The operator introduces the Third Quarter 2023 Generac Holdings Inc. Earnings Call and hands over the call to Kris Rosemann, Senior Manager of Corporate Development and Investor Relations. Rosemann introduces the speakers, Aaron Jagdfeld (President and CEO) and York Ragen (CFO). They begin by cautioning about forward-looking statements and discussing non-GAAP measures. Jagdfeld then thanks everyone for joining and discusses the company's third quarter results, highlighting an improvement in operating performance, strong C&I product shipments, and sequential growth in home standby generator shipments. Overall net sales decreased 2% to $1.07 billion with core sales declining 4% during the quarter.

The company experienced a 15% decrease in residential product sales, but saw a 24% increase in global C&I product sales. They also saw margin expansion and generated significant free cash flow, allowing them to complete share repurchases. Home standby shipments grew sequentially but declined compared to the previous year as they worked to reduce field inventory levels. Despite not having a major outage event, power outage activity in the US was above average and drove home consultations higher. The company also saw an increase in residential dealer count and continued to train non-dealer contractors to grow installation capacity.

The number of home standby generators activated improved sequentially in the quarter, but declined from the same period last year. However, October showed strong sequential improvement, indicating a new baseline level of demand. Field inventory levels are also decreasing, although some regions and models are seeing faster declines. The gap between shipments and activations narrowed in the third quarter, and the company projects sales to return to growth in the fourth quarter of 2023. The company remains confident in the long-term outlook for backup power due to increasing electrification and renewable energy adoption.

The company believes that home standby generators will remain the most effective and economical solution for whole home resiliency due to the increasing frequency and duration of power outages. Despite weaker market conditions for residential solar and energy storage, their Residential Energy Technology Products and Solutions returned to year-over-year sales growth. Ecobee continues to gain market share in the smart thermostat market and recently launched a new smart doorbell camera. The company also announced the opening of a new engineering center in Nevada to further develop and test their clean energy solutions.

The company's grid services team received a $50 million grant from the Department of Energy to pursue a project demonstrating efficient building electrification. The C&I products continue to outperform expectations, with strong sales in domestic and natural gas generators for applications beyond standby projects. The company is also leveraging its position as a leading provider of natural gas generators to support increased adoption of energy technology solutions in C&I end markets. Additionally, the company is building a comprehensive solution set to enable the deployment of their products in multi-asset applications. C&I generator shipments through the North American distributor channel also grew strongly.

The quoting activity in the third quarter remained strong, supporting expectations for continued growth in this important channel. Sales to rental and telecom customers showed some softness, but the company believes there is a long-term growth opportunity in these markets. To meet future demand, the company announced an expansion project in Wisconsin. The International segment saw a 14% increase in sales, largely due to acquisitions and favorable currency effects.

The core total sales growth for Generac was driven by strong performance in key long-term growth markets such as India, Latin America, Australia, and the Middle East, offset by lower sales in Europe due to decreased energy security concerns. The company's international expansion and diverse product portfolio are expected to continue driving growth. The global energy transition and rising energy resiliency concerns are also creating opportunities for Generac's products and solutions. The company's third quarter results and full year guidance reflect improved performance and strong execution by their teams. They expect a return to year-over-year sales growth for home standby generators in the fourth quarter and 2024. This, along with margin expansion and free cash flow generation, supports their long-term focus on executing their enterprise strategy. Generac will continue to invest for future growth and position themselves as a leader in residential and commercial energy ecosystems globally.

In the third quarter of 2023, Generac's net sales decreased by 2%, with contributions from recent acquisitions and favorable currency exchange rates. Residential product sales declined by 15%, mainly due to lower shipments of home standby and portable generators. However, commercial and industrial product sales increased by 24%, driven by strong core sales growth in domestic and international markets. Shipments to telecom customers were down compared to the previous year. Overall, the company remains confident in its position to lead the evolution towards a more resilient, efficient, and sustainable energy future.

In the third quarter of 2022, net sales for other products and services increased by 7%, with core sales growth of 6%. This was primarily due to growth in parts, accessories, industrial distributor projects and services, and energy technology grid services. Gross profit margin also increased to 35.1% due to lower costs and efficiencies, but this was partially offset by an unfavorable sales mix. Operating expenses decreased by 1%, but this was mainly due to a provision for legal charges in the current year quarter. Adjusted EBITDA also improved, driven by higher gross margins, but partially offset by increased operating expenses. The company has two reporting segments, and financial results for both are discussed in the paragraph.

In the third quarter of 2023, the company's domestic segment sales decreased by 6% to $894 million, while the international segment sales increased by 14% to $208 million. Adjusted EBITDA for the domestic segment was $160 million, representing 17.9% of total sales, while adjusted EBITDA for the international segment was $28 million or 13.6% of net sales. The company's GAAP net income for the quarter was $60 million, which includes additional interest expense and a higher effective tax rate compared to the prior year. Diluted net income per share for the company on a GAAP basis was $0.97 in the third quarter of 2023.

In the third quarter, the company saw a strong increase in GAAP earnings per share due to a lower share count and a prior year adjustment. Adjusted net income was $102 million, compared to $112 million in the prior year. Cash flow from operations was $140 million, a significant improvement from the previous year. The company also repurchased $100 million worth of common stock and maintains its net sales outlook for the full year 2023, expecting a decline of 10-12%.

The company's product mix for the full year is expected to have a higher proportion of C&I products due to their outperformance, with a decrease in residential product shipments. Gross margin expectations and adjusted EBITDA margins are unchanged, but adjusted net income and free cash flow are expected to be strong. The company's GAAP effective tax rate and interest expense have also been updated.

The company's capital expenditures, depreciation expense, intangible amortization expense, stock compensation expense, and diluted share count are all in line with previous projections. The company's outlook for 2023 does not include potential acquisitions or share repurchases. The company's home standby field inventory has decreased quarter-over-quarter and the times normal is currently between 1.2 to 1.3. The company did not provide specific details on the wholesale and retail channels.

The company is seeing a more sustainable level of sales and production, with certain regions and channels returning to pre-COVID levels. They are still undershipping the market, but the gap is narrowing. The company is working towards improving efficiency and production rates to meet end market demand. Despite a light season, the demand for home standby remains strong. The company expects to be closer to normal levels in all channels by the end of the year and into 2024.

The speaker is answering a question about the company's sales channels. They mention that the dealer channel is closest to normal, followed by wholesale and then retail. They also mention that they are focusing on improving dealer productivity and that the majority of their sales go through this channel.

The company is focused on growing their dealer channel, which has over 3 million units in the field. They are able to measure close rates through their PowerPlay sales system and have seen some improvement in October, but are not ready to call it a new trend yet. They acknowledge some uncertainty around consumer spending, but believe that outages can help overcome any macro weakness. Sales leads are currently encouraging.

The speaker discusses the strong performance of the company in the third quarter, with sales leads being the second highest ever. Close rates are also maintaining. The Q&A session did not go smoothly. The gross margin was higher than expected, partly due to favorable mix and price-cost benefits. There were mix headwinds in the beginning of the year that offset these benefits.

The company is seeing a decrease in mix headwinds in the third quarter, which is expected to continue into the fourth quarter. This is due to an increase in home standby shipments and favorable mix. The company is pleased with the trajectory of margins and California remains a small market for the company, with growth during power safety shutoff events.

Despite being underpenetrated at 2%, the clean energy market in California still has potential for growth compared to the national average of 5.75%. Gas bans have been localized and some have been overturned in courts of law, but natural gas is still necessary as a bridge fuel for the transition to renewables. Power safety shutoffs have decreased in recent quarters, but there is still growth in the market. The state of California represents a large market opportunity due to the number of homes.

The speaker, Aaron Jagdfeld, discusses the current state of the solar plus storage market and its impact on their company's strategy. While there is currently softness in the market, they are still bullish on it long-term and have a lot of new products coming out next year. They believe these new products will set them apart from the competition and establish them as a leader in the marketplace. They have a large team working on these new products and are heavily investing in them.

The speaker believes that the current market pause may be beneficial for the company as they plan to launch new products next year. There has been an increase in IHCs from younger individuals who may not be as familiar with the product, which could be a factor in the current lower close rates. It may take longer to reach historical highs due to this demographic shift.

Aaron Jagdfeld explains that the company has been focusing more on the IHCs (in-home consultations) in the past 12 months and there has been a drop in close rates due to long lead times for products during COVID. While the lead times have recovered, close rates have not, leading the company to look into other factors. They have found that the category of buyers for their products is largely concentrated in the over 60 demographic, but as the category expands, they are reaching different demographics who are interested in resiliency. This could be attributed to the digital age and the way people live and work today.

The speaker notes that many people are working from home due to the current situation, which has increased the importance of having reliable power. However, power outages are still a common occurrence and can have a bigger impact now. As the company reaches out to different demographics, they are finding that younger customers may require more education and financing options, which can lengthen the sales process. The company is aware of this and is focused on addressing it.

The speaker discusses the success of ecobee and how it is driven by rising energy costs and the strong payback of the product. They also mention the importance of understanding potential buyers and adapting marketing and sales strategies accordingly. Additionally, they mention plans to continue widening the category and addressing challenges that come with growth. A question is asked about incentives for installers to sell the product.

The ecobee thermostat is not just a basic product that can be remotely controlled. It learns your patterns and adjusts accordingly, taking into account occupancy and energy costs. This makes it the best offering in the growing smart thermostat category. Installers appreciate the ease of installation and technical support from ecobee, which saves them time and money.

The ecobee thermostat has excellent technical support, which is why many installers choose it over other options. There are still underselling demands to work through, but next year should see a more normalized growth rate. The category has historically grown at a rate of 15% per year.

The speaker discusses the challenges faced in the field inventory this year, but remains confident in the long-term growth of the category. Power outages are on the rise and customers are frustrated, particularly in Michigan where penetration rates are over 15%. Every 1% increase in penetration rate represents a $3 billion market opportunity. The company has a 75% market share in Michigan and is focused on increasing penetration rates. The company does not give short-term guidance due to potential major events.

The speaker discusses the drivers of growth in the company's business, including market verticals in the US such as telecom and national rental accounts. However, there has been a slowdown in these markets in recent quarters due to factors such as higher interest rates and reduced CapEx spending by large telcos. These market verticals are expected to continue growing in the long-term, but have pulled back in the short-term.

The company sells into various verticals, with the telecom and equipment rental industries being the largest in the U.S. Outside of the U.S., there is great interest in backup power in Europe due to concerns about energy security. Other important markets for the company include India, the Middle East, and Australia. The company has limited exposure to Africa and Asia.

The speaker discusses the market in South America and notes that while it is growing, it is relatively small compared to Europe. They also mention the success of industrial distributors in the US and answer questions about the impact of the current housing market on their business. They clarify that the housing market only makes up a small portion of their sales and that they mainly focus on retrofitting existing homes. They also consider the potential effects of a slowdown in the housing market due to higher interest rates.

The speaker believes that power outages will become more frequent and longer in duration, causing homeowners to prioritize purchasing a generator over other home improvement projects. They also believe that this trend will continue for the next several decades, despite potential economic cycles. The call has ended and the company looks forward to discussing their fourth quarter and full year 2023 earnings in mid-February.

The operator thanks the participants for their participation and informs them that the conference call has ended. They can now disconnect.

This summary was generated with AI and may contain some inaccuracies.