Thank you for standing by, and welcome to Generac Holdings Third Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there’ll be a question and answer session. [Operator Instructions]. I would now like to hand the call over to Kris Rosemann, Director of Corporate Development and Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter 2024 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 and our 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, Chris. Good morning, everyone, and thank you for joining us today. Our third quarter results were ahead of our previous expectations as elevated power outage activity drove a return to robust growth in overall net sales and strong execution helped to deliver significant margin expansion. The recent increase in outage activity pushed year-to-date power outage hours through September to the highest level since we began tracking this data in 2010. As a result of the third quarter outperformance and the higher-than-expected outage activity, specifically the impact of Hurricane Helene and Hurricanes Milton, we are raising our 2024 outlook. Year-over-year, overall net sales in the quarter increased approximately 10% to $1.2 billion. Residential product sales increased 28% from the prior year due to accelerating demand for home standby and portable generators in the quarter. Global C&I product sales decreased 15% from a strong prior year as CapEx spending for U.S.-based rental, telecom and beyond standby products remained lower in the quarter and as market conditions further weakened in Europe. These softer end market conditions were partially offset by continued growth in shipments to our domestic industrial distributors as we continue to reduce our lead times. Additionally, favorable sales mix, lower input and logistics costs and improved production efficiencies drove significant expansion in gross and adjusted EBITDA margins in the quarter, with gross margins reaching their highest level since the third quarter of 2010. This margin expansion, together with our returned to overall net sales growth demonstrates the earnings power here at Generac as we continue to execute our strategic vision. Home standby shipments in the quarter increased at a high 20% rate from the prior year as a result of the elevated outage activity. Outage hours during the third quarter were at their highest quarterly level since the fourth quarter…

Thanks, Aaron. Looking at third quarter 2024 results in more detail. Net sales were $1.17 billion during the third quarter of 2024, as compared to $1.07 billion in the prior year third quarter. The combination of contributions from recent acquisitions and the unfavorable impact from foreign currency had a slight net positive impact on revenue during the quarter. Briefly looking at consolidated net sales for the third quarter by product class. Residential product sales increased 28% to $723 million as compared to $565 million in the prior year. This robust growth was driven by a significant power outage -- the significant power outage activity during the quarter due to Hurricanes Beryl and Helene, resulting in a high 20% increase in shipments of home standby generators and very strong growth for portable generators domestically. In addition, sales of residential energy technology solutions were higher during the quarter as we experienced growth in both our clean energy and ecobee product offerings. Commercial and industrial product sales for the third quarter of 2024 decreased 15% to $328 million as compared to $385 million in the prior year quarter, including a slight positive impact from the combination of contributions from acquisitions and unfavorable foreign currency. The core sales decline was due to the expected weakness in domestic shipments for telecom, national equipment rental and beyond standby applications as well as softer market conditions in Europe. This was partially offset by a robust increase in C&I product shipments through our domestic industrial distributor channel and growth in certain other international markets. Net sales for other products and services increased slightly to $123 million as compared to $121 million in the prior year quarter as strength in domestic service parts, accessories and deferred warranty revenue was partially offset by lower industrial project services revenue. Gross profit…

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

Good morning. And thank you for takin my question. I want to start on home standby. So you guided the residential revenue of high teens year-over-year now. Within that, is it safe to assume that home standby would be a little bit above and what are you assuming for activations embedded in that full year guidance? Thank you.

Yes, Tommy. So yes, home standby is going to be a little bit above that 15% range. In terms of activations, we're anticipating -- we returned to growth here in the third quarter with activations. We believe that's going to accelerate, as we said in the prepared remarks this morning throughout the fourth quarter as the market digests the increase in demand here from the recent events. So again, I don't think we've given specific guidance on activations for the full year, but it is expected to be -- and again, I would remind you, we had a really strong fourth quarter last year. So it's a pretty strong comp that we're up against there on activations, but we're pretty confident given all of the signs here. We are seeing activations here early in the fourth quarter kind of pacing to where we thought they'd be.

Thanks, Aaron. As a follow-up, we haven't talked too much today about the margin impact from the energy technology investments. But I know that the intention there is for that to fade over time. And while you're not going to guide us for 2025 today, anything you can do to help frame how that margin drag could fade next year based on what you're seeing would be helpful. Thank you.

Yes. I mean, this year, it's going to be in that 350 to 400 basis point range. It's kind of been hanging in that level. It's -- obviously, it's a high level of investment for us. As we said in the prepared remarks, we are making progress at RE plus this year, which is the renewable energy show out in Anaheim, we introduced our PWRcell 2. We had really good receptivity there. I think the idea of building out this ecosystem with the ecobee Energy Hub as we refer to it. At the center of that was incredibly well received. We think it's a differentiator in terms of the ability to control one of the heaviest loads in the home in terms of HVAC and do that in concert with energy storage and build out that ecosystem. And then as we said, doing similar things with some of the other heavier loads that present like EV charging, we just believe that that's something that's going to be really, really important going forward. And we don't think that there's really anybody else that's going to be doing it similar to us. Now as we laid out in our Investor Day last year in 2023, we still think that by the end of 2026 that we're going to be closer to breakeven. That's that we believe is still within reach for that business. And so the drag on EBITDA, again, we're not going to be able to pin down specifically next year's impact. But obviously, it's going to abate from the 350 to 400 basis point drag run rate, if you will, today, to that kind of breakeven point, which, by the way, even if we hit breakeven with that business, still going to present a drag on EBITDA margins in '26 until we get significantly to the other side of that. But we are seeing progress. We're excited about the receptivity of those products. Now we've got to do the hard work of commercializing these new products that we're bringing to market. And that's, I think, something that, again, we haven't really had with the first-generation product that we've been selling. It's been more difficult for us to make headway -- and we -- I know the teams here, the commercial teams, in particular, and energy technology are really excited to have new products to sell as we get into 2025.

Thank you. Our next question comes from the line of George Gianarikas of Canaccord Genuity. Your question please, George.

Hi. Good morning, everyone. And thanks for taking my question. I'd love if you can kind of dig in a little bit as to what's happening in your European business and when you expect those trends to potentially rebound? Thank you.

Yes. Thanks, George. So Europe has been kind of -- we were seeing trends earlier this year around portable generators mainly. I mean that was our -- again, we had some pretty tough comps from the prior year on the back of the Ukraine-Russia war, there were energy security issues, concerns around energy security that really drove portable generator sales higher in 2023. As we rounded 2024, those concerns after kind of a mild-ish winter, somewhat abated and we were kind of seeing struggles there. That has now expanded to include kind of the broader C&I complex of products in Europe as well. It's not all bad news for our international segment. We are seeing pockets of, I would say, surprising strength in Latin America, in particular, we've got a new team managing that business down there. I think we've done a nice job. They've done a nice job really tackling the market and improving our position there. But broader Europe, Germany in particular, I mean, if we had to kind of pin it down to a particular country, not to call anyone out here, but Germany has really been a struggle. And it's an important market for our operations there. So I think it's something that I think everybody has seen the recent headlines. Even the automotive sector, in particular, in Germany is really struggling. Volkswagen announcing their first plant closures in Germany ever in something like 84 years or something like that, I think, was the headline. So I think that it's going to be a struggle in Europe, Mainland Europe for a bit until we see maybe the economic shift happened there. Hopefully, that happens sometime in 2025. I would tell you right now, we're probably going to see -- I would expect to see maybe a recovery in C&I domestically before we see a recovery in Europe. I just say I think that maybe is how the pacing will work. We're starting to see some green shoots domestically for telecom here in the U.S. I think rental is going to remain down. We were a little bit below our guide even for the third quarter in rental. The season hasn't been as strong. It wasn't a huge miss. But I think the rental companies are taking a little bit more of a wait-and-see approach. I don't know how much of that is based on the current election environment, just getting to the other side of that, whatever party ends up being in power here, but I think there is some trepidation around CapEx spending there. And so I think Europe is going to be tough, probably for all of next year, would be my guess -- tougher anyway, again, offset by some pockets of strength in Latin America and maybe some other areas of the world.

Our next question comes from the line of Mike Halloran of Baird. Please go ahead, Mike.

Good morning, guys. I wasn't sure if that was lending -- you needed to hear the validation for you guys. So there's probably a couple of years to this, but could you place the activity you're seeing today in historical context, what kind of uplift are you seeing? How does that compare to history? And I'm asking from kind of two perspectives. One, your penetration and awareness is much higher in these regions today than it was then maybe less of the penetration, but certainly the awareness. And so how is that manifesting when it comes to the activity levels that you're seeing -- but then secondarily, how is that awareness impacting non-impacted regions, if that makes sense. So both how are the regions tracking? How are the other regions tracking? Is there a spillover effect in place in some historical context as well, please?

Yes. Thanks, Mike. Yes, I think it's a great question, actually. And when you put it in perspective, there's a couple of things. I think so the states that were impacted here, and I think there's 6 or 7 states that bore the brunt of Helen and Milton those states actually oddly enough, are slightly below the national average of 6% pen rate for home standby. So when we just talking HSB for a second, while they're not materially below like maybe like California as per the -- as compared to the national average, they're still below. So in terms of the upside, I think there are -- the interesting thing is we have a good dealer representation in those markets because they are markets we've sold into in the past. Obviously, Texas has had a number of high-priority events. So barrel hits -- that said, we've added a lot of dealers in Texas. We said of the 400 dealers we've added over the last year, a good chunk of those are coming out of Texas. We would expect to see in the fourth quarter dealer counts improve probably coming out of Florida and the Carolinas. Those are going to grow. But I think just going back to the core of your question, putting it in perspective, so we've always said these events are -- can provide between $50 million to $100 million impact in the current year, depending on the timing of the event, right? And so the later timing of the event in the year, the less of that $50 million to $100 million you're going to be able to get. So if you add up all 3 events that would put your range somewhere between $150 million to $300 million upside. We said that the upside we're…

Our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Your line is open, Jeff.

Hey. Good morning, guys. So maybe just back on clean energy. Can you just talk about what you think is really differentiated in the new product and just the initial feedback you're getting any kind of early distribution partner wins? And just an update on the inverter intro timing?

Yes. It's great, Jeff. I appreciate that. So the new product, PWRcell 2, obviously, it's basically -- it's a ground-up redesign of the platform. So the acquired platform from Pika days when we acquired that back in 2019, I believe it was. We went through kind of our ups and downs of that platform, have been working very hard over the last 1.5 years with our teams. We've invested tremendously, as you can see, obviously, the 350 to 400 basis point drag that we talked about on EBITDA margins. It's a heavy lift here. But the differentiating factors of that platform. So our focus -- and this is really going back to the first-generation product, we really positioned ourselves from a storage standpoint of being focused on resiliency. The product, of course, can take care of the time shifting needs that you need when you've got solar attached to it and you're trying to store product from a savings standpoint. But what we really felt that people wanted, what homeowners want is if they have a battery, they want it to last some period of time if they do have an outage. And so the first generation product was the largest capacity battery in market. The second-generation product here will remain the largest capacity battery in product. But we've also done some other cool things to focus on some other important upgrades there around -- just around improved continuous and peak power output, which allows you to cover more of your house at once when there is an outage, so you're not limited to having to make choices about what you get -- what's backed up by the storage device and what's not. And that's kind of at the storage level, right? So that's that product, I'll call those the…

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

Hi. Thanks for takin my question. I'm just looking at the timing of the hurricanes you know, Helene and Melton. I mean, there's still obviously significant outages in several states, even in mid-October. And there's a cycle time to getting these home standbys installed, obviously, and getting to the dealers and all those conversations need to happen. I'm just trying to figure out why even half of the demand related to those recent hurricanes would be fulfilled in 2024. It seems like this is -- I mean, you've only had like a couple of weeks since these people even got their power back on. I don't know, it just feels like just the beginning of a wave of demand rather than you're kind of making it sound like, I think, like a lot of it will be satisfied in 2024?

Yes, I think that's a great question, Brian. I think it's 1 that bears a little bit further explanation. I mean, clearly -- so at least here in 2024, our ability to fulfill that demand is going to be gated, as I said, by what we can do from a supply chain and operations standpoint. And that's with a pretty significant ramp. We actually started ramping after barrel in early July. Yes, that was early July. So we got the benefit of that. We kind of got ahead of it a little bit. In terms of prioritizing with our supply chain, both portables, kind of getting our portable generator inventories in a better place ahead of the season and then obviously, with the home standby ramp, we were starting to -- we were able to begin execution on that maybe a little earlier because of that early season event. I think that put us on alert that and obviously, all the predictions were for a pretty active season. And then nothing really happened after that until we got Helene in late September. So I think it was a matter of being able to get that ramp going and now we're going to continue in the back half of the year. The question of whether the demand -- I think the important thing to note here is, consistent with prior events, we've always seen a surge in demand followed by kind of a pullback to a new and higher baseline level, right? I think the question is the surge in demand, how long does it last? And what is the pullback -- when does the pullback happen and where does that new and higher baseline level kind of emerge. And those are kind of an answer yet at this point, and…

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

Yes, hi. Good morning, Aaron. Aaron, York, I'm wondering if you could just talk about the level of in-home consultations that you're seeing based on web traffic. It looks like you're setting records in terms of interest in your products. Is that translating into home consultations? And with the revised residential standby guidance, it looks like you're not counting on a sequential pickup in the standby business 4Q versus I'm wondering, is that right? And can you talk about that because normally, seasonally, you do see higher shipment rates 4Q versus 3Q?

Yes. Thanks, Jerry. On the IHC, yes, I mean, again, October here, we're not completed yet. We got one more day, but we're going to be at a record level. And we think that, that -- when you look at 3Q, as we mentioned, that was...

How portable they're going to go down Q3 to Q4 and home Sam's going to go up as we ramp production course is sort of matched by the portable decline.

Yes. So home standby is going to increase and portable is obviously, unless we have so a lot of -- we sold a lot of portable generators. Frankly, even if we have another major event here anytime soon our inventory levels are quite low. So we're in the middle of replenishing those stock levels. So it's really a shift between higher home standby lower portables for Q4 when you're going trying to compare the Q3 to Q4 run rate.

Our next question comes from the line of Kashy Harrison of Piper Sandler. Your line is open, Kashy.

Good morning, guys. And thank you for taking my question. I'll keep in mind to the C&I side of the business. Can you help us think through whether the implied 4Q C&I numbers have essentially stabilized or whether based on what you're seeing on cycle times in the U.S. than Europe and rental and everything else, that there could be some more risk? I'm just trying to get a sense of if the business has in aggregate bottomed by your measures? Or if you think there could still be some softness as we think about the coming quarters qualitatively?

Yes, Kashy, thanks for that. I appreciate the question. So I think as we said on the last call, actually, we kind of viewed Q2, Q3 is the bottom for telecom. We don't see that pulling back. In fact, we're seeing some green shoots and Q4 would contemplate the guidance we gave this morning would contemplate that, that actually improved slightly Q3 and Q4. I think on the rental market side, as I said in a previous question, we actually saw that be a little weaker than we would have hoped in Q3. So normally, that's a little bit of more of a seasonal business for us. We see lighting towers from that season is when we kind of get to this time of year, that has not played out. Again, it's not materially off of our expectations, but it was disappointing to see kind of maybe further weakness than we expected there. But it's -- I think in terms of bottoming out, it feels like that is probably kind of maybe where we're at. I just -- the question -- the fundamental question on rental is kind of where does that go kind of next year, right? And I think our views on rental right now without additional kind of direct guidance from the major rental companies that we serve. We haven't been given any kind of guide yet on next year's CapEx spend in our categories. But we would believe at this point that's probably going to remain pretty muted throughout 2025. I think telecom, as we said, those green shoots, we're hoping to see continued improvement. I think when you think about our core industrial distributor channel, we've been working to catch our lead times. We've been executing quite well operationally, but we've been seeing book-to-bill rates…

Our next question comes from the line of Stephen Gengaro of Stifel. Your question please, Stephen.

Thanks. Good morning, everybody. So a quick one for me. When we think about the margin progression that you've seen and relative maybe to the prior guidance, but even just relative throughout the year. Can you talk about or give us some sense for how much is mix and how much is sort of cost out and efficiency gains that you've been able to achieve?

Yes. Stephen, this is York. So gross margins improved roughly 5% year-over-year. We've been seeing that for quite some time now over a number of quarters. This particular quarter, I'd say about say, 40% to 50% of that 5% was mix related. So obviously, as home standby generators increase in mix, we're going to get a nice bump in margins. So that means around 50% to 60% was price cost. So we're still on a year-over-year basis, still seeing the benefits of lower input costs coming through the P&L as we turn through that higher cost of inventory or as we sell through that in the past, and now we're -- now that's not running through the P&L. And then logistics costs, we continue to do a good job in terms of bringing material to the plants and getting out to our customers. So we continue to run our factories more efficiently as -- in particular, the home standby volume picks up. So price cost has been favorable for a number of quarters, continues to be in Q3, like I said, around 50% to 60% of that year-over-year increases price cost. What's interesting is if you look from, say, like now look ahead from Q3 to Q4 now sequentially now, not talking year-over-year but sequentially. I'd probably say a lot of that price cost is now running through our P&L here in Q3. I mean we carded, what, 40% gross margins in Q3. That's the best we've seen since 2010. So we're feeling good in terms of where we're at from our gross margin profile and that we believe will continue into Q4. And so I'd say, sequentially, the price/cost scenario has played out, but year-over-year, we'll still see benefits.

Our next question comes from the line of Keith Housum of Northcoast Research. Your question please, Keith.

Great thanks. Appreciate. Good morning, guys. In terms of like the power outages and the driving of demand, all focuses have been on HSB. But can you touch on, is there any opportunity for growth within C&I or the beyond standby batteries in terms of those guys benefiting from when you have these massive storms come through?

Yes. Thanks, Keith, and I appreciate you bringing that up because I probably should have mentioned that when we're talking about C&I on one of the last questions. Absolutely. When we get outage events, I mean, longer-term trends, the outages drive awareness, whether you're a small business owner or whether you are a wireless telephone network operator that has thousands and thousands of sites, hundreds of thousands of sites, you realize very quickly if you haven't invested in a backup plan, you realize the impact that can have on your operations and on your revenue streams on your continuity of operations, maybe spoilage of inventory that can happen. And so we just -- we also know that historically, for us, and when we look at our business, that usually is more of a delayed reaction. And the point -- the reason for that really is that in the business world, those are business decisions. They're usually CapEx budgets. There are approval processes. It takes time to get those projects going. So we would expect, as historically would follow on is sometime late -- kind of in that 4-quarter cycle basis, you would start to see some demand start to pull through from those events directly related to those events in the affected areas and perhaps indirectly affected -- indirectly impacted areas outside of that, when you're talking about a national telecom operator who is now going to allocate more dollars in the budget process for hardening of networks, right? So they put more dollars aside for purchases of generators or storage devices. Those things definitely are things that we see historically. And that also, I think, could be an offset to any potential longer term weakness in kind of the core industrial C&I markets that we're currently seeing. We think those are fleeting. We've seen these cycles before, and I think you bring up a really good point. As soon as you get kind of an active period of events like this, that definitely gets people on notice and brings it more to the forefront from a business planning standpoint, from a disaster planning standpoint, continuity of operations ending plan regulatory standpoint, all of those things come to the front of the line.

Our next question comes from the line of Jordan Levy of Truist Securities. Your question please, Jordan.

Morning all. And thanks for all the detail. We've talked before about the percentage of the HSB category that finance or I think your program with Synchrony. I think you said it's around 20% of dealer network sales or so. I'm just curious how you think about the potential to ever kind of expand that financing optionality on HSB as more customers start to think through power quality and outage activity sort of issues?

Yes. No, this is York, Jordan. Definitely having financing is -- I mean, price in general is always a barrier to driving close rates higher financing as a way to sort of break-through that challenge that you might have in terms of closing a deal. I know for a fact in 2025, we're going to be doing some -- we're going to be ramping up that -- the financing initiatives throughout the dealer channel, and it's going to be a big focus throughout 2025, just like it has been in 2024 here. So yes, no, it's -- I agree -- we agree with you that, that will be an important aspect to trying to drive close rates higher.

I would now like to turn the conference back to Kris Rosemann for closing remarks. Sir?

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2024 earnings results with you in mid-February. Thank you again, and goodbye.

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