The operator welcomes participants to the Generac Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. The call will include a presentation, followed by a question-and-answer session. Kris Rosemann, Senior Manager of Corporate Development and Investor Relations, introduces the speakers, Aaron Jagdfeld, President and CEO, and York Ragen, CFO. The call will include forward-looking statements and reference to non-GAAP measures. Aaron discusses the company's strong fourth quarter results, with an increase in shipments of home standby generators despite a softer power outage environment.

In the quarter, the company saw margin expansion and record free cash flow due to favorable mix and price cost tailwinds. Net sales increased 1% to $1.06 billion, with growth in residential product sales offsetting lower portable generator sales. The company also achieved record C&I product sales for the third consecutive year, resulting in a 30% compounded annual sales growth rate. This helped offset headwinds in the residential category, and despite lower shipments, home consultations and sales leads increased. The company also saw improving margin performance and a reduction in inventory levels, leading to record cash flow from operations for the full year.

The company had a strong cash flow in 2023, allowing them to invest in their engineering and manufacturing capabilities, launch new products, and make strategic investments. They opened an engineering center and broke ground on a new manufacturing facility. They also launched new products, such as energy storage solutions and a smart doorbell camera. They made progress towards their vision of a common platform for their residential solutions and introduced a new advertising campaign. They also made strategic investments, including acquiring a provider of energy storage solutions and making a minority investment in a leading EV charging solutions provider.

The company is excited to partner with Wallbox, a leader in EV charging technology, and integrate their solutions into their energy technology portfolio. The increasing severity of weather events and the evolving energy grid in the US have highlighted the importance of the company's products and solutions. Despite no major power outages in 2023, smaller scale severe weather events drove power outage activity above the long-term average. Legislative and regulatory reactions to climate change are also impacting the power grid. The supply side is shifting towards renewable energy sources, while demand is increasing due to electrification trends and infrastructure growth. These changes are creating challenges for utilities and grid operators to reliably match supply and demand.

The North American Electric Reliability Corporation has warned of a high risk of resource shortages, creating opportunities for power resiliency and energy efficiency solutions. Generac, with its market share of over 70%, is well positioned to capitalize on the potential of the home standby generator market. The company also sees potential in the global C&I market as businesses are concerned about power reliability and energy prices. In the fourth quarter, home standby shipments increased despite inventory de-stocking and lower power outage activity, but severe winter storms in early 2024 led to record levels of outages in January.

In the fourth quarter of last year, there was a spike in power demand due to cold temperatures, leading to power conservation notices being sent to homeowners. This, along with other factors, increased consumer awareness of the vulnerability of the electrical grid and resulted in a record number of home consultations. Despite lower power outage activity, activations (proxy for installations) were at an all-time record, indicating a sustained demand for home standby generators. As a result, the gap between shipments and activations is expected to narrow in the first quarter of this year, and home standby sales are expected to increase in line with overall residential sales growth.

The company expects an increase in sales of home standby generators throughout the year, along with growth in sales of residential energy technology products and solutions. The launch of a new smart doorbell camera was well received, and the company has a large installed base of satisfied customers to cross-sell their products to. They were also awarded grants from the Department of Energy for resiliency programs in Puerto Rico and Massachusetts, which will utilize their energy storage systems and other technologies to provide clean energy and support grid operators.

During the fourth quarter, the company made a minority investment in Wallbox, which will provide a seat on their Board of Directors and potential collaboration opportunities. This partnership also gives access to bidirectional charging technology, which will be important as electric vehicle usage increases. The company expects strong growth in residential energy technology sales, with investments being made in next-generation energy storage systems. Commercial and industrial product sales were flat in the fourth quarter but saw a 19% increase for the full year. Domestic sales declined slightly, but there was continued strength in industrial distributor and direct customer sales. C&I generator shipments through the North American distributor channel grew significantly, and quoting activity remained resilient despite a decrease from peak levels earlier in the year.

Shipments of natural gas generators for non-traditional standby projects increased during the fourth quarter, but higher interest rates are expected to negatively impact future shipments. Sales to rental equipment customers declined, but there is potential for growth in this market. Shipments to national telecom customers also declined and are expected to remain soft in the coming quarters.

The company has experienced cyclical spending patterns in the market, but believes that the long-term trend of increasing global tower and network hub counts and the importance of wireless communications will continue. International sales were affected by declines in certain regions, but there is still growth potential in other emerging markets. The company expects a decline in global C&I product sales for the year, but sees positive momentum in residential product sales and anticipates strong growth in home standby generators in 2024.

The company's strong momentum and record cash flow performance in the fourth quarter has given them confidence to focus on building out their longer-term vision for residential and C&I energy technology ecosystems. They plan to use their earnings power to invest in organic growth, strategic acquisitions, and returning capital to shareholders. The company's net sales increased by 1% in the fourth quarter of 2023, with favorable contributions from acquisitions and foreign currency. Residential product sales also increased, driven by a 10% increase in home standby generator shipments and growth in energy technology products. However, there was a decrease in portable generator shipments due to a tough prior year comparison.

In the fourth quarter of 2023, commercial and industrial product sales increased slightly to $363 million, mainly due to contributions from foreign currency and an acquisition. However, there was a decline in core sales, attributed to weak sales to domestic telecom and national equipment rental customers. Other products and services saw a 6% increase in sales, driven by growth in domestic C&I service offerings and aftermarket service parts. Gross profit margin improved to 36.5% due to favorable sales mix and lower costs. Operating expenses increased by $2 million, primarily due to higher employee and marketing costs. Adjusted EBITDA was $213 million, or 20% of net sales, compared to $174 million in the prior year.

In 2023, the company's adjusted EBITDA before deducting for non-controlling interest was $638 million, representing 15.9% of net sales. Domestic segment total sales increased by 1% and adjusted EBITDA for the segment was $192 million. For the full year, domestic segment total sales decreased by 15% and adjusted EBITDA margins were 15.8%. International segment total sales decreased by 13% and adjusted EBITDA was $20.4 million. For the full year, international segment total sales increased by 6% and adjusted EBITDA margins were 13.7%. GAAP net income for the company in the quarter was $97 million, including $5 million of additional interest expense compared to the prior year.

The GAAP income taxes for the current year fourth quarter were $30 million, resulting in an effective tax rate of 23.7%. This is an increase from the prior year's effective tax rate of 15.5%, primarily due to the absence of discrete tax benefits. Diluted net income per share for the company on a GAAP basis was $1.57, a significant increase from the prior year. Adjusted net income for the company was $126 million, or $2.07 per share. Cash flow from operations was $317 million, with free cash flow reaching an all-time quarterly record of $266 million. This improvement was mainly due to a reduction in inventory and higher operating earnings, partially offset by higher capital expenditures. Total debt outstanding at the end of the quarter was $1.58 billion, resulting in a gross debt leverage ratio of 2.5 times. The company also repurchased approximately 1.3 million shares of common stock for $151 million during the fourth quarter.

The company's Board of Directors has approved a new stock repurchase program and the company's cash flow from operations was an all-time high in the previous year. The company strategically deployed capital for acquisitions and investments, as well as repurchasing shares of common stock. The company will continue to operate within a disciplined capital allocation framework and has announced an increase in net sales for 2024, driven by higher home standby generator sales, growth in residential energy technology, and strong performance of Ecobee products and solutions. Overall, the company expects residential product sales to grow in the mid-teens range for 2024.

The company is expecting a decline in global C&I sales due to cyclical pressures, but overall net sales are projected to increase by 3% to 7% compared to the prior year. This does not include the potential impact of a major power outage event. The first half of the year is expected to be 45% weighted in terms of sales, with the second half being 55% weighted. Gross margins are expected to improve by 300 basis points for the full year due to lower input costs and higher home standby sales volumes.

The company expects gross margins to increase in the first quarter due to higher home standby shipments and lower input costs, resulting in sequential improvement throughout the year. Operating expenses will be high due to investments in new and existing markets, but are expected to be leveraged for improved EBITDA margins. Adjusted EBITDA margins are expected to be 16.5% to 17.5% for the full year, with a significant improvement in the second half. The company is also investing in residential energy technology products and solutions to take advantage of long-term growth opportunities.

In 2024, residential energy technology is expected to have a negative impact on EBITDA margins similar to 2023. Adjusted earnings per share and free cash flow guidance is provided, with items added back net of tax using the expected effective tax rate. Interest expense is projected to be $85-90 million, with a projected GAAP effective tax rate of 25-26%. Capital expenditures are expected to be 3% of net sales, with higher depreciation and intangible amortization expenses due to increased investments. Stock compensation expense is estimated at $55-60 million. Operating and free cash flow generation is expected to be weighted towards the second half of the year, with strong free cash flow conversion from adjusted net income.

The company's full year weighted average diluted share count is expected to decrease, and potential acquisitions or share repurchases could drive incremental shareholder value. The call was then opened for questions, with the first one focusing on the assumed growth for HSB and residential in 2024, which is expected to be in the mid-teens range. The company is not expecting a decline in activation rates, but is also not being overly aggressive in their assumptions due to the current environment. The growth in the residential category is largely due to the destocking of field inventory in 2023, which will abate in Q2 and for the rest of the year. The company is also assuming modest growth in the home standby market.

The company is expecting to see growth in their energy tech segment, with new product launches and rebranding efforts. They have been working on these products for a while and expect them to be market-leading. The next-generation energy storage devices should be available later this year.

The company has allocated a small budget for the launch of their new product, but they believe it will gain traction with time. They are focused on rebranding and regaining market confidence. They see continued growth with Ecobee and are working on integrating all their products onto one platform for a seamless user experience. This process will take time, but they have already started integrating certain products and plan to do the same with upcoming products like the Wallbox.

The speaker praises Ecobee's team and their products, mentioning their ability to integrate an ecosystem. The next question asks about the home standby channel inventories and the $300 million tailwind from the absence of destocking. The speaker explains that they are close to wiping out the abnormal excess field inventory and expects it to be gone by the end of the first quarter. They also mention that there may still be pockets of higher inventory in certain markets or channels.

York Ragen, the speaker, believes that the market will see a decrease in outages by the end of the first quarter. He also mentions that the company undershipped the market in 2023 and will see a tailwind in growth from that in 2024. The next speaker, Brian Drab, asks for more information on the IHCs (installed home standby generators) and the speaker, Aaron Jagdfeld, explains that they saw a softening in Q4 due to a low power outage environment, but overall IHCs were up for the year. He also mentions that January had a high level of outage activity.

The speaker discusses a new trend in the category of outage activity, where media reports and potential outages are driving sales leads. They also mention a modest improvement in close rates for sales, which is encouraging and gives them confidence in their sales forecast for the first and second half of the year.

The speaker, Aaron Jagdfeld, is responding to a question about the company's close rates in the fourth quarter. He mentions that October saw a modest improvement and the quarter as a whole was also up modestly. He does not have the pacing for each month of the quarter, but the company is assuming that close rates will continue to improve in 2024. Jagdfeld also notes that the company is seeing more people entering their sales funnel due to concerns about potential outages.

The speaker discusses the impact of cold weather on homeowners and their energy consumption. They mention that this can lead to more people becoming interested in their product, but it may take longer for them to convert into customers. They also mention that they are expecting a modest improvement in close rates over the next few years, but are focused on investing in resources to drive long-term growth opportunities, which may impact their margins.

The speaker explains that the company has been investing heavily in their business to prepare for changes in the market, particularly in the energy sector. They believe these investments are necessary for future success as the grid continues to evolve. The speaker also mentions the challenges of balancing renewable energy sources with storage and increasing demand for electricity.

The speaker discusses the opportunities created by the mismatch of supply and demand in the energy industry, particularly due to severe and volatile weather patterns. They mention the work and investments needed to deploy solutions for homeowners and business owners, which will result in a margin drag of 350-400 basis points in 2021. However, the speaker expects this to dissipate by 2025 and achieve breakeven levels in 2026.

During a call with investors, the CEO of a company addressed questions about their gross margin guide for 2024 and explained that the 37% margin is mostly driven by product mix. The company saw a 1% growth in residential revenue in the fourth quarter, with home standby and energy technology products performing well, but offset by softness in portable generators and tour products. The CEO also mentioned that there was a small increase in pricing to cover additional costs, but it was not significant.

The speaker discusses the reasons for the increase in gross margin and mentions that half of it is due to the growth of the residential and home standby business. The other half is attributed to cost abatement, including the end of supply chain pressures and lower logistics costs. The company also has a profitability enhancement program in place. The speaker then addresses a question about the softness in the C&I side of the business, mentioning telecom and rental accounts as contributing factors. They also mention that the company's involvement in the beyond market, particularly in chance at rock, has been important.

The company's C&I business has been growing rapidly, with a CAGR of close to 30% over the last three years. This business is truly global and the company has a lot of long-term conviction in it, as evidenced by their recent groundbreaking on a new plant. However, there have been certain cycles in the C&I markets, with the telecom vertical experiencing a strong year in 2022 but softening in the back half of this year. The company remains hopeful for a rebound in 2024, but current evidence suggests otherwise. The company is a Tier 1 supplier to all major wireless carriers and they have all cut their CapEx guide by around 10%.

The telecom industry is experiencing a decrease in CapEx spending, which is a cycle that has been seen before. This is also happening with national rental accounts, who have recently announced lower CapEx spending. In the temporary power and lighting market, there has been a heavy refleeting cycle and now they are waiting for utilization rates to increase before purchasing new equipment. There has been growth in the beyond standby market, with customers finding additional value in using generators for grid support programs.

The company has been able to monetize their assets through time of use programs and demand response programs. This has been a significant growth opportunity, especially with the rise of electricity prices and low natural gas prices. They have seen success with Generac as a customer and in the data center market, particularly in smaller gas gens for edge data centers. However, with the current higher interest rate environment, these projects have been delayed and will likely return when interest rates normalize.

The speaker discusses the impact of interest rates on the C&I segment, which includes telecom and rental companies. They mention that the recovery time for spending in this segment is typically four to six quarters, but can be longer in certain situations such as mergers. The speaker also notes that the level of interest rates can affect the segment, with a drop to 3% potentially bringing back delayed projects.

The speaker discusses how major acquisitions by carriers can lead to a pause in capital expenditures, and how rental cycles can last for about four to six quarters. They also mention how the timing can vary and how the company is expanding their capacity in certain markets. The speaker also notes that they are the strongest manufacturer in the mid-range product market and have an outsized share in certain segments.

The speaker discusses their unique approach to the market in 2024 and their lack of experience in a higher interest rate environment. They also mention that the success of projects in the beyond standby market depends on various factors and cannot be pinpointed to a specific interest rate level. The next question asks for updates on DC generators and the storage strategy, specifically in regards to AC coupling and potential partnerships with other inverter companies in 2024.

Aaron Jagdfeld discusses the company's decision to move away from their DC generator product and focus on their AC generator product, which they believe will be more efficient and cost-effective. They also plan to improve their AC coupling capabilities with the introduction of new storage products later this year. This will set them up for success as they continue to offer their Pika products and expand into microinverter products in 2025.

The speaker discusses the company's belief in the efficiency of DC coupling for clean sheet implementation and the potential for AC coupled solutions with micro inverters. They mention the challenges of supporting both architectures and the investment being made to improve the product. They also mention the goal of increasing the dealer count to 10,000 and the slower growth in 2023 compared to previous years.

The increase in dealer count over the past few years has been significant, with over 2,000 dealers added. However, the company only counts a dealer if they have purchased from them within the past 12 months. This has resulted in a churn of dealers and a slower growth in dealer count in 2023. The company is still targeting a net dealer count of 10,000, but this has been impacted by softer power outage environments and a decrease in in-home consultations. The company is expanding their outreach to include HVAC contractors in addition to electrical contractors.

The speaker discusses a trend of consolidation in home services businesses, and how this has led to new partnerships and opportunities for growth. They also mention the potential impact of infrastructure investments on the cyclical downturn in the commercial and industrial sector.

The company has run into some issues with installation bandwidth due to customers not being able to keep up with the speed of building out their networks. This has caused some delays in the schedule and potentially some field inventory. However, the company is not worried as they have seen this type of cycle before. The company receives forecasts and guidance from their large customers, but visibility is still a weak area for them in terms of their C&I business.

The company is seeing strength in its independent distribution network, which has given them good visibility in local markets. However, national account customers have been more volatile in their order patterns. The company believes that some customers in the telecom rental and standby industries may have turned off orders more quickly than expected, but they anticipate a quick rebound in the next few years. The company's long-range plan may have underestimated the impact of these customers, but they still expect growth in the coming years.

The speaker, Aaron Jagdfeld, is discussing the impact of interest rates on the growth or decline of home standby generators (HSPs). He explains that while higher interest rates may have some indirect effects on the macroeconomic environment, the HSP category is not highly interest rate-sensitive. He also mentions that the company offers financing options, but most customers opt for the 18-month same as cash option, indicating that they are not deferring payment. Jagdfeld believes that the primary demographic for HSPs, older Americans, are more concerned with protecting their homes and families rather than financing options.

The speaker believes that the company's success is more dependent on factors other than interest rates. The operator then thanks everyone for participating and announces the end of the call.

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