The first quarter 2025 earnings conference call for Generac Holdings, Inc. was introduced by the operator, who announced that after a presentation by the speakers, there would be a Q&A session. Kris Rosemann welcomed attendees and mentioned the presence of Aaron Jagdfeld, CEO, and York Ragen, CFO. He discussed forward-looking statements and the potential risks and uncertainties involved, directing participants to refer to the earnings release or SEC filings for more information. Aaron Jagdfeld then reviewed the company's strong first-quarter performance, highlighting better-than-expected results driven by robust sales of home standby generators, strong residential energy technology sales, ecobee's success, and high shipments of energy storage systems, all contributing to adjusted EBITDA surpassing expectations.

In the most recent quarter, net sales increased by 6% year-over-year to $942 million, driven by a 15% rise in residential product sales due to strong demand for home generators and energy solutions, although commercial and industrial (C&I) product sales dropped by 5%. The company achieved its highest first-quarter gross margin of 39.5% since 2021, thanks to a favorable sales mix and lower input costs, boosting adjusted EBITDA margins to nearly 16%. However, uncertainty in tariffs and federal policies has led the company to widen its guidance for 2025, predicting a more conservative consumer environment but avoiding a full recession. Assuming current tariffs remain, with Chinese imports at 145% and steel/aluminum tariffs at 25%, product costs are expected to rise by $125 million in the latter half of 2025 if no cost-mitigation strategies are implemented.

In response to anticipated higher costs, the company has increased product prices and initiated supply chain cost reduction measures to counter tariff impacts. In the first quarter, home standby generator shipments rose due to heightened power outages, particularly from Southern California wildfires, which offers growth potential despite low market penetration. The company plans to boost awareness and expand distribution in California. Sales were pressed by high demand and limited capacity, so efforts in 2025 will focus on optimizing marketing, enhancing lead optimization, dealer development, consumer engagement, and improving financing options for home standby products to bolster close rates.

The paragraph highlights the growth and expansion of a residential dealer network, which increased by over 400 dealers in the past year, enhancing sales, installation, and service capacities. This growth supports increased consumer awareness of home standby generators. The success of the Aligned Contractor Program has also helped engage more electrical contractors. There was a rise in generator activations, particularly in areas recently affected by power outages, such as the southeast, south-central, and west regions. The company plans to launch a next-generation home standby product line in the second half of 2025, which will offer homeowners benefits like lower total cost of ownership, improved fuel efficiency, and quieter operation. The new line will also include the industry's highest output air-cooled generator, addressing increased residential electrification needs.

The launch of a new home standby generator platform has improved installation and diagnostic processes for channel partners, enhancing customer service efficiency while reducing costs. This has enabled increased automation in manufacturing and strengthened the supply chain. Despite tariff challenges, growth in generator sales is anticipated in 2025 due to increased activations and pricing. Post-2024 power outages have maintained demand. The company is focused on improving sales and marketing strategies, dealer effectiveness, and mitigating tariff impacts. Their residential energy technology solutions, including ecobee and energy storage in Puerto Rico, have performed well, showing strong sales growth and improved gross margins.

The paragraph discusses ecobee's strategy and performance in expanding its smart thermostat offerings to capture more market share, particularly in the growing value segment. It highlights a 17% growth in connected homes and increased recurring revenue from service attachments. The company also experienced significant growth in energy storage system shipments and expects to ship its next-generation PWRcell 2 systems soon, following positive feedback from partners. The paragraph emphasizes ecobee's strengths in distribution, direct-to-consumer marketing, brand reputation, and its comprehensive range of products, including smart thermostats, energy storage, EV chargers, and generators, which together create a unique value proposition. The sales forecast for residential energy technology remains at 300 to 400 million dollars by 2025, assuming continued support from the DOE program in Puerto Rico and intact tax credits from the Inflation Reduction Act. Additionally, ecobee is expected to become profitable within the full year.

The paragraph discusses Generac's expectations for its residential energy storage systems, stating they will likely be minimally affected by tariffs in 2025 due to current inventory levels. The company is committed to investing in this sector, believing that trends like lower power quality and rising prices will drive demand for cost-saving solutions. In contrast, sales of their commercial and industrial products decreased by 5% year-over-year, affected by softer markets in domestic rental and certain international sectors, despite growth in domestic telecom and industrial distributor shipments. They predict softer full-year sales for industrial distributors due to a lower backlog entering 2025. However, sales to national telecom customers have increased significantly, with expectations for growth, leveraging the expansion of global telecom infrastructure which demands higher power reliability.

In the first quarter, shipments to rental equipment customers declined due to reduced capital spending, and this trend is expected to continue. However, infrastructure projects provide long-term growth potential. The company is on track to expand its product line with larger megawatt diesel generators, with initial orders already received and shipments expected later this year, particularly targeting the data center market. They are well-positioned to capture market share due to their customized services and extensive service network. International sales grew by 5% year-over-year, driven by residential shipments in Latin America and inter-segment sales to the U.S., despite a decline in international C&I product sales. Continued positive order momentum suggests improved performance in the international segment, with large megawatt generator shipments expected in the latter half of the year.

In the first quarter of 2025, Generac reported a 6% increase in net sales, reaching $942 million. This growth was supported by acquisitions and favorable foreign currency effects. Residential product sales rose by 15% to $494 million, driven by increased demand for home standby generators due to elevated power outages in late 2024. The company remains confident in its long-term strategy, focusing on agility and cost optimization to navigate economic uncertainty and trade policy changes.

The paragraph reports on a company's financial performance in the first quarter of 2025. There was a 5% decline in commercial and industrial product sales, primarily due to a decrease in sales to certain international markets and direct customers, despite growth in domestic telecom and industrial distributor shipments. Net sales in other products and services increased by 4%, driven by growth in aftermarket parts, connectivity, and international services. Gross profit margin improved to 39.5% due to favorable sales mix and lower input costs, although operating expenses rose by 16% due to higher employee costs, marketing, and expenses related to acquisitions. The adjusted EBITDA increased to $150 million, or 15.9% of net sales, up from $127 million or 14.3% in the prior year.

In the first quarter of 2025, the domestic segment's total sales rose by 9% to $782 million, with a 2% contribution from acquisitions, and adjusted EBITDA increased to $123 million. The international segment saw a slight sales decrease to $186 million, impacted by a 5% currency headwind, though core sales grew by about 5%. Its adjusted EBITDA slightly decreased to $27 million. Overall, the company's GAAP net income grew to $44 million, and interest expenses declined due to lower borrowings and interest rates. The GAAP effective tax rate decreased to 24.3% compared to the previous year due to unusual prior year tax items not occurring this year. Diluted net income per share increased to $0.73, and adjusted net income was $75 million, or $1.26 per share.

The company reported an adjusted net income of $53 million or $0.88 per share for the previous year. This year, cash flow from operations was $58 million, down from $112 million the prior year, and free cash flow was $27 million, compared to $85 million last year. The decline in free cash flow was mainly due to increased working capital related to inventory replenishment, partially offset by higher operating earnings. At the end of the quarter, total debt was $1.3 billion, with a gross debt leverage ratio of 1.6x, within the target range of 1x to 2x adjusted EBITDA. The company repurchased about 717,000 shares for $97 million, leaving $250 million for further repurchases. The company remains committed to a balanced capital allocation strategy and has updated its 2025 outlook to account for higher tariffs and uncertain government policies, maintaining high-end guidance for sales growth and EBITDA margin but lowering the low end due to potential economic softness.

The paragraph outlines the company's financial assumptions and expectations for the year, including maintaining current tariffs, sustaining clean energy policies, and high interest rates leading to cautious consumer spending without a recession in 2025. It projects a net sales increase of 0%-7% for the full year compared to the previous year, slightly adjusting from the prior guidance due to anticipated lower shipment volumes despite tariff-induced price increases. The second-quarter net sales growth is expected to be modest, with residential product sales increasing slightly and commercial and industrial sales remaining flat. The paragraph also indicates a higher sales concentration in the second half of the year, particularly during the third and fourth quarters.

The company has updated its financial expectations for 2025, anticipating that the gross margin will remain flat compared to 2024 at around 39%, slightly lower than the previously expected 40%. Due to macroeconomic uncertainties, they plan to manage potentially lower shipments with targeted reductions in operating expenses to maintain operating expenses as a percentage of net sales. The adjusted EBITDA margin guidance for 2025 has been revised to 17%-19% from the previous 18%-19% due to reduced operating leverage. They expect adjusted EBITDA margins to dip slightly in the second quarter before improving to nearly 20% in the latter half of the year due to higher sales volumes. Additionally, the impact of higher tariffs is expected to be offset by pricing strategies and supply chain improvements. The company is also providing guidance for adjusted EPS and free cash flow, noting that the effective tax rate for 2025 is projected to be 24.5%-25%, slightly higher than prior estimates.

The company forecasts interest expenses for 2025 to be between $74 million to $78 million, reflecting a decrease from 2024 due to reduced borrowings and lower SOFR interest rates. Capital expenditures are expected to remain at approximately 3% of net sales. Depreciation and GAAP intangible amortization expenses are projected at $90 million and $100 million, respectively. Stock compensation expenses are anticipated to be between $53 million and $57 million. Cash flows are expected to be stronger in the latter half of the year, with free cash flow conversion from adjusted net income estimated between 70% to 90%, a wider range due to higher tariffs increasing inventory costs. The share count is projected to decrease modestly due to share repurchases, and the outlook does not consider potential acquisitions or additional share repurchases.

In the paragraph, Tommy Moll from Stephens asks Aaron Jagdfeld about new product launches for data centers in the C&I market, focusing on design highlights and service strategies. Aaron expresses excitement about their new large megawatt diesel lineup, which targets data centers and other sectors like municipalities, manufacturing, and healthcare that need significant backup power. He confirms that their go-to-market strategy involves leveraging their Nationwide Service Network, which is built for their telecommunications customers, for direct sales and service of data center products across the country.

The paragraph discusses Generac's approach to servicing products outside of data centers, emphasizing their use of an industrial distributor channel and the ability to quickly deploy resources for support across the U.S. It highlights Generac's differentiator in the C&I product space: their ability to customize products in-house, which allows them to maintain quality, control costs, and manage lead times effectively. The company intends to apply this customization model to new products, offering factory-engineered and manufactured solutions, while acknowledging some aspects will still require third-party involvement.

In the paragraph, Aaron Jagdfeld discusses the company's decision-making process regarding guidance amidst macroeconomic uncertainty. He explains that while some companies opt not to provide guidance or offer multiple scenarios, they chose to stick with their guidance, emphasizing their understanding of how their business performs during economic slowdowns. He notes that higher prices typically reduce demand, but power outages have a significant impact on their business, as they lead customers to reprioritize their spending towards their products.

The paragraph discusses the resilience of generator sales despite economic conditions, emphasizing the company's assumption that the outage environment will align with long-term averages. Variations in outages could lead to performance differences. The company acknowledges that price increases may deter some consumer purchases, reflecting this in their guidance amidst economic uncertainties. Current consumer spending appears stable, but uncertainty remains regarding economic conditions and potential impacts from trade policies and government actions. The company is prepared to adapt due to its core value of agility.

In the paragraph, Aaron Jagdfeld addresses a question about the company's financial guidance and the factors influencing it. He explains that the lower end of the forecast range reflects potential demand degradation, but the company remains confident in offsetting tariff impacts through pricing strategies. The midpoint of the guidance indicates a decline due to a softer consumer environment. He also highlights that the company faces a potential impact of $125 million in the second half due to tariffs, assuming no mitigation. Additionally, he notes that 70% to 80% of the cost of goods sold (COGS) comprises materials, with about 50% of these materials sourced from the U.S. or North America.

The paragraph discusses the company's global supply chain strategy, highlighting efforts to diversify away from reliance on China, whose contribution to material purchases has been halved to less than 10% over the past five years. They aim to reduce this further as they launch new products in the next 12 to 18 months, shifting away from countries with high tariffs. With tariffs imposed at a significant 145%, the company is forced to pass on these costs to consumers through pricing adjustments. Fortunately, they have a new product line launching soon, offering an opportunity to reset pricing. The company has also increased its inventory in anticipation of this transition, which has fortuitously protected some stock from current high tariff levels.

The paragraph discusses the company's clean energy business and their inventory situation in the storage market, indicating that they do not expect tariff impacts on those products by 2025. The conversation shifts to Jeff Hammond from KeyBanc Capital Markets inquiring about sales pacing, particularly regarding any pull forward due to price increases. York Ragen confirms there was minimal sales pull forward, amounting to approximately $20 million. Aaron Jagdfeld comments on IHC (installed homeowner contracts) trends, noting that the business sees strong metrics in areas with frequent outages, such as the Southeast and Western regions, including California due to wildfires.

The paragraph discusses the relative immaturity of the California market compared to other regions, noting that despite significant growth, it underperformed expectations for outage-related intensity. California's current market penetration is less than 2%, but it has doubled compared to five years ago, suggesting considerable future opportunity. In contrast, the Northeast and Canada had fewer winter outages recently, leading to lower intensity of IHCs (Incident Handling Costs) as expected. There's good progress in markets that faced outages in the past year, while areas with fewer recent outages see lower year-over-year IHCs. The subsequent discussion shifts to the impact of a 145% China tariff, with about two-thirds of $125 million related to China, affecting costs of goods sold (COGS) and possibly affecting guidance if the situation changes.

In the paragraph, Aaron Jagdfeld discusses the impact of the shifting U.S.-China trade relationship on his company's supply chain and pricing strategy. He notes that China has become a smaller part of their supply chain, a trend that has been ongoing and is accentuated by current trade policies. Jagdfeld emphasizes the importance of managing pricing carefully to avoid passing increased costs to consumers, which could affect demand. He also highlights the need to monitor potential changes in trade agreements that could impact the supply chain and pricing strategies. Following Jagdfeld's remarks, a question is posed by Jerry Revich from Goldman Sachs regarding conversion rates from initial homeowner contacts (IHCs) into orders, reflecting interest in category trends up to April.

In the paragraph, Aaron Jagdfeld responds to a question about whether close rates for IHCs are returning to previous cycle levels due to strong interest. He explains that close rates experienced pressure in the latter half of the previous year, a typical occurrence following high demand events that strain sales and installation capacity. He notes that they are increasing market awareness, particularly in less mature areas like California, which helps recover close rates over time. Although close rates were still under pressure in Q1, the decline rate has moderated from the previous year's second half, and they expect recovery throughout the year as historically observed. Jagdfeld emphasizes that these fluctuations in rates are expected and consistent with past trends. Following his response, the operator introduces a question from Mark Strouse regarding the indirect impact of steel tariffs on prices, which have increased significantly.

In the paragraph, Aaron Jagdfeld discusses the impact of tariffs and elevated steel prices on their business, with a focus on hedging strategies and pricing reactions. He explains that steel, aluminum, and copper are their primary inputs and that tariffs, whether directly affecting these metals or not, have contributed to increased market prices. Though they have some hedges in place, it's not significantly large. Historically, the company has responded to such pressures by adjusting prices, but they also have a Profitability Enhancement Program (PEP) to manage inflationary challenges, including non-typical tariff-related pressures. Jagdfeld also mentions the potential offsetting effect of decreasing shipping rates on overall costs.

The paragraph discusses the decline in container and sailing rates from Asia to the U.S., which have dropped significantly in recent weeks, leading to potential reductions in logistics costs. Despite the volatility and uncertainty in these inputs, the company has incorporated all current information into their guidance. If costs increase, they are prepared to adjust their pricing. During a Q&A session, Keith Housum from Northcoast Research asks about the impact of tariffs on different product lines. Aaron Jagdfeld responds, indicating that the company won't provide detailed impact per product due to the complexity and variability within product families. However, they have a $125 million figure for unmitigated tariff impacts but are actively seeking ways to mitigate these costs.

The paragraph discusses the impact of tariffs on supply chains and the challenges companies face in adapting to them. It highlights that all products are sensitive to tariffs and notes the complexity of supply chains, including the lack of certain industries within the U.S. It emphasizes the need for time and thoughtful strategies to adjust, mentioning ongoing efforts and the acceleration of these changes. Additionally, it points out challenges such as labor availability and the cost of automation, as many parts come from high-tariff countries. The paragraph concludes by acknowledging the inevitability of some tariffs and clarifying that recent changes have added to existing tariffs from previous years.

In the paragraph, Aaron Jagdfeld explains the company's manufacturing strategy and footprint across Mexico, India, China, and the U.S. The company adopts an in-country, for-country approach due to the size and localization needs of generators. In Mexico, production primarily serves Mexico, Central America, and some parts of South America. In India, manufacturing is mainly for the Indian market, while in China, it caters to both China and Europe. The company is exploring how to best use this international footprint to mitigate tariffs, including potentially increasing production in Mexico to benefit from the USMCA agreement. Additionally, they have a strong U.S. presence with seven manufacturing plants, including a new facility in Wisconsin, focusing on C&I products for the U.S. and Canada. The company emphasizes its longstanding commitment to manufacturing in the Upper Midwest.

The paragraph discusses the company's perspective on the U.S. market, highlighting its commitment despite tariffs, and a positive performance in energy technology (ET), particularly through ecobee's success in market share and a new smart thermostat launch. It also touches on the residential solar space, which faces near-term pressure, but sees potential in new product rollouts. The company is involved in a Department of Energy project in Puerto Rico, with encouraging progress in inventory and installation rates, and the associated economics are favorable.

The paragraph discusses the company's focus on developing next-generation storage products, specifically the PWRcell 2, amidst consolidation in the solar market. With suppliers like Panasonic exiting the U.S market, there are new opportunities for the company. Despite potential reductions in incentives and changes in investment tax credits, the rising power costs support the long-term viability of solar and storage systems. The company believes that even without incentives, the economic benefits of solar plus storage in areas with high electricity costs will remain strong, and future state-level programs may provide additional support.

The paragraph discusses the impact of tariffs, specifically a $125 million effect, and how the company plans to mitigate this through price increases and supply chain initiatives. The company aims to offset the tariffs at the EBITDA margin level. Additionally, they plan to launch new, cost-effective, high-performing products, including advancements in their smart thermostats and ecobee business, with more details to be unveiled at the Renewable Energy Show in Las Vegas. The recovery in their energy technology sector is also highlighted. Sean Milligan from Janney inquires about the pricing impacts and updates on residential home standby pricing given the tariffs, to which York Ragen and Aaron Jagdfeld respond, focusing on maintaining their EBITDA percentage.

The paragraph discusses the company's efforts to maintain EBITDA margins by implementing supply chain initiatives and pricing strategies, including a 7% to 8% price increase effective March 30th. A new product line with additional features will be introduced in the second half of the year, prompting another pricing adjustment. This new line aims to offer greater value and reduce tariff exposure due to a more diverse supply chain. The focus is on strategically managing pricing in response to costs and tariffs, ensuring that any price increases reflect the added value provided to customers and partners.

The paragraph is from a conference call and notes that the company is closely monitoring negotiations on a country-by-country basis with the current administration. Khris Rosemann expresses gratitude for the participation and mentions that the company looks forward to discussing their second quarter 2025 earnings results in late July. The call is then concluded.

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