Generac Holdlings Inc.

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.

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.

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.