduction initiatives to more than offset the continuation of inflationary cost pressures during the first half. As a result, we expect gross margins for full year 2022 to increase modestly compared to 2021, with sequential improvements throughout the year. Specifically, from a seasonality perspective, we expect price-cost headwinds to hit peak levels in the first quarter of 2022 and leading to trough gross margins that are expected to be approximately 100 basis points below fourth quarter 2021 levels. We expect quarterly improvements throughout the year, ultimately leading to fourth quarter 2022 gross margins recovering back to first quarter 2021 levels. In addition, we continue to make significant operating expense investments to scale the business, support innovation, and drive future revenue growth in new and existing markets. These energy technology investments and the impact of acquisitions completed in 2021 are expected to result in moderately higher operating expense as a percentage of revenue for the full year 2022 when compared to full year 2021. As a result of these factors and our gross margin expectations, adjusted EBITDA margins before deducting for non-controlling interest are expected to be approximately 22.0% to 23.0% compared to 23.1% reported for the full year 2021. This includes the combined impact from recent acquisitions that is expected to dilute adjusted EBITDA margins by approximately 150 basis points during 2022. From a seasonality perspective, we expect adjusted EBITDA margins to improve significantly as we move through the year, primarily driven by improving gross margins throughout the year, as previously discussed in detail. and to a lesser extent, improved leverage of operating expenses on the expected higher sales volumes. Specifically, regarding the first quarter, adjusted EBITDA margins are expected to bottom in the first quarter at approximately 250 to 300 basis points below fourth quarter 2021 levels, and then improve sequentially throughout the year, returning to the mid-20% range in the fourth quarter of 2022, even when including the impact of recent acquisitions. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for 2022. As a reminder, our approximate $30 million per year tax shield that originated from the LBO transaction in 2006 fully expired at the end of 2021. As a result, 2021 was the last year that adjusted earnings will benefit from a notably lower cash income tax rate relative to the GAAP tax rate. Given that our cash tax rate is now expected to be more in line with the GAAP tax rate, we are now only going to guide to the GAAP tax rate going forward. For 2022, our GAAP effective tax rate is expected to be between 24% to 25%, as compared to the 19.7% full-year cash tax rate for 2021. This increase is driven primarily by the expiration of the previously mentioned tax shield, as well as lower expected share-based compensation deductions in 2022 when compared to the prior year. In 2022, we expect interest expense to be approximately $41 to $43 million, assuming no additional term loan principal payments during the year and assuming increasing LIBOR rates throughout 2022. Our capital expenditures are projected to be approximately 2.5 to 3% of our forecasted net sales for the year. And depreciation expenses forecast to be approximately $56 to $58 million in 2022, given our assumed CapEx guidance. Gap intangible amortization expense in 2022 is expected to be approximately $95 to $100 million during the year. This is an increase compared to $50 million of amortization expense in 2021 due to the impact of acquisitions completed during 2021 that resulted in a significant increase in finite live intangible assets such as trade names, customer lists, patents, and technology. Stock compensation expense is expected to be between $31 to $34 million for the year. For full year 2022, operating and free cash flow generation is once again expected to follow historical seasonality of being disproportionately weighted toward the second half of the year. Given the very strong organic sales growth expected during 2022, we expect the conversion of adjusted net income to free cash flow to be approximately 70% to 80% for the year, as a portion of cash flows will be invested in working capitals to support this growth. Our full-year weighted average diluted share count is expected to increase and be approximately 65.3 to 65.5 million shares as compared to 64.3 million shares in 2021. Finally, this 2022 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.
spk01: And thank you. As a reminder to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. We do ask that you limit yourself to one question and one follow-up. Again, one question, one follow-up. And our first question comes from Tommy Mall from Stevens. Your line is now open.
spk13: Morning, and thanks for taking my questions. Hey, Tommy. York, you gave some helpful insight on the growth strategy. EBITDA margins and their progression through the year I wanted to drill down on the home standby business it sounds like their price cost should be a tailwind as you get into the second half of the year I would think that once Trenton has scaled production there that that also ought to be margin accretive so if you run it all through things go according to plan Could you exit 22 with a higher margin on that business than you have put up in the past?
spk14: I mean, I think overall what we're talking to and what our guidance anticipates is that our gross margins overall for the company get back to, I guess, what we're calling pre-inflationary environment. You know, if you look at Q1 2021 gross margins of roughly 40%, our guidance, basically gets us back there in Q4. I guess I'd have to, you know, we haven't necessarily parsed that out by product category in our guidance and in our prepared comments, but I would think it would get back to at least similar margins to where the preinflationary environment was, you know, earlier in the year in 2021. Fair enough.
spk13: Had to ask. Aaron, to follow up on grid services, You made some news last month with the virtual power plant deal you announced in California. I wanted to ask what you can tell us about that deal specifically, and then you mentioned the funnel for grid services is pretty full for 2022. How many more of these do you think you could sign this year?
spk16: Yeah, the grid services piece, Tommy, as we've indicated a couple times I think publicly, is the pipeline there is growing at a rapid pace. We're actually – We've been expanding our sales force there. We've more than doubled the headcount in that business. We're closing in on 100 people that are focused on it every day, and that's without the – there's a dedicated team, a pretty large dedicated team at Ecobee as well that, as I mentioned in my prepared remarks, that's going to be helpful in some of the sales efforts there. The challenge, of course, with grid services, and we noted this during the investor day, is just the long sales cycle. You're dealing with utilities and grid operators and folks that have – for these types of programs. The process is one of approval through a regulatory agency or regulatory body in general. A lot of these programs in some cases to certain utilities and grid operators are completely new. So there's a pretty good size learning curve here as well. But I would say that we're incredibly encouraged. We talked specifically about the Southern California Edison Power Flex program as kind of a proof point you know, of some of the deals that are in the pipeline that are actually getting done. You know, that one's not a huge program, admittedly, but, you know, it's a nice program for us because it helps us demonstrate not only to Southern California Edison, but we can use that program and the elements of that program. We can share that with other utilities. I think a lot of utility companies are just struggling with what is the right equation for them. You know, what's the right, is it, Is it a demand management program? Is it some kind of grid support program? Or, you know, is it some other kind of, you know, some grid operators need help with, you know, with frequency or voltage on the grid? And we can do that with a lot, in particular with our storage systems. Those things can be incredibly helpful to helping stabilize the grid, whether you're talking about voltage or frequency or you're talking about augmenting power generation or curtailing demand. We have basically a huge amount of flexibility in what we can design for programs. So, you know, the kind of lack of formality around what type of program is needed by each grid operator, so you have to work with them on forming that, and then the long sales cycle that goes into that, it's going to be a while before we see, you know, real meaningful, you know, kind of impact from that in our results. Now, we've contemplated that in the guidance we're offering today, and in fact, it's It's tracking very well, if not above, what we shared with you on the Investor Day back in September. But really encouraging stuff, but just a long sales cycle.
spk01: And thank you. And our next question comes from Ross Gilardi from Bank of America. Your line is now open.
spk02: Good morning, guys. Thank you. Good morning, Ross. Good morning, Ross. Can you guys quantify any more specifically – what you're assuming for home standby backlog exiting, you know, 22. And just, like, what is a normalized level of orders for home standby in today's world? I mean, really what I'm trying to get at is, I mean, do you have enough home standby backlog, you know, in your planning assumptions right now exiting 2022 to avoid a down year in 2023? without significantly above trend order year in 2023? Hopefully you followed all that, but I think you know what I'm asking.
spk16: Yeah, I mean, you're asking for 2023 guidance, right? No, I think I understand what you're saying. And so just a couple of comments, I think. We do think, as we said in the prepared remarks, we're going to end the year, this year, we're going to end the year with a pretty substantial backlog yet of HSB because we anticipate the order rate, which we've seen already so far this year and as we exited 2021, has been really strong. In fact, so strong that even though we've taken our production capacity up, you know, we've continued to outstrip that and grow the backlog. And we are going to grow our output throughout this year. We've got some pretty, you know, heady growth, as we've talked about, our double-double, you know, the theoretical capacity. We talked about how, you know, we're unsure how supply chain is going to be able to feed that. although we're getting more comfortable with that as the year progresses here, again, based on our prepared remarks, and we've got some pretty nice growth built into our forecast for the year. But that all said, we're still going to end with a pretty good backlog. The question of how much backlog is going to depend largely on the type of outage environment we see over the next six to nine months as the year progresses. So if we get a heavy, you know, or normal, I'll say even, outage environment over the summer months and into the fall, we may outstrip that even further. The backlog may be even bigger. So it's really difficult at this stage, for sure, to kind of answer the question you're asking. I do think, though, that what's changed is when we last prepared remarks, we thought we'd be out of backlog by the end of 2022, and that has changed at this point based on the current demand environment. and based on, you know, even though that we're adding more capacity. So really, you know, it's encouraging on the one hand, and we do think we're going to bring lead times down, but we're not going to get back down to that normal kind of one to two week lead time as we end the year.
spk02: All right. Thanks, Aaron. And then I just want to ask you about international. You made some interesting comments about growth and interest in international HSB. Where are you seeing that? And then Your international EBITDA contribution has, you know, basically tripled from the first quarter to the fourth quarter. I think a lot of that's M&A, but you finished the year with a 14% EBITDA margin in the second half of the year. If we carry that over into 2022, that seems like a pretty big tailwind that I hadn't really thought about before. So can you talk more about, like, what's the front margins in the business today?
spk16: Yeah, so on the HSB side specifically, the markets we're seeing interest, there's a number of markets, but very specifically down in South America, we're seeing it in Argentina, we're seeing it in Brazil. When you go kind of elsewhere, you expand your aperture to a global basis, we're seeing obviously Australia has been a market we've targeted for some time for HSB. We're starting to see growth there, which is very nice. Interest in Japan, which is interesting. We're seeing interest in Russia and Ukraine, which arguably might be related to some of the security concerns short-term here. But typically, this product category benefits from a concern over your power quality. And whether that concern is driven by weather or whether it's driven by geopolitical concerns or something else, we have seen a really interesting increase in the interest level. In fact, I would tell you that the teams over in Europe that are responsible for the rest of the world sales and marketing efforts, they want more product from us. And because of our production constraints here, they're telling us they could sell even more product if we get it in their hands. So we're very encouraged by that because I think largely, as we've all talked, the category has been primarily a U.S., North American-focused element. And so to get outside of that, I think is exciting. Now on EBITDA margins, that's really exciting because we've been pushing on this for a while. We took, you know, we were heading the right direction up until the pandemic hit. And then our international EBITDA margins kind of stepped backwards as we lost top line volume. As volume returns, and this is, you know, strip out for a second the acquisitions, take out deep sea and off-grid, which have, you know, they're accretive from a margin profile, no doubt. But actually the core ROW businesses we refer to at our international segment are without those acquisitions actually was up as well. So we're really encouraged by what we're seeing in terms of progress on our march towards improved EBITDA margins in that business. Then you add in the acquisitions, and like you said, we ended the year at almost 14% in the fourth quarter, and we believe that that is going to be a nice, if you call it a tailwind, I call it kind of getting finally on with where we want to be with this business longer term with EBITDA margins, but we're encouraged by it. And, again, home standby generators, because of the margin profile of those products, certainly helps. Our natural gas CNI generators that are becoming popular there also help. They're accretive to margin. And then the acquisitions. So you put all those together, plus just improvements in the general core business that is the ROW business. We're very pleased with where we're going with EBITDA margins there.
spk01: And thank you. And our next question comes from Phillip Sheen. from Roth Capital. Your line is now open.
spk15: Hey guys, thanks for taking the questions. Just following up on one of the last questions around demand. You just mentioned, Aaron, that where you thought backlog would be by end of 22 is meaningfully higher now versus the last time you hosted a call. And so given the demand signals that you're seeing and given the supply constraints and outlook for freight improving and so forth, where do you stand now with capacity expansion? Are you closer to making a decision? Do you think we could get something beyond the Q2-22 double-double sometime soon? And if so, what's the timing and the magnitude of what that expansion could be? Thanks.
spk16: Yeah, thanks, Phil. And obviously we continue to watch that very closely and continue to make the necessary changes moves we think are important to make timing-wise. As we mentioned on the last call, we made a commitment to invest in additional tooling for production of our alternators, which is one of the constraint areas in ramping production further or ramping output further. We made that commitment because of the long lead times of those machines at this point. That automation equipment is out 50, 60 weeks in lead time, so we've got that on order. We don't necessarily have an address on where we're going to deliver it yet, but it would, you know, based on the timing of that, it would be sometime in 2023, early 2023, we'd have to, you know, find a home for that. We're considering whether we can add that to our existing footprint and maybe take some of the raw material or even finished goods storage that we do in the facilities we use today, maybe move that to off-site. So we're looking deeply at the, you know, at the home standby capacity footprint and to figure out how we're going to affect that next leg up. But we have put in motion kind of the longer lead time items that make that possible. So I feel good about that. And we continue to invest in additional automation in our existing operations and additional capacity. We mentioned, and we've talked about this at some time, we really are producing home standbys in three facilities now. The intent, of course, being once we ramped our Trenton facility, we would go down to two facilities. We'd kind of absorb what we're doing today on a bit of a temporary basis in Jefferson, Wisconsin. We'd absorb that into Trenton more fully. We are looking at should we keep that third facility running and should we expand it even further. In fact, in our prepared remarks today, we added another line in Jefferson in the fourth quarter. We also turned down another line in Trenton during the fourth quarter. So, The Trenton one was contemplated. The Jefferson one was planned as well, but we've got those up and running now. And my point is with this is that the Trenton one could become more permanent as a way to expand capacity beyond the double-double. So, yeah, and that plus the additional tooling investments that we're committed to, we think we're going to be in really good shape at least, you know, to have taken care of some of the longer lead time items that make that possible as we get to early 23. Great.
spk15: Thanks for that, Collar. And then... As it relates to Chilicon and the power micro, it sounds like you're ramping in Q2. Can you talk about how the channel is receiving that yet? Does the channel yet have the samples to be able to test and get the inverters on the approved vendor lists for different companies and financing partners? And just curious on what kind of demand in terms of megawatts or revenue we could see from Chillican in Q3 and Q4. Thanks.
spk16: Yeah, thanks, Phil. We're super excited about the Power Micros. We think this is an opportunity for Generac to begin to really fully participate in the clean energy markets beyond just the storage markets, which have been really good so far and really encouraging so far as storage attachment rates continue to climb. But we know there's still a substantial number of PV-only type of systems going in that today we don't participate in. So the power micros are our way to do that. The Chilicon acquisition was our pathway. We're making really good progress on the redesign of the initial Chilicon, the original Chilicon microinverter design. You know, they had a really great design. The guys at Chilicon, super bright guys, had developed what we think is Frankly, we think it's industry-leading technology. And, in fact, the approach, the two-to-one microinverter, two panels to one microinverter, we think is an important part of kind of the value prop of the product going forward. We're on target for a Q2 launch, and so we feel good about that. And as we said in the prepared remarks, where you'll start to see the benefit of that or where we'll experience the benefit of that is really in the second half of this year. We haven't given specific guidance on that yet. We have a lot of supply chain work ahead of us here to ramp, and as you know, a lot of the components that go into those types of products on the electronic side, semiconductors, processors, microprocessors, there are supply chain constraints that have formed for everybody in the industry, and we're no different. But we're working through that, and we're talking to our supply chain partners today about how to be ready for the second half and to scale. We do expect to get early in the second quarter get samples into beta test sites for our channel partners. Receptivity by channel partners, by the way, continues to be incredibly strong. They are very excited to see us enter the market, and I think it really rounds out our product offering. It's that product supermarket approach that we've talked about so much that I think from a single provider to be able to offer everything from generators to storage systems to PV inverters to load control devices to and integrate that on a single pane of glass like we're planning on doing here, and then expose all of that through our grid services teams. There's nobody in the industry that can do what we can do by the time we get to the second half of this year with the product launches we've got, that being a key one, of course.
spk01: And thank you. And our next question comes from Brian Drab from William & Blair. Your line is now open. Okay.
spk04: Thanks for taking the question. I'll just ask one question here. Karen, I'm wondering if you can talk a little bit about the dynamic, I guess the dynamics that are impacting the dealer count and how it's flattened out. I think obviously that's, and I think you've talked about this related to new dealers not being able to get product right away, that they want to give them the lead time. So how do you view that playing out? And I'm wondering if this in the end sort of spring loads growth in the 23 in the home standby category because as the lead times come down, there's an inverse relationship there with the dealers and then all of a sudden you get a little bit of extra growth because you're growing that dealer base again.
spk16: Yeah, it's a great question, Brian. Thanks for bringing it up. The pipeline for new dealers remains very strong. Our challenge, of course, has been fulfilling those orders for new dealers because of the backlog. So As the backlog, you know, was extended as it is, you know, we're doing everything we can to get product to those folks, but it did flatten out at the end of the year here. We still added 800 in the full year, which is more than we've ever added in a single year. But I think you bring up a good point. I mean, there's no question that continued expansion of that channel is critical to our growth. I mean, we need that installation bandwidth. We need that sales bandwidth. We need that service and support bandwidth as the install base grows. So we are laser-focused on continuing to grow that channel. And, you know, it is arguable that maybe it does spring-load that a bit for 2022 here. We didn't necessarily kind of, you know, speak to it that way, but I think it's probably the right way to think about it. And that's an incredibly important area for us and is getting a lot of attention. And, you know, I think we're going to, We're going to find our way through to continue to grow that throughout the year here, even, you know, hopefully as we increase our production capacity, that certainly helps us satisfy those new dealers with product. Because the last thing we want to do is sign a dealer up, and then we can't deliver to them. I mean, that's a demoralizing experience for the dealer. So we've got to focus on that as we get into 2022 here.
spk04: Is there some sort of lead time threshold that you think you need to get to where that starts to – where the dealer kind of starts to grow again?
spk16: You know, I think you're going to see growth. I mean, just naturally. I mean, you may have seen a little bit of a flattening out here in the back half of the year simply because of the lead times being extended. But as I mentioned, lead times are actually starting to come down. You know, in fact, they're down four to five weeks from where they were at the end of Q3. So that, as it comes in, you know, I don't think it's going to remain flat. I think it's going to accelerate here as we get out of, you know, as we exit 2021 and get into 2022. You will see dealer counts, you know, begin to pick up again.
spk04: Thanks very much.
spk01: And thank you. And our next question comes from Jeff Hammond from KeyBank. Your line is now open.
spk00: Hey, good morning, guys, or good afternoon. I guess we're not there yet. Anyways, just maybe talk about, you know, I think you gave kind of residential commercial, but maybe just How are you thinking about gross rates and storage this year, clean energy all in? And then just give us your view on kind of the California net metering proposal and how you think it impacts, you know, battery storage short-term and long-term.
spk14: Yeah, Jeff, I'll start there. As I highlighted, you know, embedded in the 32% to 36% overall growth guidance, I mentioned residential products will increase, you know, in the low 40% range. embedded in that is clean energy. You know, we do have aggressive growth plans. We've doubled that business here from 2020 to 2021. We've got aggressive growth plans here in 2022, you know, well north of 50% growth. So we're excited about that. So, you know, that will be accretive to our overall residential product growth overall.
spk16: And then, Jeff, just on the California net metering issue, you know, situation that's playing out there. Really interesting for me personally, I mean, I've gotten a front row seat to this for the first time. We're involved. I'm on the – there's a war room for the CEOs in the industry on this NEM discussion. It's being sponsored by California Solar and Storage Association, CALSA. And so this is kind of our first kind of foray into the debate around policy changes that impact the industry. And clearly – you know, the concern there is a valid one in terms of the draft, you know, resolution that's been put forth by a California regulatory commission there, the CPUC. And so I personally, you know, as a provider of storage, we think that this net metering fight is going to play out everywhere. I mean, this is like early innings on what's going to happen when solar hits a tipping point. You do run up against the fact that you need to kind of take a hard look at the incentive structure that net metering provides to assure, you know, fair and equitable, you know, incentive structure going forward, yet you don't want to dampen, obviously, enthusiasm for renewable energy. So there's got to be balance in that. And, you know, I think the industry recognizes that. And I think what, you know, the proposed, you know, draft that was put out on California NEM 3.0 clearly doesn't achieve balance. And I think that's the concern That being said, I do think that as NEM, as the battle for NEM plays out and as you find balance, it's going to drive storage rates higher, which is good for us. In the short term, we actually are underexposed in California, so it probably doesn't hurt or help us in California much initially here. But over time, this net metering fight, if you want to call it that, or this debate is going to play out. It has highlighted for us something, though, important, and that is that I think we need to have a stronger voice in the debate around policy as a company. You know, I think we've probably taken a bit of a lower profile there than we should, and so we're starting to lock arms here with the industry and go shoulder to shoulder with others to, you know, kind of, one, really become deeply knowledgeable on the policy-related things that are going on in the industry, and then try to figure out how we impact it, how we impact it positively, for the broader industry as well as for Generac and our customers and our dealer partners. So I think we are going to be investing in policy and investing in the regulatory forefront more so than we ever have, but it's been really interesting to see this kind of firsthand.
spk00: Okay, great. And then in your analyst day, I think you put out 2024 EBITDA margin targets of 24 to 25, and clearly we've had – this unprecedented supply chain price cost, which seems like it's going to get better into the second half. Some acquisitions coming in, most notably ECOBI. How should we think about same or different around that target as you look at it today?
spk14: Yeah, no, Jeff, this is York. As I mentioned, on the EBITDA pacing – You know, we're looking at Q4 EBITDA margins in our guidance to be somewhere in that mid-20% range, which is, you know, for a fourth quarter, that's a seasonally strong quarter. But, you know, looking out, I don't see any, you know, now that we'll level set and reset the margin profile, you know, with the pricing actions we've implemented and maybe with some moderation in some of the inflationary pressures here, we should get back to sort of the cadence that we've been thinking about all along in our investor day, that 24% to 25% EBITDA margin longer term.
spk01: And thank you. And ladies and gentlemen, just as a reminder, please limit yourself to one question, and we will not be having follow-ups, just one follow-up. Thank you. And our next question comes from Mark Strauss, J.P. Morgan. Yeah, good morning.
spk12: Thanks for taking our questions. You've been raising pricing three or four times now over the past year. Your backlog continues to build. Just curious at a high level, once we eventually get to the other side of the raw material pricing and the shipping pricing coming down, what is your strategy on pricing to your customers? Do you bring down cost equivalently or do you kind of leave pricing where it is and try and juice up your margins a bit?
spk16: Yeah, Mark, I think, you know, there's a, within that question, there's, you know, there's a lot of moving pieces, obviously, on where do costs go? You know, is the inflationary environment transitory? I mean, look at, you know, the PPI yesterday was a 9.7% read on annualized, you know, for the last 12 months, and so, you know, 10%, and costs are up dramatically. You look at our business, and I don't think all of it's read through yet, personally. I think this is the problem with the Fed and The problem with these statistics is they're backward-looking and they're lagging. You're looking at data that's dated. Every new contract that comes up, and I don't care if it's for snow plowing, grass cutting, delivering materials to the facilities, trucking, you know, if it's, you know, everything that we do is higher. All the insurance renewals, everything else is coming in. Every time we get a new renewal, software costs, they're higher. So inflation is going to continue to kind of you know, read through here. I think over the next six to 12 months, again, in spite of what economists and other talking heads say, I mean, they should really go work for a company because it's really just easy. You just look at all the costs. I said this a year ago. There's no way this is transitory. Wages are going up. Wages don't go back down. It doesn't happen. Sorry. You know, and we look at some of the costs and some of the inputs. They're not going back down. They're structural. So it's not that hard. And I think a lot of these folks just get tied up in the data and So my point on all this is the pricing we put in was to help us neutralize these cost increases. That being said, we didn't put as much pricing in as costs have gone up because we are going to work very hard this year to offset that with some notable cost-out projects. We've got some big projects that we've been working on. We actually initiated them last summer when we saw costs really starting to climb that are going to help us kind of not have to fully bake in the pricing to offset costs dollar for dollar, the cost increases. So where do things go from here? You know, let's hope that they come down at some point and we're able to bring our pricing down. We want products to be affordable. We think that's an important tenet of growing the category going forward.
spk01: Ed, thank you. And our next question comes from Joseph Osha from Guggenheim Partners. Your line is now open.
spk09: Hello, and thanks for taking my question. I wanted to ask a little bit about some of the trends you're seeing in consultation activity around the country. I've heard in the past that you were seeing some interesting growth in consultations in parts of the country that hadn't necessarily been big markets for you in the past, and that that might signal some higher growth in places like California, for example. So I'm wondering what kind of trends you're seeing now, what that might signal in terms of how how in the U.S. your sales shape up this year?
spk16: Yeah, no, thanks, Joel. It's a great question. And, you know, obviously we call them IHCs, in-home consultations. We are seeing a move towards more virtual nature there. But, you know, on a year-to-date basis, as we said, I mean, we saw 46 states that had growth in IHC counts. And, I mean, it's amazing how widespread the growth was, how broad-based it was. You know, in the fourth quarter, you know, there were a couple of regions that, We did see, you know, a little bit of cooling off and a couple of regions that were just, again, really strong. You know, regions like the Midwest, regions like South Central, and the western regions continue to be very strong with consultations. Some of that could be that, you know, some of those areas have, you know, individually there's some states underneath some of those areas that maybe have lower installed bases or lower penetration rates. So, you know, they're kind of catching up to the averages. Whereas maybe some of the other regions like the northeast and southeast, might have a little bit above, you know, kind of national average penetration rate. So maybe they're slowing down a little bit. I mean, a lot of that is based on what's been experienced in that region directly. That's our history with IHCs. But still phenomenally, I mean, for the whole quarter, you know, up double digits again for the quarter across the country. So, you know, just a really strong read on IHCs. And I think it portends really well, and it gives us confidence in the guide that we're issuing this morning around, you know, around 2022. given that kind of front-end interest that we're seeing in the product category.
spk01: And thank you. And our next question comes from Jed Dorsemer from Canaccord Genuity. Your line is now open.
spk03: Hi, thanks. Congrats on a great quarter and outlook. Aaron, I guess my one question is just around grid services and the VPP. In the deal you mentioned with SoCal Edison, which is obviously on renewable. And my question is, Europe is proposing to reconstitute both nuclear and nat gas as clean energy, and Europe's kind of been a leading indicator for some of the trends here. So I'm wondering, your capacity that's out there in the field, seems to be over 20 gigawatt hours of capacity. Most of that's nat gas. I'm wondering how your discussions are going around moving that over from a BPP perspective or whether or not that's still a roadblock because it's nat gas powered.
spk16: Yeah, Jed, that's a great question. I mean, we're really encouraged by seeing that move in Europe, you know, to kind of redesignate, if you will, nat gas and nuclear as quote-unquote, you know, clean or renewable. And, I mean, it's, look, and you follow the energy markets, and a lot of folks in this call do as well. I think we all understand the importance of, you know, continuous sources of baseload power. We want to clean it up as much as we can. You know, we want to move to lower intense forms of energy, lower carbon intense forms of energy. Natural gas provides for us an awesome opportunity to do that and, you know, move away from things like coal and and move to natural gas and nuclear and other forms that dramatically change the profile of baseload power in the context of, you know, how clean it is versus today. And especially as we go to electrify everything, right? I mean, our dependence on, you know, electrical power, just electricity in general, you think of, you know, a typical home today, And we depend on not only electricity, but oftentimes most homes depend on natural gas for heating or for cooking. And certainly with transportation, we depend on gasoline. I think having those three fuels provides for some flexibility. If we go to relying on a single source going forward, the challenge with reliability becomes, I think it's going to be incredibly risky to do that. Back to your point, though, your point in terms of the conversations we're having here in the U.S., I think most of the utility operators and grid operators, they understand it. Maybe they're not able to publicly say it, that nat gas is something that needs to be around. And you've got these movements afoot, kind of local community to local community, where they're trying to ban new natural gas connections, which is ridiculous. It's completely short-sighted. And it actually serves us negatively as a populace to do this. And so... I think it's well-intentioned, but I think the outcomes are really going to be very undesirable. So the conversations are happening. That fleet of product that we have is really desirable, and I'm excited that we're going to be able to connect those products, as we've said, through our smart grid-ready technology. We're going to make them available and exposed to use in BPP programs like what you're seeing in SoCal Edison and in a lot of other places.
spk01: And thank you. And our next question comes from Christopher Glenn from Oppenheimer. Your line is now open.
spk10: Yeah, thanks. Good morning, everyone. Just a quick one. A lot's been asked. I'm curious if the guidance assumes that Trenton's, you know, running full throughput at the targeted capacity for the second half, or if you have some you know, more gated assumptions there just based on all the factors required to make Trent and, you know, hum at that to accomplish that double-double?
spk16: Yeah, thanks, Chris. You know, so the simple answer is that you've got two types of capacity, a theoretical capacity, and then you kind of have your real-world or realized capacity, right, like what you can actually do. And so theoretical capacity is a bigger number than what we've planned for here, And again, because we've got, again, we've got a pretty good line of sight on everything we need, but you've got potential labor constraints, you've got potential supply chain constraints, logistics constraints. We've baked in, if you will, a hedge. I don't know if that's the right word to use. People can call it whatever you want to call it, but we are planned below the theoretical capacity of the facility for the balance of the year. Now, if we get some breakthroughs on that, could it be higher? Potentially. And, you know, we're obviously shooting for higher numbers. And, you know, we want to get to that theoretical capacity. You know, I think it's always difficult to run a facility at a theoretical capacity number. You very rarely ever run a facility at 100%. You're always generally running it at something less than 100% because of the real-world implications of doing that. You need downtime for equipment repair and maintenance. You need, you know, you have people come and go in terms of, you know, whether it's illness or whether it's something else. You know, you have the human limitations there. You try and put all that into the modeling, if you will, and that's what we come up with as kind of our real-world capacity, which is below the theoretical capacity of the facility.
spk01: And thank you. And our next question comes from JB Lowe from Citi. Your line is now open.
spk07: Hey, guys. Why don't we... Why don't we talk about, I mean, obviously there's good, there's some pretty decent visibility under resi storage, but I was wondering what you guys are thinking, how you guys are thinking about the opportunity on the commercial storage side, and then also just international expansion for the battery product.
spk16: Yeah, JV, it's great. You know, the off-grid energy acquisition has been, you know, that was our first foray into commercial storage. It's generally the product they have, the form factor of the product is, is really ideal for the rental market. So it's mounted on a trailer. It can be paired with a mobile generator, so you can charge it right there in the field. And then you can run off a battery. It's particularly useful in construction sites, especially when you get into metro areas where it's difficult to run generators at night, or you have noise restrictions, things like that. These products have become very popular. And we're just now introducing them here in the US. So we've got a couple of our national rental account that are really excited to add them to their fleets. So we're going to be putting that equipment here in the U.S. But we're also introducing off-grid to all of our rental customers through our Pramac group, which is our ROW group in Italy. You know, they have the European rental market is quite well developed. You get into the U.K., you get into any of the European mainland countries, and we have a lot of great relationships there because we provide, you know, backup generators or construction generators as well as lighting towers there. water pumps, things like that. So we've got a really great history with those customers, both, you know, again, here in the U.S. as well as in Europe, and the off-grid products are being incredibly well received. So our first foray into storage is kind of geared towards the rental market. We are taking those products, though, and we're developing a roadmap for stationary storage that puts us, you know, kind of into, I would say, it's more akin to what we do in the CNI generator market globally. And that's not necessarily what the off-grid product is geared towards today, but in the future, the roadmap would give us a product that would look like kind of storage for those stationary CNI applications. So more to come on that as we develop that, but really good kind of early innings here with storage for CNI.
spk01: And thank you. And our next question comes from Kashi Harrison from Piper Sandler. Your line is now open.
spk06: Good morning, everyone, and thanks for taking the question. So back at your investor day, you provided the multi-year outlook on the revenue KGAR through 2024. Obviously, it's only been a few months since that color was provided, but I was just wondering if you could maybe walk us through some notable developments in that multi-year view since that investor day that you think might be worth pointing out. Have there been any big developments we should be paying attention to And if there are, you know, what are they?
spk14: Yeah, no, this is York. I'm thinking out loud. We've been talking about how our backlog coming into 2022 and therefore ending the year in 2023 is going to be probably higher than we were anticipating back in the LRP period that we launched in September of last year. So that obviously will be a tailwind there as you progress through the model. Ecobee was not in the LRP model, so you'd layer that on top. That's probably the biggest development that wasn't in the LRP model is just our strategy around Ecobee and developing a home energy ecosystem and all the synergies that will come with that. That's probably the biggest thing that's not in the LRP.
spk16: Yeah, I would agree with that. And I think the fact that maybe not fully appreciated in the LRP In my prepared remarks today, I said, you know, based on our read of the markets that we participate in, you know, we gain share everywhere across the board. And, you know, that might not have been fully contemplated in the LRP as well, just those share gains. Share gains tend to be pretty sticky, you know, and so when you are picking up share, you kind of, you know, that has a compounding effect in out years. So that could be a positive tailwind, although I think York's right. Probably the bigger tailwinds there would be the higher, you know, anticipated backlog for HSB exiting 2022. and the Ecobee acquisition, which clearly, you know, really wasn't baked into the LRP model last September. But good question.
spk01: And thank you. And our next question comes from Donovan Stager from Collars Security. Your line is now open.
spk05: Hey, guys. Thanks for taking my question. I want to focus on international markets here. So, Your acquisitions from, say, 2010 to 2018 were really focused on building an international footprint to benefit from megatrends like the shift from diesel to natural gas generation. And now it looks like this is really starting to play out for you. But I want to hone in on what specifically have you seen in the last year, leaving aside COVID, because I know that had an impact, but within, say, the last year, what's really been driving this and, you know, what could we see or what would you expect it to drive over the next, say, you know, medium term three to five years? And I just want to kind of throw out some candidates of kind of factors. You know, the LNG market has been growing very aggressively. Brazil and Argentina, I think those are LPG markets. So, you know, could that be part of what drives things there? Japan has been talking about developing offshore methane hydrates for years now. India launched a pilot program for residential natural gas distribution. So, you know, from that whole grab bag, you know, what do you think are the most important things?
spk16: Yeah, Donovan, I really appreciate that. And you're spot on. I mean, over the last 10 years, the last decade is about building the footprint, right, and building the team, building the capabilities to deliver products, manufacture and deliver products into the markets. whatever those products may be. Our long-term view was always around, you know, HSB products potentially, CNI natural gas products, and, of course, more recently, clean energy products, whether they be storage. And we're demonstrating this, right? Just my comments just with the previous question around off-grid energy, the ability to take those storage systems and put them in the hands of our teams where we already have business, where we already have customers, where we already have distribution in those countries. The comments I made in the presentation prepared remarks about HSB expanding and then that we talked about here on the Q&A about, you know, markets like Argentina and Brazil. And you're right. It's where you see markets where natural gas is expanding. India is another market opportunity for us longer term. I didn't talk about that, but there is a lot of new pipeline capacity being put online, and it's definitely on the drawing board right now in India. Now, it's got to get through the regulatory processes and things in India, but nonetheless – Natural gas is an enabler. LPG markets are an enabler for many of these products, and it fits right in with what we're doing. We always said that our effort in investing globally was always about the long term, and when we said long term, we meant decades. We didn't mean years. It's starting to play out, which we're really happy to see some of these things in the near term, but longer term, I'm not going to speak specifically to three- to five-year type of growth rates, but we're incredibly encouraged to by the interest level in these products. And we haven't even gotten to our entire portfolio of clean energy assets yet and getting those in the hands. Residential storage, PV microinverters in these other markets where we certainly know, especially in markets like Europe and in Australia where they're a lot more developed. We think we have opportunities there and we are going to execute on those opportunities in the years ahead.
spk01: And thank you. And I'm showing no further questions. I would now like to turn the call back over to Michael Harris for closing remarks.
spk11: We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2022 earnings results with you in late April. Thank you again, and goodbye.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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