The operator introduces the Generac Holdings First Quarter 2024 Earnings Call and reminds participants that the call is being recorded. Kris Rosemann, Senior Manager of Corporate Development and Investor Relations, introduces the speakers and mentions that they will be discussing forward-looking statements and non-GAAP measures. CEO Aaron Jagdfeld thanks everyone for joining and discusses the company's first quarter results, which exceeded expectations due to various factors. He also mentions that the company is reiterating its 2024 outlook for sales, adjusted EBITDA margin, and free cash flow conversion, which will be further discussed by CFO York Ragen.

In the first quarter, overall net sales increased slightly to $889 million, with residential product sales increasing 2% and global C&I product sales decreasing 2%. Margin expansion and efficient working capital management led to improved free cash flow generation. Home standby generator shipments were in line with expectations and field inventory levels are reaching normalized levels. Power outage activity in the U.S. was consistent with the long-term average, with a decline in activations due to a weaker outage environment in recent quarters. However, home consultations did increase sequentially but were lower compared to the same period last year.

In the first quarter of 2022, home consultations were higher than the same time period in 2019 and there was a moderate increase in close rates. The company is implementing initiatives to drive further growth, including optimizing lead generation and nurturing practices and expanding their sales funnel. They also added 100 residential dealers and have been successful in working with non-dealer contractors. The company is investing in their network of installers and making operational improvements to support growth and profitability. They are confident in their improved competitive position.

The company plans to use its strengths in manufacturing, sourcing, marketing, and distribution to drive growth in the home standby market. However, overall residential product sales were lower than expected due to softness in certain markets and post-pandemic challenges. Despite this, the company's ecobee team saw growth in sales and connected homes, with an improved gross margin. Progress is also being made in the development of residential clean energy products.

The company has seen an improvement in fleet health after completing a warranty upgrade program and is focused on improving the quality of their products. They are also working on partnerships with the Department of Energy to bring clean power generation to Puerto Rico and participate in a grid resilience program in Massachusetts. The company is excited about their collaboration with Wallbox for EV charging solutions and believes their investments in residential energy technology will generate attractive returns. They are also focused on integrating acquired products and platforms and creating competitive advantages through their core competencies. In terms of C&I products, global sales declined slightly due to a decrease in sales to domestic telecom and rental customers, but there was continued growth in North American industrial distributor channel and certain international markets.

The company saw strong sales in the first quarter of 2024 for their C&I products, leading to higher expectations for full-year sales. Shipments to North American distributors grew significantly, and the company continues to gain market share. Lead times were reduced due to operational execution. Shipments to national telecom and rental customers declined, but the company remains confident in future growth potential in these markets. Shipments of natural gas generators for non-traditional standby projects declined due to higher interest rates, but the company sees this as a long-term opportunity. They also plan to focus on multi-asset projects utilizing both natural gas generators and energy storage systems.

The company plans to increase market share in energy storage and continue investing in technology and teams to provide comprehensive solutions for commercial and industrial customers. International sales were lower due to declines in certain markets, but offset by growth in Latin America. The company remains confident in their enterprise strategy and is encouraged by their first quarter results.

The increasing demand for artificial intelligence and data centers is putting a strain on the electricity supply and highlighting the need for backup power. This demand is also contributing to the overall increase in power consumption in North America. The aging power grid in the U.S. is not prepared for this increase in demand, especially with the added stress of severe weather events. Generac's backup power portfolio is well-positioned to provide continuity and resilience in this electrified world, and their next-generation energy technology solutions will further enhance their value proposition.

During the first quarter of 2024, our net sales increased to $889 million, with contributions from acquisitions and favorable foreign currency. Residential product sales grew by 2%, driven by an increase in home standby generator shipments. Commercial and industrial product sales decreased by 2%, with foreign currency and acquisitions offsetting a decline in sales to domestic telecom and rental customers. Sales for other products and services increased slightly, with a 1% contribution from favorable foreign currency.

The company's gross profit margin increased in the first quarter due to a favorable sales mix, improved production efficiencies, lower input costs, and higher pricing. Operating expenses also increased, mainly due to investments in future growth and marketing efforts. Adjusted EBITDA before non-controlling interest was $127 million, representing 14.3% of net sales. The domestic segment saw a slight increase in total sales and a higher adjusted EBITDA margin, while the international segment experienced a 14% decrease in total sales, partially offset by foreign currency and acquisitions.

In the first quarter of 2024, the company experienced an 18% decline in core total sales for its segment, primarily due to lower intercompany shipments and decreased sales in certain European markets. Adjusted EBITDA for the segment was $28 million, and GAAP net income for the company was $26 million, including a non-cash expense related to a minority investment. The effective tax rate decreased, resulting in diluted net income per share of $0.39. Adjusted net income was $53 million, and cash flow from operations was positive at $112 million.

In the first quarter of the year, the company saw a significant improvement in free cash flow due to higher operating earnings and a reduction in primary working capital. Total debt outstanding was reduced, resulting in a lower gross debt leverage ratio. The company is maintaining its outlook for net sales and adjusted EBITDA margin for the full year of 2024, with a 3-7% year-over-year growth expected. However, there is a slightly lower mix of residential products and a higher mix of C&I products. The company is not changing its outlook for home standby generator shipments, but other residential products are facing softer end market conditions, leading to a lower growth rate projection for the year.

The company expects a decline in residential product sales, but an increase in C&I product sales will offset this. They anticipate a flat net sales for the second quarter, with growth in the second half of the year. The gross margin expectations for the full year have increased due to strong performance in the first quarter. Adjusted EBITDA margins are expected to be around 16.5% to 17.5%, but higher operating expenses may offset the improved gross margins.

The company's second half adjusted EBITDA margins are expected to be 450 basis points higher than the first half, due to gross margin expansion and operating leverage. The GAAP effective tax rate is expected to be 25-26% for the full year, with interest expense increasing due to higher interest rate expectations. Capital expenditures are projected to be 3% of net sales, and overall cash flow generation guidance remains unchanged. Adjusted net income to free cash flow conversion is expected to be strong at approximately 100%.

In the paragraph, the speaker discusses the company's outlook for the year, specifically in regards to depreciation expense, GAAP intangible amortization expense, stock compensation expense, and diluted share count. They also mention that the outlook does not include potential acquisitions or share repurchases. The speaker then opens up the call for questions, and the first question is about home standby. They explain that while shipments are up, activations are down due to a slower outage environment compared to previous years. They also mention that Q1 of last year was a strong quarter, making for a tough comparison.

The speaker discusses the impact of data center power demand on their company and mentions that their product range is not typically used for backup in data centers. They do not have plans to develop an engine range for this purpose and their products are used in different applications.

The company serves some edge data centers with lower backup power needs and has seen opportunities for natural gas backup generators due to challenges with siting and permitting for diesel engines. The company is growing its natural gas generator line and believes there could be opportunities in smaller edge data centers. The larger opportunity, however, is the expected increase in power demand from data centers in the coming years, potentially equivalent to adding 40 million households to the grid.

The utility industry faces challenges in quickly responding to the increasing demand for energy due to the lengthy process involved in building new plants and the need to incorporate intermittent sources like solar and wind. This may require the addition of expensive storage or the implementation of alternative strategies such as virtual power plants. Data centers and operators cannot wait for these solutions and the use of AI is growing rapidly, potentially leading to a decrease in power quality in the future.

The speaker discusses the future of the power industry, noting that there will likely be a degradation of power and shortages due to a supply-demand imbalance. They mention the challenges of replacing traditional energy sources with intermittent ones and the increase in demand from data centers. The next question from a conference call asks about the outlook for the company's commercial and industrial (C&I) business, and the speaker explains that while there has been a slowdown in the rental and telecom markets, the C&I business has performed well and they are confident in its sustainability.

The company's industrial distribution channel has been growing for the past decade, thanks to investments and acquisitions. This has helped the company gain market share and remain resilient in the face of power quality challenges. Businesses today heavily rely on a continuous source of power, making power outages a major disruption to their operations.

The speaker discusses the current state of the C&I market in North America, noting a strong penetration rate for backup power in buildings. This has helped offset the expected weakness in rental and telecom markets. The speaker also addresses residential One and states that destocking is likely complete. They also mention that IHC activation trends have been weak, but they are confident in their unchanged outlook for the second half of the year.

The company is experiencing mid-teens increases in shipments due to the decrease in field inventory. Activations and IHCs have been slightly lower than expected, but the company is still confident in their yearly projections. The category is not as sensitive to interest rate changes and is driven by emotional responses to power outages. The demographic of older homeowners is also less sensitive to interest rates. Interest rates have been high for a while and have affected market demand in the back half of last year.

The speaker believes that the impact of higher interest rates on the market has already been accounted for. They also mention the Colorado State University hurricane forecast, but do not put much stock in it. They are looking at longer-term trends and factors like air and water temperatures and El Nino events. The speaker also mentions that their guidance assumes a baseline level of outage activity and expects a sequential increase in the second half of the year. The question from a caller focuses on energy technology, and the speaker discusses the potential for incremental revenue from this area over the next few years.

The speaker discusses the current market conditions for Energy Tech products, specifically solar plus storage and EV charging. They mention that the market is weaker due to factors such as NEM 3.0 and higher interest rates, but they are still optimistic about the future and are on track for their launch plans later this year. They expect the market to improve by 2025 and acknowledge that this year's sales may be on the lower end of their range due to current market conditions.

The speaker, Aaron Jagdfeld, is discussing the company's gross margins for the quarter. He mentions that they were pleasantly surprised by the cost performance, which came in better than expected. This was due to supply chain normalization and improved efficiency levels. He also notes that this improvement came sooner than expected, which derisks their assumptions for the second half of the year. A question is then asked by Stephen Gengaro from Stifel.

The speaker is asked about any changes in the competitive landscape and the impact on margins due to their biggest competitor being taken private. The speaker confirms that the strength of their standby products is a margin positive for the company. They also mention that the competitor has not yet been acquired by private equity and it may take time for them to adjust to operating with a high degree of leverage and a large amount of debt. The acquisition is also complicated due to the company's long history.

The company believes that the recent acquisition will not have a significant impact on the competitive landscape. They have a strong presence in the C&I sector, while the acquired company is smaller in the residential sector. The company continues to invest in driving leads and awareness for the category, which has resulted in improved share position. The market opportunity for home standby is still large, with low penetration rates, making it worth being a net investor. On a different note, the company saw positive developments in the industrial distributor channel this quarter, which helped offset declines in other C&I subsectors.

The speaker asks Aaron Jagdfeld about the significance of the industrial distribution channel in the company's C&I revenue, specifically in terms of the portion it makes up and the portion that is owned by the company. Jagdfeld reveals that the industrial distribution channel makes up around 70-75% of the company's domestic C&I sales, with the remaining portion coming from mobile and telecom products. He also notes that the growth of the industrial distribution channel is important in balancing out the impact of fluctuations in spending from larger customers in rental and telecom.

The industrial distributor business has been successful for the company, and they are investing in new factories and R&D to continue its growth. This channel is important for providing service and support to large accounts in the telecom industry. The products sold through this channel are highly customized for each building's electrical needs.

The company has a configure-to-order business with a long sales cycle and lead times ranging from 8 to 52 weeks. They have been focused on engaging with decision-makers and spreading the word about the advantages of natural gas over diesel for backup power. This has helped them get specifically named in specifications and they hold an advantage over others in the natural gas genset market. Natural gas backup power is growing faster than diesel in their market.

The speaker discusses the strength of the industrial distributor channel and the impact of HSB activations on the company's revenues. They mention that activations were down modestly year-over-year, but still in line with expectations. They also expect residential revenues to be up low double digits for the full year due to a stronger outage environment compared to the previous year. Overall, the category of HSB activations has grown significantly since 2019.

The speaker discusses the weaker power outage environment in the last couple of quarters and mentions that they undershipped the market in Q1 but are back to normal in Q2. They also mention the seasonality of the business and how it supports the guide for residential products. The speaker is then asked about the competitive landscape for storage deployments in the residential market and they mention that storage attach rates are up significantly due to a decrease in new solar projects in California.

The company's storage business is seeing some growth, but not as much as other residential products. The portable generator market has been soft due to a decrease in power outages and international demand. The chore product market has also been struggling due to the pandemic and a lack of demand from distribution partners.

The company experienced a weak snow season and high snow inventories, leading to a delay in investing in spring chore products. However, the weather is improving and there are positive trends in chore products. The company also faced headwinds in the portable generator market. During the first quarter, the company saw reductions in input costs, mainly due to lower steel costs and improved plant efficiencies. Freight costs have also decreased.

In the first quarter, the company saw a better gross margin than expected, largely due to factors such as cost savings and increased efficiency. Copper prices had a lesser impact compared to steel prices. In terms of R&D expenses, the company is focused on energy technology and has no plans to target the data center market. They are working on next-gen MLPE storage products with the goal of competing in the market at a lower price point with lower failure rates and ease of installation. OpEx guidance remains unchanged, with the company continuing to invest in strategic initiatives.

The company has maintained its EBITDA margin guide from last quarter, with the gross margin outperformance offset by higher operating expenses. They have been investing heavily in R&D, particularly in energy tech products, such as storage devices and rooftop solar products. They have been building teams and opening tech centers in various locations to compete with other companies in the market. The company is also working on a project to unify all of their products on a single platform for a seamless user experience.

The company's acquisition of Ecobee was a key part of their strategy, as it allowed them to bring advanced ML and AI technology and a high-quality user experience to their products. This will give them a unique advantage in the market, as they believe no one else has a similar offering. With the increasing cost of electricity, the company aims to help homeowners control their energy usage and costs through their products. They are confident in their brand, distribution, and marketing abilities to achieve success in the long-term. The company will discuss their second quarter earnings in late July.

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