The operator introduces the Second Quarter 2024 Generac Holdings Inc. Conference Call and hands it over to Kris Rosemann, who thanks everyone for joining. Aaron Jagdfeld, President and CEO, and York Ragen, CFO, will also be speaking. Forward-looking statements and non-GAAP measures will be referenced during the call. The second quarter results exceeded expectations and the company is raising its full-year outlook due to increased power outage activity, including the impact of Hurricane Beryl.

In the second quarter of the year, overall net sales were similar to the previous year, with an increase in residential product sales and a decrease in global C&I product sales. Gross and adjusted EBITDA margins also improved due to favorable sales mix and lower input costs. Power outage activity was above average due to storms and Hurricane Beryl, leading to increased demand for home standby and portable generators. Home consultation activity and close rates have also improved, especially in the month of July. However, close rates may decrease after a major outage event in the affected region.

The company is focused on expanding their market and increasing engagement with customers in regions with low outage activity. They have increased their dealer count and continue to strengthen relationships with non-dealer contractors. Despite a decrease in activations in the first half of 2024, they expect growth in the second half due to recent outage activity. The company is well-equipped to respond to major outage events and their distribution network and call centers provide support to customers in need.

The company is increasing its advertising and production efforts following Hurricane Beryl to meet the increased demand for home standby and portable generators. They are also adding more dealers and contractors to their distribution network. The company is raising its 2024 outlook due to the expected higher demand for backup power and sees opportunities for further growth in the residential standby generator market. However, the market for residential solar and storage products is facing challenges due to changes in California's net metering program and higher borrowing costs. The company recently announced a grant to provide energy storage systems to Puerto Rico.

The grant for Ecobee has increased to $200 million over five years, with shipments expected to start later this year. Ecobee's market share and margin have improved, and their connected homes count is approaching four million. Generac is leveraging Ecobee's expertise to develop a common platform for their residential energy ecosystem. Generac has also made an additional $35 million investment in Wallbox for global expansion of their EV charging solutions and deeper integration with their dealer and customer platforms. This is seen as important as electric vehicle penetration increases and impacts home and business owners as well as grid operators.

The company is confident in its ability to compete in the energy technology market through a combination of internal initiatives, strategic investments, and core competencies. They plan to expand their distribution network and gain market share by leveraging their expertise in customer support and qualified sales leads. In the C&I product category, global sales declined due to decreased shipments to domestic telecom and rental customers, but were partially offset by growth with North American industrial distributors. The company plans to continue expanding their market share through operational execution and investment in certain territories. They also expect shipments to National Telecom and rental equipment customers to remain soft for the rest of the year.

The company sees long-term growth opportunities in both the rental and backup power markets despite current cyclical weakness. They believe the need for future infrastructure projects and the growing demand for reliable power in the telecom industry will drive growth. The company recently acquired a battery energy storage system product offering and has an expanding pipeline of commercial projects. They also have a commercial agreement with Wallbox to expand their opportunities in the microgrid market. Internationally, sales were lower due to declines in intercompany shipments from Mexico to the U.S. telecom market.

Despite lower shipments in Europe, the company's expanded agreement with Wallbox and increased shipments to other regions, such as Latin America and India, have partially offset the softness. The company's international growth strategy has been successful in recent years and they remain committed to investing in it. The company's strong performance in the first half of 2024 has allowed them to continue investing in their Powering a Smarter World Enterprise strategy and repurchasing shares. The recent Hurricane Beryl highlights the need for resiliency in the electrical grid, as changing weather patterns and increasing demand for electricity put stress on the aging infrastructure. These trends are expected to lead to lower power quality and higher prices in the future.

In the second quarter of 2024, Generac's net sales were $998 million, slightly higher than the previous year due to contributions from acquisitions and favorable foreign currency impact. Residential product sales increased 8%, driven by a rise in home standby and portable generator shipments. However, commercial and industrial product sales decreased 10%, mainly due to weaker sales to domestic telecom and rental customers, offset by growth in other international markets.

In the second quarter, net sales for other products and services decreased slightly, but gross profit margin increased due to favorable sales mix and lower input costs. Operating expenses increased due to investment in future growth, but adjusted EBITDA before non-controlling interest also increased. In the domestic segment, total sales increased by 1% and adjusted EBITDA margin improved to 16.9%.

The company saw an improvement in margins due to favorable sales mix and lower input costs, but this was partially offset by higher operating expenses. International sales decreased due to lower shipments in certain markets, but there was growth in other regions. The adjusted EBITDA for the segment also declined due to reduced operating leverage. Overall, the company's GAAP net income and diluted net income per share increased in the second quarter of 2024 compared to the prior year. The effective tax rate decreased due to certain unfavorable discrete tax items in the prior year. Adjusted net income for the company was $82 million, or $1.35 per share.

The company's adjusted net income in the current quarter was $68 million, compared to $1.08 per share in the prior year. Cash flow from operations was $78 million, with free cash flow of $50 million. The decrease in free cash flow was due to higher tax payments, but was partially offset by higher operating earnings. The company also repurchased shares and has remaining funds for repurchases. They recently replaced their term loan B credit facility and have a lower gross debt leverage ratio. The company plans to continue their disciplined and balanced capital allocation strategy.

The company has increased its overall outlook for full-year 2024 due to high demand for backup power in Texas. They now expect net sales growth to be 4% to 8%, with home standby generator sales growing in the high teens range. However, they have seen softness in residential clean energy and chore markets, resulting in only a modest reduction in their outlook for those products. The company expects net sales growth to accelerate in the second half of the year, with third quarter growth in the high single digits and fourth quarter growth in the low to mid-teens. The company's gross margin expectations have also increased due to second quarter outperformance and higher sales mix from home standby generator sales in the second half of the year.

The company has increased its expected gross margin improvement for the full-year 2023 by 350 to 400 basis points. This will result in adjusted EBITDA margins of 17% to 18% for the full-year 2024, with sequential growth throughout the year. The GAAP effective tax rate is expected to be 25% to 26%, and add back items for adjusted net income and earnings per share should be reflective of this rate. Gross interest expense is now expected to be $92 million to $94 million, assuming no additional principal prepayments.

The company expects stock compensation expense to be between $52 million to $54 million for the year, an increase in free cash flow conversion guidance, and a decrease in weighted average diluted share count. They also maintain consistent guidance for capital expenditures, depreciation expense, and GAAP intangible amortization expense. The 2024 outlook does not include potential acquisitions or share repurchases. The company expects high-teens growth in home standby sales, with some of it attributed to lapping over destocking and some from underlying demand. The company did not provide specific numbers for activations and shipments in Q2 and July after the storm.

The company has increased its guidance due to the impact of a $300 million field inventory situation last year. The increase in guidance is mainly due to the delta that is storm related and is all incremental. The original guidance took into account the destocking that occurred in Q1 and is not expected to be a problem for the rest of the year. Activations were modestly down in the first half of the year due to lower power outage activity, but are expected to pick up in the second half. Shipments were slightly ahead of activations in Q2, but this is a normal seasonal trend and field inventory levels are currently at normal levels.

The operator introduces a question from George Gianarikas about the company's guidance increase in July. Gianarikas asks about the impact of Hurricane Beryl and the company's sales and penetration rates in Texas. CEO Aaron Jagdfeld explains that the hurricane and previous outages in the area led to increased interest in their products, resulting in a guidance increase. He also mentions that the duration of outages plays a role in driving sales.

The company carries a significant amount of inventory and was able to quickly deploy it in response to the unexpected storm in Houston. The increase in in-home consultations has been significant, and the company has seen a higher intensity of sales leads with every hour of outage activity. The company has about 800 dealers in Texas and expects an uplift in other markets due to media coverage of the event.

The media coverage of Hurricane Beryl was not as extensive as it would have been if it had hit the East or West Coast. However, the increase in IHCs supports the company's guidance and they believe there is room for growth in Texas. The next question is about the margin trajectory for clean energy, specifically regarding ecobee's improving margins and the timeline for profitability in that business. The ecobee team has been focused on reducing the cost of materials and improving supply chain efficiency.

The company's initiatives have resulted in a significant improvement in gross margin, which can be attributed to both market forces and the efforts of the team. The timing for new product introductions remains on track, but the solar plus storage market has been negatively impacted this year. However, the company has received a Department of Energy grant that is expected to bring in $100 million over a five-year period.

The company expects to see a $200 million impact from discussions and negotiations with DOE and other partners, with most of the installs happening in 2025 and 2026. The timing of the project is intact, but the puts and takes may be different than originally planned. The company also expects input cost tailwinds to continue into the second half and believes that the recent storm activity and nurturing initiative may drive incremental uptake from warm leads. The gross margin increase in the second half will be mainly due to a higher mix of home standby, but the company also expects some further price cost improvements to continue.

Aaron Jagdfeld, CEO of Generac Holdings, discusses the increase in interest for their products from "tire kickers" and new demographics. He attributes this to the broader mentions of potential power outages and the growing trends of electrification and decarbonization. The recent event of Hurricane Beryl has also led to an influx of leads, but this may temporarily weaken their close rate in affected markets. However, they may be able to offset this by nurturing warm leads resulting from the event.

The speaker expects the close rate to temporarily decrease but believes the company's increased leads and improved nurturing techniques will lead to future sales. They also discuss an increase in revenue guidance by 1%, which equates to approximately $40 million, due to storm activity and a shift from mid-teens to high teens in home standby sales, which will add around $50 million in revenue.

The speaker, York Ragen, responds to a question about why the company is not being conservative in their outlook for the impact of Hurricane Beryl. He explains that their numbers are close to the impact of the ice storm of '21, which was one of the top five weather outage events. He mentions factors such as home standby growth, portable improvements, and clean energy offsets that contribute to their outlook. He also mentions that the impact of a major power outage event is usually between $50 million to $100 million, and they have included their guidance towards the lower end of that range. He also notes that the hurricane unexpectedly took a sharp turn, which affected their ability to deploy portables, and they will continue to update their outlook as more information becomes available.

In response to a question from Jerry Revich of Goldman Sachs, York Ragen, a representative from the company, discussed the gross margin performance in the first quarter. He mentioned that the gross margins have been improving for a few quarters due to price cost improvements and a higher mix of home standby shipments. He also stated that there is an expectation for further improvement in the second half of the year, with a higher mix of home standby and continued price cost improvements. The call was then put on standby for the next question.

The speaker, Aaron Jagdfeld, responds to a question about the contribution of Texas to the company's revenue and the sustainability of growth in the industrial distribution business. He notes that Texas has seen significant growth in penetration rates and is a large market for the company. He also mentions that the telecom sector is at its lowest point but expects a slight increase in the second half of the year.

The telecom market is expected to bottom out in Q2 or Q3, and there is hope for improvement in 2025. However, there is no solid forecast yet for 2025. The company is optimistic about the long-term potential of the telecom market, especially in terms of infrastructure and the need for reliable power. The company has also made strategic investments and acquisitions in the industrial distributor market to improve performance and increase market share.

The company has seen an increase in market share in certain areas and attributes this to their efforts in developing distribution partnerships. They also note that storms in one region can have a positive impact on sales in adjacent markets, as people become more aware of the need for backup power. This has been seen historically and is currently being observed in the company's Florida IHC market.

The speaker discusses the recent Hurricane Beryl event and how it was not covered as much by the media compared to events on the East or West Coast. They also mention that the Gulf Coast states are more aware of hurricane season and the potential for strong storms. The speaker also briefly mentions the standby segment, stating that it has been quieter due to the higher rate environment.

The high rates in clean energy projects have caused them to be put on hold, but they are still expected to grow in the future. Microgrid projects, which use natural gas generators, also include storage and EV charging components. SunGrid acquisition and partnership with Wallbox strengthen the company's position in the microgrid market, and they are also building competencies in the C&I sector.

The company is confident in the growth potential of the microgrid industry, but acknowledges that the current rate environment may be challenging. They also discuss their success in the Indian market, where they focus on natural gas solutions for backup power. They are optimistic about the potential for growth in this market due to the country's shift towards natural gas.

The speaker discusses the potential growth in India's economy due to geopolitical tensions between the U.S. and China, as well as the country's progress in infrastructure and business-friendly political environment. They also mention their company's focus on gas and the potential impact of major storms on sales in the past. The tailwind from such events typically lasts two to four quarters, with the possibility of a longer-lasting effect depending on the severity of the event.

The impact of the pandemic has exacerbated the concern about outages, and the recent hurricane may have a similar effect. The company is currently expecting this event to be on the smaller end of a major event, but that may change as time goes on. The media plays a role in creating awareness and driving demand during these events, which can lead to a sustained increase in distribution. The company is expecting a 4% to 8% revenue range for the back half of the year, with Beryl activations being a major factor.

The company is not seeing any softening in the consumer market, and their guidance increase is mainly due to the impact of Beryl in Texas. They may see a temporary moderation in close rates due to the large increase in IHCs, but overall close rates are holding steady. The company thanks everyone for joining the call and looks forward to discussing their third quarter earnings in October.

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