Good day and thank you for standing by. Welcome to the First Quarter 2021 Generac Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Michael Harris. Please go ahead.

Thanks, Alicia. Good morning, and welcome to our first quarter 2021 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release, or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our first quarter results were incredibly strong as net sales, adjusted EBITDA and adjusted EPS were all-time records for Generac, despite Q1 historically being the low point for the year seasonally for our business. First quarter revenue margins and profitability were all significantly ahead of our previous expectations. The revenue outperformance was very broad-based and was highlighted by increased shipments of residential products, primarily due to home standby and portable generators. Home standby build rates were ahead of plan for the quarter, and demand further accelerated due to continuing traction with the Home as a Sanctuary megatrend, as well as being driven by significantly higher power outage activity in recent quarters, including the major event in Texas, which also led to a sharp increase in demand for portable generators. Revenue from C&I products also outperformed expectations during the quarter domestically with our industrial distributors, national telecom customers and rental customers, as well as internationally, mostly in the European region. Also, in terms of profitability, adjusted EBITDA margin came in considerably higher than our previous forecast, driven mostly by greater operating leverage from the significantly higher revenue achieved during the quarter. Year-over-year, overall net sales increased 70% to $807 million and also increased sequentially from the fourth quarter of 2020, which was our previous all-time record. Growth in the quarter was broad-based, led by a dramatic increase for residential products that more than doubled compared to prior year as shipments for home standby generators were much higher due to record production levels. Shipments of portable generators also increased driven by the major outage event in Texas and higher outage activity overall in recent quarters. Deliveries of chore products and clean energy products, such as our PWRcell energy storage system,…

Thanks, Aaron. Looking at first quarter 2021 results in more detail. Net sales increased 70% to $807.4 million during the first quarter of 2021, an all-time record, as compared to $475.9 million in the prior year first quarter. The combination of contributions from the Energy Systems, Mean Green and Enbala acquisitions and the favorable impact from foreign currency had an approximate 3% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class. Residential product sales more than doubled to $542.1 million as compared to $257.6 million in the prior year, representing a 110% increase. Also, residential products improved 9% on a sequential basis as compared to the fourth quarter of 2020, benefiting from the significant backlog for home standby generators entering 2021, which is in contrast to the normal seasonally lower volumes experienced during the first quarter that have averaged a 26% sequential decline over the past five years. As Aaron already discussed in detail, home standby generator sales continue to experience robust year-over-year growth, which more than doubled during the first quarter as we made further progress increasing production levels for these products. Portable generators also experienced dramatic growth versus the prior year due to the much higher power outage activity, highlighted by the impact from the major event in Texas. In addition to this strength, shipments of PWRcell energy storage systems also grew at a significant rate as compared to the prior year, as the solar plus storage market in the U.S. continues to expand and as we build out our capabilities selling into the clean energy space. Lastly, shipments of Chore products were also much higher during the quarter, in part due to the Home as a Sanctuary trend continuing to positively impact demand for outdoor power…

[Operator Instructions] Your first question comes from the line of Tommy Moll of Stephens.

Aaron, I wanted to start on Enbala and some of the grid services opportunities you referenced. You gave a little bit of detail to start, but anything else you can give us just in terms of how active that pipeline is? What strategies you're pursuing there? How optimistic now versus maybe a quarter ago? And then you also referenced some potential for product integration, specifically you referenced a purpose-built generator. I think that's on the home standby side. But what details can you give us there as well?

Sure. No, good questions, Tommy. On Enbala, I think our confidence grows daily with that acquisition. It just continues to reinforce our strategic direction around participating more fully in the shift to Grid 2.0, right? I mean that's really what that acquisition was about. It really was about helping us take our legacy assets, our generators, if you will, as well as our clean energy assets like PWRcell and our load management devices and really expose those distributed energy resources for the benefit of grid operators, utilities, energy aggregators and ultimately the end customers, the owner operators of those pieces of equipment. What I can say over the last quarter is we continue to dive pretty deep into the pipeline that Enbala had previous to our acquisition. It is substantially larger today than it was, that pipeline -- substantially larger today than it was when we acquired it. We believe there are a couple of reasons for this. One, during the acquisition, of course, that was -- COVID was -- we were in the middle of that, and there was some retrenchment by utilities and others on a lot of things. But certainly, programs like grid services were kind of put down -- they were set down and as they were working on other things. But the volumes have picked up dramatically here based on the fact that COVID has abated. But probably more importantly, many of these customers are telling us that they feel like now they get that Enbala has a partner in Generac that is, one, financially stable and, two, has access to all these wonderful assets, right? So, what Enbala was selling before was software, and it's agnostic software to the OEM and agnostic to even the type of DER, be it storage or be it…

Your next question comes from the line of Ross Gilardi of Bank of America.

I'm just curious, like, as you guys are scaling up the new capacity in the interim, where do you keep finding the extra capacity to get you through these quarters? And are you just driving continuous efficiencies out of your existing footprint? Are you able to sub out some additional assembly? We keep thinking you're out of capacity and can't possibly produce another unit out of your existing footprint, and you keep doing it, which is -- I mean that is a compliment, obviously, but just like how are you doing that?

Yes. It's a great question, Ross. And this is where I'll give a huge shout-out to our operations teams are. It's a fight every day, every hour. I mean they literally have hour by hour kind of metrics that they're pacing against, not only obviously for output, but the ability to hit the kinds of output levels that we're achieving and do it safely and to continue to produce a quality product. These are top of mind for everything we do. It's just -- it's amazing. In full disclosure, I think if you had asked me as the CEO of this company even 6 months ago, if we'd be able to achieve the levels we are at today in the existing footprint, I would have probably taken the under on that bet. I just -- I'm maybe more of a realist at heart and maybe just would have -- you never want to bet against your own team. But these folks on our team just continue to outperform. They're working very closely with our supply chain. That's obviously a major component of this to make sure we get continuous supply. We've been expanding our supply chain to dual and triple source, which has been incredibly helpful. That was an initiative we actually started back a couple of years ago now, but it's paying off very handsomely. We invested very heavily in automation over the last several years, which is also paying off quite nicely. And really, the way the teams -- to answer your question at the root of it, is the teams are continually looking at ways to improve the operations of the business. So how do we -- squeezing out 0.5 point of efficiency or 0.25 point of productivity out of our equipment, out of our teams, out of our supply chain makes a big difference at the kinds of rates that we're running right now. Again, we don't know what the future holds. Supply chain is just a really challenging area right now, everything from logistics to component availability. Everybody's talking about this. And we're no different. We have taken a pretty, I would say, I think we've properly reflected that in the guidance. We'll just say that. I think we kind of handicapped it in a way that we believe these numbers that we're going to put out are achievable based on everything we know today. If we have some improvement in the supply chain situation, maybe they go higher. We'll see. But I'm just -- I'm incredibly proud of the team. They're just -- they're doing a great job. And really, I can't say more about it.

Your next question comes from the line of Philip Shen of ROTH Capital Partner.

Congrats on the strong results. And just kind of piggybacking off that last question. Let's say, we get a huge hurricane wildfire season this year. What kind of capacity do you have to be able to serve that increased demand? Can you help us bridge where you're at now relative to what that potential scenario could be? Any specifics? Can you talk about this capacity expansion plans, Aaron? I know you've talked about adding more in Wisconsin, more in South Carolina, and you can do it earlier. But to what degree can you quantify that? And the wait time is continuing to just go longer. Aaron, I think you talked about 28 weeks, but our recent dealer check suggests the dealers are waiting 35 weeks for the 22-kilowatt engine. So what is the plan to reduce that wait time, serve the busy season, if you will, when that comes in Q3 and 4?

Yes. Thanks, Phil. There's -- capacity discussion here is a daily discussion. We had a plan that we had in place that we were going to bring Trenton online here midyear, which is effectively -- if you think of it this way, it's -- we're calling it a double-double, right? So we're effectively -- we are going to double our capacity. Where we're at today is somewhat kind of double where we were running maybe a little more than a year ago, maybe 12 to 18 months ago. And we had a pretty good line of sight to exit this year at that level. We felt pretty good that we -- we started tuning into the backlog pretty well. Notwithstanding, again, to your point about an active hurricane season, that was going to be a wildcard. But what happened here in between kind of our last plan and today was Texas. And so, as the Texas event was unfolding, we basically went back to the drawing board. And we said, look, we had a plan, it's not enough. How do we get more? We can't have lead times going out. 28 weeks is terrible, and that's the average across all channels, all customers, all products. But those lead times are -- that's too long to wait. And we're working hard to bring those in. But that recalibration of the capacity plan, simply put, just without getting too detailed, is to take our level that we're at today which we anticipated would go up somewhat by the end of this year as we brought Trenton online. But effectively, we've now made investments and plans to completely double where we're at today a year from now. So that will ramp throughout the year. And the way we're going to do that is…

I mean we will sell our portable should we get to a major event. That's part of it.

That's part of it, too. Yes.

Your next question comes from the line of Brian Drab of William Blair.

I am just wondering for my one question about margins, 26.5% first quarter, you're going to exit the year around that level you expect. Given all the puts and takes, you won't have -- I would guess that severe headwind -- you have severe headwinds from cost going into 2022, but you'll have a lot of additional capacity. So, can you just help us at all think about, does that 26%, 27% EBITDA margin run rate at the end of the year carry into 2022? Or is it reasonable to expect that to kind of come off of that really high level given you're running so hot?

Yes. I mean, I think we've said we most likely would not be catching the backlog here in 2021. So, we'll be coming into '22 with that backlog. So conceivably while we're running full steam in terms of production, those types of EBITDA margins would be sustainable. I haven't necessarily rolled out my 2022 guidance yet. But thinking out loud, that's how I'm thinking about it. Ultimately, once we catch the backlog, that's -- I guess that's yet to be determined. We don't know what type of hurricane season we're going to get this year. So I guess more to come and how that will play out in 2022. But yes, I guess I haven't necessarily laid out 2022 margin profile yet.

Well, I think the key there is where do input costs go, how much higher they go?

I think the message is we believe that we -- the things we're doing from a price cost efficiency, cost reduction standpoint and then elements around mix will help offset those inflationary pressures that we're seeing today. The impact of that, we believe, is going to be transitory here in the middle part of the year of 2021. That should alleviate more with the back end, to your point, Brian.

Your next question comes from the line of Mark Strouse of JPMorgan.

Most of them have been answered. I just wanted to go back to the supply chain issues. Can you just remind us what kind of the specific raw materials are? Or I guess what the major headwinds are? Is it specifically raw materials? Is it any kind of semiconductors like we're hearing with other companies? Maybe just give us an indication what that could be.

Yes. No, Mark, it's an important question, and there's two types of headwinds here. There's cost headwinds and then there's availability headwinds. And so from a cost headwind standpoint, we use a lot of copper, aluminum and steel in our products. So obviously, as those have run here over the last 6 to 12 months, we've seen a sizable increase, and that's kind of the cost pressures that York was alluding to on the last question. And we're offsetting that with pricing and other cost out actions. Interestingly enough, the second headwind, which is availability, we're also seeing some availability issues within some of those basic materials, which is not something we've typically experienced. So finding electrical-grade steel as an example for the alternators we manufacture, which is the business entity of a generator. That's been challenging. Having to go out to the mills and buy coil stock. We're kind of jumping the supply chain in a lot of cases to get upstream to find rock coil stock to provide to our electrical grade steel lamination manufacturers. So that would be one instance of it. I would say more broadly, the electrical components are in terms of availability. We use a lot of semiconductors, a lot of microprocessors in all of our products. I would say, much more heavier use on our clean energy products, much lighter use on products like Chore products. But nonetheless, there are still a lot of microprocessors across the board. I think that one thing for us, maybe just a little bit of how we've been insulated from some of the current shortfalls you're reading about in automotive and some other areas, as much as I'd love to say, we're an incredibly lean supply chain in terms of inventory levels and whatnot. The fact of…

Your next question comes from the line of Christopher Glynn of Oppenheimer.

Nice work. A lot of high-level questions have been asked. I'm curious what you're seeing in terms for HSB? What you're seeing for emergence of replacement and upgrade market as well as new construction penetration?

Yes. That's a great question. And we watch this very, very closely. As we've said in the past, the replacement rate is roughly about 10% today. We get quarterly updates. That's up nicely. We get quarterly updates on what the replacement rates are. We survey people who buy products. Are they buying it for replacement? Are they buying it as a new home? Are they buying it as an existing home? So, in new construction, it's 15% to 20% of the products going into new construction. So, both of those trends are favorable and have been favorable over the long haul. The replacement trend, I think, is maybe the most favorable because when you really just peel back the math on it, and I think we showed this a couple of years ago at an Investor Day, and we may have to update this coming up here in our Investor Day in September. But the replacement rate itself was worth quite a bit of money there, just over the long haul. And so -- and that, I think, as technology continues to improving the products and in particular, as those products become grid services enabled, right, in Enbala-ready, the idea of the newer products being in Enbala-ready and the old ones not, that becomes an asset that could be producing for somebody in a different way than just protecting their home. It could be something that is able to be monetized. So pretty interesting stuff there. The remote monitoring capabilities that we've added to products over the years also don't exist in generational products 10, 15 years ago. So really interesting trends longer term, and I think they're bullish for us and bullish for the category.

Your next question comes from the line of Jed Dorsheimer of Canaccord Genuity.

I'll echo the sentiments. Congratulations on great execution. So I guess for my question, on the home standby, sort of an easy trend to call with respect to the work-from-home phenomenon, and you guys have executed flawlessly on that. Just maybe my question on turning to sort of the commercial and industrial. And if we look at the trend, if I'm a REIT and I own either industrial property or even an office or hospital post archive and knowing that this work-from-home phenomenon is that there's going to need to be a law to get tenants to come back into the properties. I'm curious where you think from the conversations, where we're at in terms of, to use baseball analogy, sort of the innings of using guaranteed power is one of the benefits in terms of that and whether or not the fact that the structure of that REIT in having to spend the money from a tax perspective, if you're starting to see that benefit yet, and that's what we saw in these results.

Yes. I think, Jed, it might be a little early to be saying it's reading through today, maybe a little bit, but really we've always looked at the sales cycle and just that -- those products because they're budgetary items generally for a business or even a hospital, in some cases. Those are little more quote-driven. But really, we bifurcate the C&I world into two markets. There's the quote-driven and then there's the optional standby markets within just purely standby, right? So, quote-driven markets are clear, where you've got to provide backup power because of a wastewater treatment plan, a hospital, some other installation where quotes require that. That's a simple bid process and would be something that is about half of the market. The other half of the market then is made up of what we refer to as this optional standby market. And that's really a decision for a business or a business owner, who says, look, I have interruption of my -- maybe it's my revenue streams or I have spoilage of inventory or I have some other thing that happens when the power goes out, it's a negative for my business, and I want to protect that and protect against that, so I invest in backup power. I think the idea there and what we've typically seen is we'll see a follow-on period here for a couple of years, especially after an event like Texas, the magnitude of that event. We'll see increased quotations activity which we're seeing today, increased activity around what types of solutions make sense. You can talk to the specifying engineering firms that are involved in projects like this, down in that region of the country. And they will tell you that there's a lot of inbound interest around businesses and other…

Your next question comes from the line of Jerry Revich of Goldman Sachs.

Let me add my congratulations to the strong performance as well. I'm wondering if you could talk about how much your PWRcell production was up in the quarter, and you mentioned you increased your expectations for the year. Maybe just quantify that for us? And if you could just touch on whether you have enough battery capacity with your existing supplier relationship or any additional plans to augment the supply base?

Yes. Thanks, Jerry. PWRcell has been incredibly well received. We're doing well to take some good market share there in a growing market, which is awesome. And we continue to roll out new products, as we talked about in the prepared remarks. But as it relates to supply chain and capacity, I mentioned briefly the battery cell capacity constraints, which anybody, who's electrifying anything today, is dealing with the same situations, and we're no different. We brought on a second source here in the first quarter to augment our primary source of battery cells, battery packs. We'll be bringing on in the second half of the year a third and potentially even fourth source to continue to kind of broaden the supply base for those products. That being said, again, we -- as I said before, we've kind of reflected in our guidance. Even though we're talking about a 75% to 100% growth rate year-over-year for clean energy products, we're really -- it could be higher. The demand is much higher. I mean the inbound demand that we're seeing in those product categories is phenomenal, and it's very exciting. And I think this is really ahead of any kind of -- all the major policy changes that are being proposed out there, right? We really didn't even touch on that today much, but the current administration has a whole host of kind of plans and proposals out there related to increasing and extending the investment tax credit, actually giving an ITC credit, making that available for storage only, which is something that would be very interesting, I think, for people, who are looking to add storage to an existing solar array or use storage perhaps as an arbitrage opportunity. So, we need to continue to work on capacity as, I think, the takeaway here. Our teams are looking at that very hard. And longer term, I think that we're going to need to do some other things there that I think we're probably prepared to talk a little bit more deeply about once we get to our Investor Day in September. But as it relates to what we did in Q1, I guess, York

I think we said in the prepared remarks. So shipments obviously did grow dramatically. I think what was encouraging where orders, or demand actually was up sequentially from Q4 to Q1, actually better than expectations. So that was the driver of taking our outlook up. There's a lot of momentum on the distribution side for these products, took our outlook up to growing 75% to 100%. At the midpoint of that range, that would be about a $100 million increase in shipments of those products year-over-year. So, a lot of encouraging signs. And again, that's better than we had originally expected. And I think the key there is we'll be ramping volumes throughout the year. Margin profile will ramp throughout the year. And we're going to have attractive margin profile as well on top of that.

Your final question comes from the line of Ross Gilardi of Bank of America.

I just had a quick follow-up. Where is the backlog by the end of the year, if you get your capacity where you want and you get normal order activity for the balance of the year based on a number of product activity?

Yes. It's a great question. And obviously, the big wildcard and that kind of equation or formula is what kind of a season do we see this fall. And so, I think it's really difficult for me to just kind of spout out a number here because I don't know what the season holds for us. We really want to bring the backlog down in terms of the lead times. We'd love to see that get a lot shorter as we go forward. And that's something that we're working hard to as we ramp capacity. As I said, the South Carolina facility, the team there, we've got a plan that basically doubles where we thought we were going to be at the end of the year. In terms of exiting the year down in Trenton, we want to be twice as high as we thought we'd be. And then again, augmenting that with more production in Wisconsin here. So, we're going to grow into a really big capacity number by the time we hit kind of Q2 of next year. But the season could -- if the season plays out to be an active one and there are quite a number of forecasts out there saying that, and that's just the hurricane season. I guess I haven't touched on the fire season out west, it's been incredibly dry out west and very dangerous situation there. Already seeing fire activity out in the northwest in Washington. Californians, I think, are really on edge with where that could go. So

Lots of interest in Texas.

Tons of interest in Texas coming off of the outages there. So again, we're trying to reflect what we think is an appropriate level of…

Either way, we're not going to be catching our back.

We're not going to catch it. We're going to come out of the year with a fair amount of backlog. It's just a question of what the magnitude of that number is. And just not in a position yet to size that.

There are no further questions at this time.

Great. We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2021 earnings results with you in late July. Thank you again, and goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.