Generac Holdlings Inc.

Good day and thank you for standing by. Welcome to the second quarter 2023 Generac Holdings and Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Harris, SVP, Corporate Development and Investor Relations. Please go ahead.

Good morning and welcome to our second quarter 2023 earnings call. I'd like to thank everyone for joining us this morning. With me today is Darren 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 Arts employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. 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 FCC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our second quarter net sales were in line with our prior expectations as stronger than expected CNI product shipments offset residential products. which were lower than expected as a result of a softer consumer spending environment that impacted shipments of home standby generators and shore products. This had an unfavorable mix effect on gross margins, resulting in slightly lower adjusted EBITDA margins than previously expected. Year over year, overall net sales decreased 23% to $1 billion, and core sales declined 26% during the quarter. Residential product sales decreased 44% as compared to a strong prior year quarter that benefited from significant excess backlog reduction for home standby generators. The current year quarter continued to be impacted by elevated levels of field inventory for home standby generators, as well as a decline in clean energy product shipments year over year. Global CNI product sales increased approximately 24% to an all-time quarterly record, with broad-based growth across nearly all regions and channels. Adjusted EBITDA margins were negatively affected by the significant unfavorable sales mix, as well as reduced operating leverage, driven by lower home standby shipments and continued investments for future growth. Importantly, continued favorable price-cost dynamics have created a meaningful margin tailwind, providing a partial offset to the unfavorable sales mix. Second quarter home standby shipments grew at a strong sequential rate, but declined significantly on a year-over-year basis as the second quarter of 2022 included the reduction of excess backlog, and we continued to meaningfully undership end-market demand in the current quarter as we focused on further reducing field inventories of home standby generators. Baseline power outage activity in the U.S. was well above the long-term average, but meaningfully weighted toward the final weeks of the quarter. Home consultations or sales leads were roughly flat from the prior year period and increased sequentially off an unseasonably strong first quarter. Additionally, home consultations during the second quarter were still more than four times higher than the second quarter of 2019, further supporting our view that consumer interest in the product category has achieved a new and higher baseline level. Our residential dealer account returned to sequential growth in the quarter, ending at approximately 8,700, an increase of 500 dealers from the prior year. We continue to invest in growing the installation capacity of our channel partners, and we are making good progress towards our initiatives to increase dealer count, train non-dealer contractors, streamline the installation process, and raise home standby category awareness across trade groups. We believe these efforts are important to the longer-term growth trajectory of the product category, as the megatrends that support the demand growth outlook remain firmly intact. activations which are a proxy for installs improved sequentially over the first quarter but declined from a strong comparable period in 2022 that included the benefit of a backlog of installations in certain regions during the prior year activations were also below our prior expectations for the quarter primarily due to the weaker consumer spending environment for home improvement but despite this relative softness activations during the quarter were more than double second quarter 2019 levels Close rates were flat sequentially and remained meaningfully higher than the comparable period of 2022, but underperformed our expectations as a result of the shifting consumer spending patterns. The number of home standby generators and field inventory further declined in the quarter, while days of field inventory relative to historical norms also decreased sequentially. However, with close rates and activations lower than expected in the quarter, the field inventory normalization process is now expected to extend further into the second half of the year. As a result, we expect the elevated field inventory levels to further impact home standby shipments in the second half relative to our prior expectations, with a return to year-over-year growth in home standby shipments now anticipated in the fourth quarter. We believe the stronger outage environment in the final weeks of the second quarter and the resulting strength in IHCs support this expected return to growth later in the year. Longer term, the megatrends that are driving awareness for backup power solutions are as compelling as ever. Homeowners and business owners are becoming increasingly sensitive to the growing frequency of power outages driven by extreme weather, and grid operators are struggling to solve the growing supply-demand imbalances that are a byproduct of the accelerated energy transition that is underway. Importantly, these are not short-term issues, as the transition to the next generation power grid will be an uneven process and is expected to take decades to complete. We believe our unparalleled suite of solutions is well positioned to solve many of the energy-related challenges that consumers and businesses will inevitably face. I'd now like to provide some commentary on our CHORE products, which consist of a broad lineup of outdoor specialty power equipment used for property maintenance in large residential and light commercial applications. These products, which are increasingly shifting towards battery-powered solutions, experienced significant growth in recent years as homeowners have been spending more time and money on property maintenance since 2020. However, shipments in the second quarter declined from the prior year and were below our prior expectations As higher channel inventories in the industry, unfavorable weather trends, and shifting consumer spending patterns impacted demand for chore products. This weaker than previously expected demand environment is expected to persist in the second half of the year, also contributing to our lower outlook for residential product sales. Now moving to our residential energy technology products and solutions, second quarter sales were in line with our prior expectations and grew at a strong rate sequentially. as shipments of our power cell energy storage systems improved and Ecobee sales hit an all-time record for a quarter. Ecobee drove strong sales growth over the prior year and continued to take share in the smart thermostat market by strong positioning with professional contractors and new placement with key retailers. The Ecobee team is progressing towards the launch of a smart doorbell camera in the second half of this year, which will provide for increased homeowner engagement with our home energy management platform. As the central hub of our home energy ecosystem, we firmly believe that Ecobee's feature-rich devices and significant expertise and user experience will prove to be key differentiators for Generac's residential energy technology efforts. Although we are making progress in our future product roadmaps and rebuilding the confidence of solar installers, the broad residential solar and storage market in the U.S. is showing signs of slowing. As a result, we now expect our suite of residential energy technology products and solutions to deliver gross sales at the low end of our previous range between 300 and 350 million for the full year 2023, as weaker solar and storage industry demand dynamics are expected to persist throughout the balance of the year. To better compete in these large and growing market opportunities, we are continuing to invest heavily in the world-class talent and R&D infrastructure that is required to achieve next-level quality while developing and commercializing innovative solutions. We believe our competitive advantages will be built around the combination of these ongoing investments, differentiated monitoring and management capabilities, and a unique and seamless user experience, combined with our core competencies around sales and marketing, lead generation, distribution, customer support, and global sourcing. I'd now like to provide commentary on our CNI products, which once again outperformed our expectations. Global CNI product sales grew 24% over the prior year to an all-time quarterly record, as multiple megatrends continue to support demand for backup power and mobile products around the world. Domestic CNI product sales grew at a robust rate in the second quarter, highlighted by strength in shipments to a number of key customers for beyond standby applications, industrial distributors, and national rental equipment companies. Shipments of natural gas generators used in applications beyond traditional emergency standby projects continued to see tremendous growth during the second quarter. We believe we are in the very early innings of this exciting new market opportunity, as grid stability concerns and volatile energy markets are expected to further drive demand for these solutions. Leveraging our position as the leading provider of natural gas generators, we are building an increasingly comprehensive solution set to enable the deployment of our products in multi-asset applications, such as pairing our smart grid-ready generators with our emerging CNI storage, connectivity, advanced controls, and grid services solutions. Shipments of CNI generators through our North American distributor channel grew once again at a strong rate, and channel backlog also increased sequentially during the quarter. Quoting activity for CNI products remains robust, highlighting the ongoing strength and demand for backup power in this important channel that serves a wide range of end markets. In addition, we experienced another quarter of robust growth against a strong prior year comparison with our national and independent rental equipment customers as they continue to refresh and expand their fleets. While order patterns from rental companies have moderated after several quarters of exceptional performance, this end market has substantial runway for growth, supported by the critical need for future infrastructure-related investments. As the leading provider of backup power to the North American telecom market, sales to national telecom customers increased slightly during the second quarter as compared to a strong prior year comparison. Although we continue to expect shipments and order trends for these products to be uneven during the second half of the year, we believe investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency. Positive momentum also continued during the second quarter for our international segment, as total sales increased 10% year over year, with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 4% to sales growth. Core total sales growth was driven by strength in nearly all regions, as well as global sales of our controls and automation solutions from our deep sea and motor tech acquisitions. While energy security concerns in Europe have moderated from peak levels seen in prior quarters, we continue to see positive momentum in important long-term international growth markets, including India, the Middle East, and Australia. As the global energy transition accelerates, demand for electricity around the world grows, and the threat of increasingly severe and volatile weather persists, we believe that the demand we are seeing in these markets supports our view that the need for power resilience is a global issue. Accordingly, we are continuing to invest and build out our international product and distribution capabilities to serve these large and diverse growth opportunities. As disclosed in our press release this morning, we are raising our full-year sales growth guidance for global C&I products to mid-teens range from prior expectations for a mid-to-high single-digit increase. In addition to the strong second quarter performance, the increased guidance is being primarily driven by continued strong backlog and operational execution for our domestic C&I products. In closing this morning, our C&I product category has continued to perform extremely well as our global teams have driven strong executions. but a softer than previously expected consumer environment impacted second quarter results and is the main driver in the reduction in our second half outlook for residential products. We view the headwinds in our residential product categories as temporary, and we remain confident in the robust longer-term outlook for our broad portfolio of backup power products and energy technology solutions. This confidence, combined with our history of strong cash flow generation and healthy financial profile, allows us to maintain a long-term focus on executing our Powering a Smarter World enterprise strategy. We will continue to make the necessary investments to capitalize on the megatrends that drive the future growth opportunities inherent in this strategy. We look forward to providing a more detailed update on our longer-term strategic vision at our upcoming Investor Day in late September. I'll now turn the call over to York to provide further details on second quarter results, as well as the outlook for 2023. York? Thanks, Aaron.