Generac Holdlings Inc.

Hello, and welcome to Generac Holdings Inc. 4th Quarter and 4-Year 2024 Earnings Conference 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 the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question only. I would now like to turn the conference over to Chris Roseman. You may begin.

Good morning and welcome to our fourth quarter and full year 2024 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Yagfeld, President and Chief Executive Officer, and York Reagan, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time by Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable US GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Erin.

Thanks, Chris. Good morning, everyone. Thank you for joining us today. Our fourth quarter results highlight our ability to rapidly increase production and execute on the strong demand for home standby and portable generators, resulting from the elevated power outage environment in the second half of 2024. The significant increase in demand for residential products led to fourth quarter records for net sales, adjusted EBITDA, and adjusted net income, while free cash flow generation during the quarter was an all-time quarterly record. Additionally, gross margins were very strong again during the quarter and drove adjusted EBITDA ahead of our prior expectations. Year over year, overall net sales increased 16% to $1.23 billion for the quarter. Residential product sales grew 28% from the prior year, driven by strong growth in shipments of home standby and portable generators, as well as an increase in shipments of residential energy technology products. CNI product sales, while still strong, were approximately flat from the prior year as increases in the domestic industrial distributor and telecom channels were offset by weakness in other CNIN markets. Favorable sales mix and lower input costs drove continued significant gross margin expansion in the fourth quarter, helping further accelerate adjusted EBITDA margins to 21.5%. Our full year 2025 guidance anticipates continued net sales growth, primarily driven by higher shipments of residential products. We project further gross margin improvement during the year on top of the very strong 2024 performance and expect to maintain strong adjusted EBITDA margins as compared to the prior year. Our current outlook does not contemplate the effect of any new tariff related actions as we're currently evaluating the potential impacts, but we expect it will offset any newly imposed tariffs through the combination of cost reductions and higher pricing. Before discussing fourth quarter results in more detail, I want to provide some full year 2024 highlights. Consolidated net sales return to growth in the year has strengthened domestic residential product sales more than offset weakness in certain CNI and international end markets. The sales mix shift to higher margin residential products and realization of favorable input costs helped drive full year gross margins to the highest level since 2010. The nearly 500 basis point year over year increase in gross margin to 38.8% supported a significant increase in adjusted EBITDA as compared to the prior year. Robust earnings growth and focused execution on a reduction in working capital contributed to an all-time high for free cash flow generation of $605 million, easily surpassing the previous record of $427 million that was set in 2020. 2024 also provided significant evidence of the mega trends that support our enterprise strategy and long-term growth expectations. It was the most active year for power outages since we began tracking this data in 2010, with nearly 1.5 billion hours lost to outages in the U.S., largely driven by three major landed hurricanes in the second half of the year. Severe and volatile weather patterns have become increasingly common, placing even greater stress on our aging power grid. The recent wildfires in California and associated public safety power shutoffs provide yet another example of the challenges grid operators will continue to face well into the future as more intense weather-related events are projected to further compromise the reliability of the power grid. We also saw grid operators and utilities aggressively raise their future expectations of power demand during the year. The rapid adoption of artificial intelligence and the resulting data center build-out is projected to drive significant incremental demand on top of the established trends of electrification and re-industrialization in North America. At the same time, our nation's power supplies are transitioning to lower carbon sources, which are more intermittent in their operation thereby creating additional pressure on reliability as demand rapidly accelerates. This growing supply-demand imbalance is threatening our power quality, with some areas of the country coming dangerously close to having insufficient power, particularly during periods of intense hot or cold temperatures when demand is at its peak. The North American Electricity Reliability Corporation recently warned that significant portions of the US and Canada are at risk of power outages due to supply shortfalls over the next five years. These trends are also impacting the forecasted cost of electricity for end users, with prices anticipated to grow well beyond the 30% cumulative increase in average U.S. electricity prices that we've already experienced since 2020. Massive investments are needed in new generating sources, including additional transmission and distribution infrastructure, to support the growing demand for power, and these costs will be passed along to ratepayers in the form of higher electricity prices. These rising power costs and the increasing risk of outages support our expectations for continued growth in energy management technologies, as we believe homeowners and businesses will begin to invest more aggressively in solutions to help them reduce their electric bills and improve resiliency. As concerns grow about power quality and power costs, our Powering a Smarter World strategy is purposeful in the focus that it gives us as we develop energy ecosystems to help customers in the residential and C&I markets solve for these challenges. These ecosystems deploy a mix of assets and the software needed to optimize solar self-generation, battery storage, diesel and natural gas power generators, and load management devices with a focus on giving homeowners, businesses, and institutions much greater control over the cost and availability of their power. Over the last several years, Generac has made a number of strategic acquisitions as well as significant investments organically in developing these energy ecosystems that we believe have dramatically expanded the total addressable market for the company and positions us well for future growth as the megatrends around lower power quality and higher power prices continue to intensify. Specifically for the home standby generator category, a significant penetration opportunity remains, with only 6.5% of the addressable market of owner-occupied single-family unattached homes greater than $175,000 in value in the U.S., having a home standby generator installed at the end of the year. Furthermore, every 1% of incremental penetration is worth approximately $4 billion in retail market value. And with a market share above 70%, we believe Generac is incredibly well positioned to continue to lead this important product category. Now, discussing our results in more detail. Fourth quarter home standby shipments increased at a mid-20% rate from the prior year, following the elevated outage activity in the second half of the year. Home consultations during the quarter increased at a dramatic rate and reached record levels for a fourth quarter. Building on the category awareness created by the major outage events in 2024, we remain focused on increasing and optimizing our marketing investments to grow and diversify our sales funnel while delivering high quality leads to our dealer network. As expected, close rates continued to moderate during the fourth quarter, given the record setting levels of home consultations we experienced in the second half of 2024. Historically, the compression of close rates occurs temporarily as our dealer network absorbs the rapid increase in demand in select markets that suffered from significant outage activity. We anticipate close rates will recover throughout 2025, resulting from ongoing investments in lead optimization, dealer development and expansion, consumer engagement, and further penetration of financing offerings for homeowners. Our residential dealer network continued to grow in the fourth quarter and ended the year at an all-time high of approximately 9,200 dealers. an increase of 500 from the prior year, and 100 dealers ahead of the prior quarter. The significant growth in dealer count during 2024 not only increases overall category awareness, but also provides support for a new and higher baseline level of demand for the home standby category going forward by adding more sales, installation, and service capacity. We also continue to see strong momentum in our aligned contractor program, which targets electrical contractors that purchase our products through wholesale distribution. We believe this highly aligned network of dealers and contractors is an important competitive advantage for Generac, and we continue to invest heavily to provide these partners with the best tools and capabilities to drive additional sales, installation, and service bandwidth. Activations or installations of home standby generators were nearly flat in the fourth quarter as compared to the prior year. Strength in the south and west was offset by other regions that saw less significant power outage activity in the quarter. Additionally, the later timing of Hurricanes Helene and Milton and longer dealer project lead times in the impacted regions have led to stronger growth and activations thus far in the first quarter of 2025, with January marking a record high for the first month of the year. We continue to focus on innovation and leadership in the home standby generator category, and we recently introduced our newest lineup of home standby generators at our annual customer conference in Nashville last month. The next generation product is our most comprehensive platform update in more than a decade and represents the most advanced home standby generator on the market. providing homeowners with unparalleled peace of mind. With this new product line, we introduced the industry's largest air-cooled generator, producing 28 kilowatts of output, providing homeowners that have higher power needs from electrical vehicle charging, heat pumps, and other large electric loads the lowest total cost solution for backup power. Our next generation product line further secures our position in this very important market segment with the broadest, most powerful, most cost-effective home standby generators in the industry. We believe that both our end customers and installer partners will appreciate the significant value-added and innovative features of these new products, which are expected to begin shipping in the second half of 2025. With this next generation platform, we are introducing automotive technologies like fuel injection and spark ignition to the market, allowing for better fuel efficiency and lower emissions. We've also developed a new advanced controller with integrated cellular, Wi-Fi, and Bluetooth connectivity protocols as standard features, providing significant upgrades to connection quality, together with advanced remote diagnostics supporting the lowest total cost of ownership on the market. These numerous benefits for our partners in the field are expected to improve efficiency and quality control in the installation and service processes, including a simplified and automated commissioning process, streamlined wiring designs, and an enclosure designed with technicians in mind. In addition to our continued track record of innovation in the home standby generator market, we have also made significant investments over the last several years in our manufacturing capacity for these products. The addition of the Trenton, South Carolina facility, as well as increased automation around engine and alternator production, has dramatically increased our ability to meet the growing demand for these products, particularly during periods when demand surges. As a result of these investments, we were able to aggressively ramp our home standby production output to meet the increased demand following the active outage environment in the second half of 2024. Given our ability to rapidly ramp production, home standby generator lead times did not increase significantly and were at normalized levels as we entered 2025. For the full year of 2025, we expect home standby sales to increase for the full year due to a combination of the new and higher baseline of awareness for the category new product introductions, and our initiatives to drive close rate improvements, dealer effectivity, and marketing optimization. Longer term, given our competitive advantages and the significant penetration opportunity, we believe that Generac is uniquely positioned to deliver on the megatrends that support long-term growth for backup power. In addition to strong home standby shipments during the fourth quarter, sales of portable generators more than doubled from the prior year, as demand for these products is more sensitive to power outages in a given period. Our team continues to drive increased shelf space with our key retail partners for portable generators. And while we expect these recent wins to support greater baseline demand for these products moving forward, the second half of 2025 will still face a challenging comparison to the prior year, as our guidance does not assume any major outage events during the year. As expected, Sales of our residential energy technology products during the fourth quarter increased at a significant year-over-year rate, with growth coming from Ecobee and energy storage systems in the period. The Ecobee team delivered exceptional results during the fourth quarter, achieving record sales and positive profitability. In October, we introduced the Smart Thermostat Lite, specifically targeting the professional contractor channel. and later the Smart Thermostat Essential, two key additions to our lineup of energy monitoring and management devices that allow us to tap into the rapidly growing value segment of the Smart Thermostat market. We expect these new products to further support recent market share gains and continue to drive Ecobee's installed base of connected homes, which has grown to an impressive 4.25 million households as of the end of 2024. Our fourth quarter shipments of PowerCell energy storage systems benefited from the initial ramp of the Department of Energy program in Puerto Rico, increasing at a very significant rate from the prior year. While the policy backdrop for the clean energy market is uncertain, we view the long-term fundamentals as intact, given the megatrends of lower power quality and rising power prices, which we believe will only further incentivize homeowners to generate, store, and manage electricity on site. Importantly, our recent new product announcements with PowerCell 2, PowerCell 2 Max, and our next generation home standby generators are evidence of significant progress towards building out our residential energy ecosystem. PowerCell's market leading single cabinet storage capacity, together with our industry leading home standby generator line, gives Generac the unique capability to offer a bottomless battery at a lower cost relative to a storage only system that attempts to achieve a similar level of resilience by using multiple high-cost battery cabinets. This resilience, coupled with Ecobee's intelligent energy management capabilities and intuitive user interface, results in a differentiated solution that can make home energy more resilient, efficient, and cost effective. For the full year 2025, we anticipate strong double-digit sales growth for our residential energy technology solutions. resulting in net sales of approximately 300 to 400 million for the year. This growth is expected to be driven by accelerated deployments of our PowerCell energy storage systems in Puerto Rico, the new PowerCell 2 product launch expected late in the first half of 2025, as well as continued strength in Ecobee sales. Additionally, we anticipate Ecobee will achieve a major milestone in our journey to build a differentiated residential energy ecosystem by delivering positive profitability for the full year. I would now like to provide some commentary on our commercial and industrial products. Global CNI product sales increased slightly on a year-over-year basis, as growth domestically was driven by strong execution in our manufacturing facilities, which was somewhat offset by softer international and market conditions. Domestic CNI product sales increased modestly during the fourth quarter, as strong growth in shipments to our industrial distributor and telecom customers was partially offset by expected weakness in the rental and beyond standby end markets. Shipments to our North American industrial distributor channel grew again at a robust rate in the fourth quarter as we continued to reduce lead times and invest in strengthening our distribution capabilities. Given our increased manufacturing throughput and extended end customer project lead times, growth in shipments outpaced the increase in orders from this channel during the year. As a result, we entered 2025 with a lower backlog as compared to the prior year, presenting a headwind to growth for the industrial distributor channel. Sales to our national telecom customers also increased at a strong rate on both a year-over-year and sequential basis during the fourth quarter. We expect to deliver strong year-over-year growth throughout 2025 as we believe this signals the start of the next growth cycle in this end market, given the long-term secular trend of increasing global tower and network hub counts that require backup power. As expected, shipments to our national and independent rental equipment customers in the fourth quarter continued to decline from the prior year, as these accounts pulled back on capital spending in our categories during the year. Given our current visibility, these trends are expected to continue throughout 2025, although moderating relative to 2024. However, we continue to believe that this end market has further runway for growth as the cycle recovers given the critical need for future infrastructure-related projects that leverage our products sold into the rental equipment channel. And market activity for our CNI generators used in Beyond Standby applications also remained softer during the fourth quarter, as elevated interest rates continued to slow project activity in this segment of the market. However, we continue to see strong pipeline activity for our CNI battery energy storage systems, or BES, and other solutions used in multi-asset microgrids. We believe we are well positioned to lead the CNI microgrid market, given our strength in natural gas generators, distribution, and investments in technologies and expertise. In 2024, we completed two small but strategic acquisitions, adding CNIBES and microgrid controller capabilities and positioning our teams to help end customers solve for the challenges of lower power quality and higher power prices. Importantly, as our CNI energy ecosystem matures, we believe that our efforts to produce turnkey solutions for multi-asset microgrid projects will help to reduce the cost and complexity challenges that have hindered adoption to this point. In addition to our latest development efforts around CNI best products and microgrids, at our annual customer conference, we recently introduced a larger diesel generator product lineup with single genset power output up to 3.25 megawatts certified for the U.S. market. These products are specifically designed for large load, mission-critical backup power applications, including data centers. We believe that the megatrend of accelerating adoption of artificial intelligence and the associated build-out of data centers presents a significant long-term opportunity for Generac, both directly through these new products and indirectly via increased power demand leading to overall grid instability issues. Initial quoting of these larger diesel generators is expected to begin in the second quarter, with the first shipments anticipated to occur later in the year, resulting in a minimal contribution to 2025 sales from this new initiative. Internationally, core total sales, which excludes the negative impact of foreign currency, increased modestly during the fourth quarter from the prior year as strength in Latin America was offset by continued softness in Europe. Importantly, however, international order activity regained momentum and outpaced shipments during the quarter. Adjusted EBITDA margins for the segment expanded during the quarter due to favorable sales mix and lower input costs. For full year 2025, we expect mixed end market and regional performance to continue in our international segment. Our CNIBEST microgrid and data center initiatives for domestic markets also extend to international markets as part of our focused international growth strategy. We continue to focus on bringing new solutions to the market to improve our positioning in established markets while also driving on expanded presence and increased penetration in certain new regions that align with the megatrends supporting our enterprise strategy. In closing this morning, our record fourth quarter results reflect our significant leadership in the residential backup power market and unmatched ability to respond to the elevated demand created by power outage activity in the second half of the year. Our recent new product announcements underscore the commitment to innovation and engineering capabilities that have been at our core since we began pioneering backup power markets more than 65 years ago. And we will continue to invest in the capabilities and solutions that we believe are necessary for the future. As previously discussed, The megatrends that support our future growth expectations have never been more evident, and we remain confident in our Powering a Smarter World enterprise strategy. I'll now turn the call over to York to provide further details on our fourth quarter and full year 2024 results, as well as our outlook for 2025. York?