Q3 2020 Generac Holdings Inc Earnings Call

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This time, all participants are in a listen only mode later.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.

As a reminder conference is being recorded.

I would now like to turn the conference over to your host Mr., Mike Harris, Vice President of corporate development and Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter 2020 earnings call I'd like to thank everyone for joining US. This morning with me today is guarantee on film President and Chief Executive Officer, and York Ragen, Chief Financial Officer.

We will begin our call today by commenting on forward looking statements certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward looking statements. Please see our earnings release.

<unk> SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures. During today's call additional information regarding these measures, including reconciliation to comparable us GAAP measures is available in our earnings release or FCC filings.

Now I'll turn the call over to Aaron.

Thanks, Mike Good morning, everyone and thank you for joining US today, we're very pleased to discuss our financial results reported earlier this morning in which net sales adjusted EBITDA and adjusted EPS were all by far all time records for Generac there.

Third quarter revenue easily exceeded our prior forecast an adjusted EBITDA margins were also well ahead of the previous guidance power outage activity was dramatically higher during the quarter as a result of a record Atlantic Hurricane season severe wind event in the Midwest and high heat and growing wildfire risks in the western U.S., which lead to higher which led to higher shipments of both portable and standby generators.

As well as aftermarket service parts.

Extreme level of power outages combined with the continuation of the home is a sanctuary trend led to unprecedented levels of demand for home standby generators during the quarter and it was broadly based across the entire U.S. we.

We are aggressively ramping production levels for home standby generators and there is a substantial backlog for these products continues to grow during the fourth quarter.

Year over year overall net sales increased approximately 16% on a core growth basis as compared to the strong prior year quarter.

Dramatic growth in sales of home standby and portable generators, coupled with shipments for the recently launched power sell energy storage system drove the net sales increase in the quarter very.

Very strong growth in aftermarket service parts and shore products also contributed to the revenue increase compared to the prior year.

Partially offsetting the significant strength was the decline in shipments of seeing eye products.

Gross margin expanded 320 basis points compared to the prior year and adjusted EBITDA margin increased 450 basis points over the prior year to 25.5% both of which were the highest margins reported since the fourth quarter of 2013.

Before discussing third quarter results in more detail I would like to stress that had the COVID-19 pandemic continues to evolve a high degree of uncertainty still remains regarding potential additional waves of the virus the magnitude and timing of an economic recovery and the potential additional impacts on our end markets and overall business.

However, as we have previously commented our historical performance has repeatedly shown the demand for residential products can decouple from broader macroeconomic trends and this has certainly proven to be the case during 2020.

The combination of the dramatically higher power outage environment, along with the increasing trend of home as a sanctuary is leading to a further increase in our full year revenue and earnings outlook for 2020, including higher expectations for the fourth quarter compared to our prior guidance.

To provide further details regarding this updated guidance and the outlook portion of our prepared remarks. This morning.

Now discussing our third quarter results in more detail.

Several key metrics that we monitor closely for home standby demand continued to be exceptionally strong during the quarter Act.

Activations once again grew at a very substantial rate compared to the prior year with broad based strength across all U.S. regions and Canada. This.

This strength was led by robust growth in the western U.S., driven by California, and very strong double digit increases in the south central southeast and northeast regions.

The combination of in home and virtual consultations once again rose during the third quarter in every single state and the contiguous U.S. with a majority of the states showing triple digit growth, which we believe provides further support for the emerging home is a sanctuary trend.

The power outage severity environment also continues to be favorable and trend well above the long term baseline average in recent years.

The significant outage activity was broad based across the major regions of the U.S. and included a major event in her Kid Hurricane Isa, Yes, which drove significant demand in the key northeast northeast region.

We also ended the third quarter with over 7000 residential dealers an increase of approximately 800 or 13% over the last 12 months. This.

This includes a significant increase in California ramping up to approximately 550 dealers at the end of the quarter, which is roughly 300 dealers higher as compared to the end of the prior year third quarter.

More recently early in the fourth quarter. These key demand metrics for home standby have continued to be much higher relative to prior year levels Rick.

Recall that we previously discussed trends with home consultations that were up approximately doubled versus the prior year and this tremendous strength has continued through October.

We believe this increase can be attributed to several factors the emerging trend of Americans viewing their homes at the sanctuary extreme level of objectivity during the third quarter and overall elevated baseline outages over the past several quarters the.

The active wildfire season, and rolling blackouts in California, and the increasing awareness of the need for backup power.

With demand for home standby generators at an all time high we've been working to aggressively ramp our supply chain and production levels and we achieved record daily build rates by the end of the third quarter.

We continue to further ramp production levels for these products during the fourth quarter significantly increased build rates well above previous peak levels and we are evaluating plans to put additional permanent capacity in place early in the second half of 2021.

Despite our operations teams working around the clock to ramp up standby production as quickly as possible the unprecedented strengthened demand cenovuss seen over the past several months has led to extended lead times for these products.

We had a substantial backlog for home standby generators at the end of the third quarter, which continues to grow during the fourth quarter and we expect to enter 2021 with a very high level of open orders for these products far exceeding anything previously experienced.

Recall, the Generac created the home standby category over two decades ago and the market continues to significantly expand with every 1% of penetration representing approximately $2.5 billion of additional market opportunity at retail prices.

Despite the unprecedented home standby activity being experienced during 2020 in the form of home consultations orders build rates activations in net new dealers. The reality is that the overall penetration rate for the product category is only expected to be slightly over 5% at the end of the year with.

With demand for home standby generators being uniquely aligned with some key mega trends and secular growth drivers. We believe there remains considerable room for this dynamic market to continue to grow over the next several years.

Also benefiting from the continuation of the home is a sanctuary trend we experienced strong growth for our core products during the quarter recall that shore products consists of a wide range of specialty outdoor power equipment, including field and brush mowers, Chippers shredders log splitters stump grinders and pressure washers and are used in a variety of property maintenance applications.

The strength experienced during the quarter included the sale of these products directly to consumers as homeowners increased outdoor project activity, while spending more time at home and so far in the fourth quarter demand continues to outpace normal seasonality.

In September we further expanded our broad line up of chore products My entering the battery powered commercial mower market through acquiring the assets of mean green products.

Based in Russell High I mean green is a leading manufacturer of an innovative line of commercial zero turn and walk behind battery powered turf care products.

Importantly, this equipment provides quite operation zero emissions and minimal maintenance requirements as compared to traditional commercial mowers.

The acquisition will support our goals to integrate and develop new battery powered solutions by accelerating the electrification of our lineup of higher powered chore products.

Rounding out our discussion on residential products as an update on clean energy.

The secular growth opportunity within the U.S. market for energy storage in monitoring systems remains very compelling, particularly around the increasing resiliency desired from these products, which is driving residential solar attachment rates that are currently approaching 30%.

Shipments of our power so energy storage systems recovered as expected during the quarter and were a key contributor to the company's year over year growth and we're expecting a further significant sequential increase in shipments during the fourth quarter.

We are making important strides in growing the still nascent market for energy storage through targeted advertising lead generation and sales capabilities, along with expanding our distribution capabilities, including our strategic partnership with Cnova.

Our new clean energy infomercial began airing earlier this year and continues to drive good volume into our lead management and selling system that we call Powerplay CE.

We're very encouraged by the trends with home consultations for power cell systems as they accelerated during the third quarter and have continued to be strong so far in the fourth quarter.

System, Activations, which are a proxy for installations and commissioning have also improved notably in recent months as compared to the second quarter, providing further proof of the V shaped recovery for the clean energy market.

We have made tremendous progress in ramping our clean energy products from essentially a startup in 2019 to your one revenues for 2020, which are expected to be in line with our previous guidance and which are far ahead of the expectations. We laid out at our Investor Day last September.

We achieved profitability for these products during the month of September and were roughly breakeven during the quarter and we're expecting to achieve our first full quarter of profitability in Q4.

We have accomplished this by significantly advancing our capabilities with our supply chain through increased volume and reduced system costs.

We have also had several important new product introductions in 2020, and we continue to develop an innovative pipeline of additional clean energy products that will be coming to market over the next several quarters.

We believe this will further enhance our competitive position and differentiation in the energy storage monitoring and management markets as we focus on whole how storage solutions with load management capabilities that provide the energy independence, we believe consumers really want in these systems.

We remain extremely excited about the long term growth opportunity for our clean energy products, including the potential to leverage and combine our new clean energy capabilities with our core competencies and strategies around our legacy natural gas generators.

We believe this will better enable us to enter new and adjacent markets that aligned with the evolving mega trend around grid 2.0, which is the evolution of the traditional electrical utility model, including decentralization of the grid and a migration towards distributed energy resources.

To help accelerate our involvement with this trend earlier. This month, we closed on the acquisition of invalid power networks, a leading distributed energy resources Technology company based in Denver, Colorado.

Imbalanced best in class technology will enable us to participate in the market for grid services, which we see as a growing opportunity. The company's concerto cloud based platform is being used by utilities and energy retailers to leverage the power of distributed energy resources to respond to the real time energy balancing needs of power systems and energy markets.

Distributed energy resources, known as D. ours, our assets or systems that can generate store or manage power such as our residential or cnine natural gas generators are power sell energy storage systems, and our devices that enable load management.

In areas, where grid stability as needed. These are assets can be connected to invalid software platform and can be aggregated into a decentralized and virtual power network to provide flexible capacity to address peaks in electricity supply and demand.

Importantly, umbrella has an open software platform that is both brand and equipment agnostic, providing the capability to connect to a wide range of assets or systems.

The platform is currently being used in areas around the world, where the increasing use of renewables is creating more variability in supply and where resiliency as needed as a result of power outages.

A recent ruling by the Federal Energy Regulatory Commission known as FERC 22, 22 is the timely development for umbrella as it mandate utilities create programs that allow de ours to participate in the wholesale electric market.

We believe this ruling will serve to accelerate the overall move towards a decentralized grid by providing a path to connect and monetize both legacy and new D.E. ours. This.

This could result in opportunities to leverage the existing installed base of natural gas generators and energy storage systems by connecting them to software platforms, such as imbalanced, thereby turning them into much more productive assets.

Valla as an important acquisition for us as we continue our evolution from an equipment manufacturer to an energy technology solutions company.

Now with regards to our scene I products as expected. The COVID-19 pandemic has continued to have a significant adverse impact on the overall market for global power generation and related equipment, given major declines in GDP growth rates around the globe.

Domestic shipments of Cnf products declined during the third quarter as compared to the prior year, but came in ahead of our expectations. While there remains some uncertainty relative to the pandemic and although we still expect shipment shipments for domestic scene I products. The decline on a year over year basis. During the fourth quarter. We are encouraged that the magnitude of the declines are slowing.

As expected shipments of mobile products, the national rental account customers declined significantly during the quarter, primarily due to the continued impact of the pandemic and lower oil prices.

A man for mobile equipment had already begun to soften as we enter 2020 with many of our national rental customers, reducing their capital spending budgets for the year, but the sudden decline in economic activity and corresponding drop in fleet utilization that occurred in March forced them to further and dramatically reduce equipment purchases.

As we are expecting continued demand headwinds for domestic mobile products in the near term we have focused our efforts on cost reductions and other restructuring actions, which we began implementing in the second quarter.

We remain optimistic about the long term opportunity for mobile products as an expected fleet replacement cycle nears and the compelling mega trend around an infrastructure improvements, which could be aided over the next couple of years by economic stimulus.

Shipments to National Telecom customers also declined on a year over year basis, but were also ahead of our prior expectations more.

More recently, we are seeing indications from several several of our large telecom customers of an improving outlook and we're now expecting overall shipments to grow in the fourth quarter as compared to the relatively soft prior year comparison.

Recall the demand trends for these customers can vary from quarter to quarter based on the timing of their capital spending and their project planning cycles. Historically, however demand for telecom backup power tends to increase after periods of elevated power outage activity similar to what we experienced during the third quarter.

In addition, the California public utility Commission in July passive mandate, requiring a minimum of 72 hours of backup power at all cell tower locations in the state, which is expected to be implemented over the next three years beginning in 2021.

We've been in contact with the wireless operator operators in California to better understand the market opportunity and to gain better insights into their network spending plans related to this new mandate well.

While we are still in the early stages of understanding the impact. We currently estimate the backup power opportunity the state could range between $100 million to $200 million over the next three years beginning next year.

Incremental demand for Generac will depend on whether or not existing capital spending by the carriers has reallocated to California from other regions in order to meet the requirements of this new mandate.

Lastly shipments of CN I stationary generators through our North American distributor channel were also lower in the quarter, but the decline was less than expected.

While this channel initially experienced a large decline in quotations for new projects in March and April during the onset onset of the pandemic project quoting activity has largely recovered since then which has improved the overall order outlook for this channel.

We also continue to experience encouraging growth trends for natural gas generators, particularly in the higher kilowatt ranges as we begin selling into applications beyond emergency standby power.

Additionally results for our seeing eye products now include the acquisition of energy systems, our industrial distributor located in northern California on which we closed the acquisition on July Onest.

This acquisition expands our presence in the rapidly growing California market and enhances our ability to serve one of the largest power generation markets in the us for both Sienna and residential products.

The ongoing global pandemic continued to have a significant impact on cnf product demand outside the us and Canada during the third quarter as well as.

As GDP growth rates have been sharply reduced around the world revenue for our international segment in the third quarter declined approximately 12% on a core basis when compared to the prior year.

This decline was broad based across numerous markets and further magnified the slower economic growth and geopolitical headwinds that were already being felt prior to the pandemic.

Despite this weakness and uncertainty in the global market overall international revenue during the third quarter was modestly ahead of our expectations and our current full year outlook is now more favorable for this segment as certain regions are trending better than previously feared.

Importantly, despite the decline in revenue during the quarter adjusted EBITDA margins for our international segment still expanded 310 basis points to 7.9% primarily due to lower operating expenses as a result of the restructuring activities that we initiated during the second quarter.

Similar to our domestic Cnine products, we believe international shipments will continue to decline on a year over year basis during Q4, but with the magnitude of the decline slowing relative to recent quarters.

Our international teams remained focused on several critical global initiatives around increasing the penetration of natural gas generators for residential and see an eye applications expanding our share globally in the important wireless telecom backup power segment and entering the emergency emerging energy storage market for both residential and Sienna applications.

In closing this morning, I'm extremely proud of our team has we are on pace for another year of record financial results, including more than 10% core revenue growth.

This is only made possible by the tireless execution of our 6500 employees globally across the company, which has been even more difficult. This year in the face of the COVID-19 pandemic.

Generate continues to benefit from a number of mega trends and Mac macro secular themes. In fact, we believe these trends and themes are more compelling today than they've ever been when considering the emergence of the new homes. The sanctuary trend the effects of extreme weather driving continued power outage activity and the company's increasing capabilities with clean energy products in grid services, which is allowing us to participate.

And the evolution of the traditional electrical utility model.

In addition, we are confident that once we get through this pandemic, our future growth prospects for our Cnf products remain very compelling driven by the increasing penetration of natural gas generators and a wide variety of applications wireless telecommunications shifting to the Fiveg architecture, and the major investment cycle needed for legacy infrastructure.

Supplementing these powerful trends and drivers is our considerable financial strength liquidity and free cash flow generation that puts us in the enviable enviable position to aggressively invest further in a number of strategic initiatives to accelerate our powering our future strategy.

As a result, we remain very excited about our long term growth prospects and believe the future for Generac is brighter than it's ever been.

I now want to turn the call over to York to provide further details on third quarter results and our updated outlook for 2020 Yorke. Thanks, Aaron looking.

Looking at third quarter 2020 results in more detail net sales increased 16.7% to $701.4 million during the third quarter of 2020, and all time record as compared to $601.1 million in the prior year third quarter, which was our previous record.

The combination of contributions from the energy systems, I mean, green acquisitions and favorable impact from foreign currency had an approximate 1% impact on revenue growth during the quarter.

Briefly looking at consolidated net sales for the third quarter by product class.

Residential product sales during the third quarter increased 37% to 450.9 million as compared to $335 million in the prior year.

As Aaron already discussed in detail on standby generator sales continue to experience very strong year over year growth, which was once again nearly 30%.

In addition to this home standby strength there was a significant increase in shipments of portable generators during the quarter. Despite the very strong prior year comparison caused by hurricane Dorian.

Portable generator shipments were at record levels during the current year quarter, primarily as a result of the higher power outage activity, which included demand from Hurricane EPS.

Also significantly significantly contributing to year over year growth in residential products were shipments of our power sell energy storage systems. Following the expected recovery in the solar market during the third quarter.

Shipments of chore products were also higher during the quarter as the home as a sanctuary trend positively impacted demand for outdoor power equipment.

Commercial and industrial products net sales for the third quarter of 2020 declined 18% to 176.2 million as compared to $214.9 million in the prior year quarter with a core sales decline of approximately 19% when excluding the impacts from the energy energy systems acquisition and favorable foreign currency.

The weakness in shipments of Cnf products was broad based both domestically and internationally.

Domestically the negative impact of the COVID-19 pandemic drove lower utilization of rental fleets and as a result, our national rental account customers continue to defer capital spending for our Cnine mobile products.

In addition shipments to our telecom national accounts continue to decline as key customers also took a pause and capital spending.

Internationally seeing eye products declined due to the continued broad based sharp drop in global demand caused by the pandemic.

Net sales for the other products and services category, primarily made up of aftermarket service parts product accessories extended warranty revenue Amadeus amortization and other service offerings increased 29.4% to $66.3 million as compared to $51.2 million in the third quarter of 2019.

As Aaron mentioned very strong growth.

Very strong growth was experienced in aftermarket service parts as a result of power outage activity being dramatically higher in the current year quarter.

A larger and growing installed base of our products higher levels of extended warranty revenue and the addition of energy systems also contributed to the increase versus the prior year.

Gross profit margin improved 320 basis points to 39.4%.

Our deferred 6.2% in the prior year third quarter.

Operating expenses increased $8.6 million or 7.6% as compared to the third quarter of 2019, but declined 130 basis points as a percentage of revenue excluding intangible amortization.

As a result, adjusted EBITDA before deducting for non controlling interests as defined in our earnings release was $178.8 million or a very strong 25.5% of net sales as compared to $126 million or 21% of net sales in the prior year.

This 450 basis point improvement in EBITDA margin was driven by the impressive gross margin expansion during the quarter, primarily due to favorable sales mix.

Improved leverage of fixed operating expenses on a much higher sales volumes and tight cost control.

I will now briefly discuss financial results for our two reporting segments.

Domestic segment sales increased 22.6% to $606.9 million as compared to 90 $494.8 million in the prior year quarter.

Adjusted EBITDA for the segment during the quarter was $171.4 million or 28.2% of net sales as compared to 120.8 million in the prior year or 24.4% of net sales.

International segment sales, which consist primarily of Cnf products declined 11.1% to $94.5 million as compared to 106.3 million in the prior year quarter.

Foreign currency had a net favorable impact of only 500 basis points on revenue growth during the quarter.

Adjusted EBITDA for the segment during the quarter before deducting for non controlling interest was $7.4 million or 7.9% of net sales as compared to $5.1 million or 4.8% of net sales in the prior year.

Now switching back to our financial performance for the third quarter of 2020 on a consolidated basis.

As disclosed in our earnings release GAAP net income attributable to the company in the quarter was $115 million as compared to 75.6 million in the third quarter of 2019.

GAAP income taxes during the current year third quarter were $32.1 million.

Or an effective tax rate of 21.8%.

As compared to $20.1 million or an effective tax rate of 21.1%.

The increase in effective tax rate was primarily due to the prior year, having more favorable discrete tax items compared to the current year quarter, which was partially offset by an overall more favorable mix of pre tax income in the current year quarter.

Diluted net income per share for the company on a GAAP basis was $1.82 cents in the third quarter of 2020 compared to $1.18 cents in the prior year.

The specific calculations for these earnings per share amounts are included in the reconciliation schedules of our earnings release.

Adjusted net income for the company as defined in our earnings release was $132.9 million in the current year quarter.

$2, an eight cents per share, which was also an all time record. This.

This compares to an adjusted net income of $90 million in the prior year or $1.43 cents per share.

Cash income taxes for the third quarter of 2020 were $23.6 million as compared to $15.1 million in the prior year quarter.

The current year now reflects an expected cash income tax rate of approximately 16% for the full year 2020, which is a reduction from the approximately 17% rate previously expected for 2020.

And compares to the prior year expectation of approximately 17% at that time.

The reduction in the current year cash tax rate from previous expectations was primarily due to favorable return to provision adjustments reflected in our recently filed corporate tax returns.

Cash flow from operations was very strong at $155.2 million as compared to $111.2 million in the prior year third quarter.

And free cash flow as defined in our earnings release was $148.3 million as compared to 100.8 million in the same quarter last year.

The increase was primarily due to higher sales volumes and resulting net income.

Before discussing our updated outlook for 2020, it's important to reiterate our healthy balance sheet and liquidity position at the end of the third quarter of 2020, which allows us to confidently operate our business and execute our strategy even during these uncertain times.

As of September 32020, we had 808 million a liquidity comprised of 540 million of cash on hand, and 294 million of availability on our ABL revolving credit facility, which matures in June of 2023.

Also total debt outstanding at the end of the third quarter was $890 million net of unamortized original issue discount and deferred financing costs.

Our gross debt leverage ratio at the end of the third quarter was only 1.7 times on an as reported basis.

In addition, our term loan matures in December 2026, and we do not have any required principal payments on this facility until the maturity date.

Also recall there are no financial covenants on the term loan, which has a low cost of debt of LIBOR, plus 175 basis points fine.

Finally, we have interest rate swap arrangements that fixed our interest rate exposure on approximately $500 million. This debt through the maturity date on December 2026.

Further enhancing our our overall liquidity is our strong cash flow profile and over the last 12 months ended September Thirtyth 2020 cash flow from operations and free cash flow were impressive at $443 million and 397 million respectively.

Lastly, given our strong balance sheet and free cash flow generation, we have significant resources to drive further shareholder value as we execute on our long term strategic priorities and our approach toward capital deployment remains disciplined balanced and consistent.

With that I will now provide comments on our updated outlook for 2020.

As a result of the higher power outage environment experienced thus far in the second half of 2020, along with the increased production rates for home standby generators expected in the fourth quarter. We are raising our full year 2020 guidance for full for revenue growth to have approximately 10% to 12% versus the prior year. This.

This compares to the previous baseline guidance of 5% to 8% growth.

And is now expected to be at the high end of our previous upside case scenario communicated last quarter when factoring in the additional 2% to 3% of revenue growth associated with a more severe outage environment.

Net sales for residential products continues to outpace our expectations due to higher shipments of portable generators from the much higher power outage environment and aggressively ramping up our home standby generator production capacity to record levels.

As a result year over year growth for these products is now expected to be even more significant for the full year 2020 as compared to previous expectations with the fourth quarter expected to increase sequentially compared to the third quarter.

Another key driver to our increased revenue guidance is a higher level of shipments of aftermarket service parts as a result of the increase in power outage hours during the third quarter.

Revenue growth for Cnf products is still expected to be down significantly for the full year 2020 versus prior year, but as moderately better relative to prior guidance.

Fourth quarter is also expected to increase sequentially compared to the third quarter.

This overall guidance assumes no further deterioration from additional ways of the COVID-19 pandemic.

We're also raising our adjusted EBITDA margin guidance for the full year 2020 to be approximately 22.5% to 23%, which is an increase from the 21.5% to 22% previously expected.

This improvement is driven by higher operating leverage and lower discretionary advertising and promotional costs given the favorable demand environment.

Operating and free cash flow generation for the full year 2020 is expected to remain strong with the conversion of adjusted net income to free cash flow still anticipated to be approximately 90%.

Depreciation expense is forecast to be approximately $35 million in 2020 versus the 33% to 34 million previously guided.

In addition share based compensation expenses also expected to be slightly higher at $19 million to $20 million compared to the 18 to 19 million previously guided.

The remaining guidance provided in previous earnings calls are not expected to change.

This concludes our prepared remarks at this time, we'd like to open up the call for questions.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. Please be reminded that you can only ask one question and one follow up.

If your question has been answered or you wish to remove yourself from the queue. Please press the pound.

Your first question comes from the line of Tom Hayes from Northcoast Research. Your line is open.

Thanks, Good morning, gentlemen, good.

Good morning, Tom.

Hi, I was wondering if you could talk a little bit maybe about the involve the acquisition sounds like a great piece.

Your complete solutions. So just wondering your kind of how you see that fitting into that solution set.

How do you take it to market.

Another color you could provide would be great.

Yes, it's a great question, Tom and this is an acquisition that it's a small company and other start up that.

We've added into our mix here of startup companies that we've been acquiring.

But were really excited about invalid and valla has.

And the name and ballot it means literally.

Energy balance so thats the thats the.

The connotation of the company's name and.

It is a.

An awesome team of.

People from the utility industry and people that are familiar with that industry, who have come through different startups and things in.

In the past, but its really aimed squarely at.

The idea of taking and leveraging not only our existing.

Assets that we have in place like generally we have over 2 million home standby generators on the ground as an example, so it represents just.

A pretty massive number in terms of megawatts available.

Really gigawatts available for potential use today those generator set largely unused right. So I mean, they they operate when called upon a couple times a year maybe for a few hours a year.

Or longer depending on the region, but by and large there that becomes a somewhat under your underutilized asset and we believe that ambarella their platform. It's a software company. So it's a technology play that software platform can allow for the what they refer to in their lingo as enrolling.

An asset like a generator or one of our power self storage systems or even a load management device enrolling that in their platform and allowing them to aggregate.

Those assets and those systems for use by utilities or other grid operators and the effective need there the need case is really around place.

Places, where you see a grid power being augmented very heavily with renewables. So as you bring a lot of renewables into the supply side of the equation you increased volatility the variability of those renewables by their very nature.

They are more volatile power sources than say up traditional combined cycle power plant.

And as a result grid operators have to deal with that NAV to deal with the potential for the wind dropping off or as we saw west. This summer you know high heat Craig.

Creating a situation where demand spike and they also had some cloudier days than they were.

Predicting and so less solar production to satisfy that demand. So the ability to turn on an ad or augment to the grid. These kind of distributed or decentralized assets to help balance out those parts of the grid that require it.

It's a really exciting area, that's going to grow rapidly in the years ahead in particular as renewable mandates.

Mature.

Many states if not all states have some level of a renewable mandates some percentage high percentage of total power generation to come from renewables.

In in future years, and so we see imbalance really enabling us to take the next logical step two.

Today, we've been we're really a a legacy equipment manufacturer and really a generator manufacturer and tomorrow, we see ourselves as much more of an energy technology solutions provider and in Bala I think is a really key piece of.

Of technology and the talent that we acquired there is a really key piece of enabling us to step forward.

I appreciate the color and then maybe just as a quick follow up.

Regarding the backlog of the home standby units is just wondering if you could quantify what was there any impact of the Q3 revenue for you guys just have been such a backlog.

Whether the Q3 revenue was was was up dramatically in fact orders. We just look at home standby orders they were about two and a half times greater than they were the year before.

So now.

We had to revenue is massive we've never seen anything like that and it's obviously as we talked on the prepared remarks, and we've got quite a backlog that we ended the quarter with and that's only continue to grow here in Q4, and we and we've been hitting record output in our production environment.

In spite of all the headwinds there with component challenges and Manning challenges and everything around the pandemic that is making that difficult we're achieving record outputs and Q4 here, we've actually brought some additional capacity online and another factor here in Wisconsin.

I also mentioned in the prepared remarks. This morning, where we are in our site selection process for another facility and other permanent facility.

Really a full second site that will not quite double production for these products, but will increase.

Production dramatically for home standby, probably coming online sometime mid next year, and then obviously needing to ramp throughout the back half of the year, but that backlog is going to be at at just eye popping numbers here. The good news is that their home improvement projects. So our experience historically as the demand is pretty sticky once once we.

An order comes in a dealer takes a down payment or we start the process of getting permits and the dealer can also do some site type of preparatory work ahead of.

Having to actually put the generator down so there can be some trenching there can be the transfer switch might be able to be involved installed ahead of time.

So we can kind of keep the project moving but lead times for these products are extended right now and probably will remain so for the foreseeable future.

Thanks appreciate the color you bet.

Our next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Your line is open.

Hi, Thanks, and congrats on a fantastic quarter.

Thanks.

Two questions first one kind of a simple one.

Lead times on the resi side, so you've expanded your dealer network lead times have gone from eight weeks to 16 weeks in you know in many of those.

So as you think about entering 21, and I'm not asking for guidance, but.

Yeah, It would seem and I may have missed the backlog number but it would seem like that backlog should.

Seriously offset what we would expect to see in terms of normal seasonality and then I have a follow up question.

Yes, thats exactly edge and in fact, if you go back to the best thing I can point people to would be kind of after hurricane Sandy.

There were a couple of the big storm Sandy being the combination of that in 2011 and 2012 out of the northeast grew.

Through our dealer base grew our backlog, we exited 2012 with a massive backlog at the time, what we thought was a massive number it'll it'll look small compared to wherever we land here with the backlog we entered the year, but.

It really did kind of.

I want to say disrupted disrupted the normal seasonality seasonal rhythms of the business. When it comes to home standby normally we would see a cadence will be Q1 is typically the lowest quarter.

Of the year for that category generally it's more difficult to install during the colder winter months.

And you just see demand kind of fall off weather patterns generally aren't as aggressive it's not hurricane season that kind of stuff, but because the backlog is is going to be high Q.

Q1 will be a bit more dependent on what kind of weather. If we have a really brutal winter that may create a situation where they just can't get product installed until the ground thaws, but remember we have a lot of demand that we're seeing in parts of the southeast and south central regions and out West where you really don't have a problem necessarily doing installations.

During the kind of January through March month. So you are absolutely right, though it's going to it's going to really distort the normal seasonality in that business.

Got it thank you and.

So just as a follow up completely separate topic, but.

You mentioned the increase in the renewable as well is that on the 26 kilowatt for example in the.

On the standby and power view home App that you have I'm wondering if you could articulate the monetization plan.

Plans around the increased level of data and intelligence that you're now going to be getting from.

From a micro grid or or.

A supply demand perspective that you may have how should we think about that yes, I mean, its super exciting Jed and I think.

It's it's really early innings in this game.

Idea of taking an asset which here to four has really been viewed as.

I mean, it's basically insurance revenue by home standby generator, because we want to protect your home protect your family from power outages and.

So the decision for input in the residential market in particular has largely been.

I don't want to say, it's all emotional but but there's there's not much of an ROI that you can ascribe those products right. I mean, you can you can say, okay, we'll throw away a freezer full of meat or food or or I might not to stay a couple nights and hotel and you might be able to you maybe get it maybe I get a break on my homeowners insurance policy, because I have a home standby generator, which are programs that are gaining acceptance but.

You'd be hard pressed to kind of create a payback model there that works beyond anything that is really just peace of mind right. I mean, thats really what those products are going forward, though and kind of what your question is leaning into is the fact that I think these products can be sold in a different way and really we look to how.

How were selling our power sell energy storage systems right the energy storage system.

We went into that thinking it was more about the ROI and less about resiliency and what we found actually is is that it's really all about resiliency and some about ROI. So we think that theres an opportunity. We think the resiliency is going to be a big team no matter, what whether you're talking about battery storage or whether you're talking about generators.

It's really going to Matt it's going to depend on the use case and if you live in areas where longer duration outages are going to happen generators, probably still going to be the best play for you, but the idea of being able to monetize that generator further I would love to give you a crisp answer on here is exactly what we're thinking we're thinking it could be a PPA type arrangement the generator maybe its own.

And operated by third party and the homeowner pays a monthly.

In the <unk> and gets a credit on their power Bill something like that the truth of the matter is I think it's going to take a lot of different formats. We're currently in engaged with a number of utility companies a number of grid operators.

A number of.

Strategic partners that were talking to about what should that model look like and I think it will become clearer as as the market develops and it could become clearer as maybe the incentive structures develop.

I don't have like a solid this is exactly how you should think about monetizing that I think as we get into 2021, and we do some guidance there clearly around the embolic piece that again the revenue is their software related.

And enables us to do more of that exactly it and it's an enabler for us and so as that enabler takes route I think we'll we'll probably have much crisper ideas and thoughts around how we intend to monetizing what I'd like though just largely I think it gives us a platform on which to just sell more equipment based solely on the fact that.

It moves to the product category that being the legacy home standby category from this peace of mind insurance product to one that could be monetized further for the benefit of the homeowners either reduce their energy costs or so.

Somehow participate in a program at a.

Virtual power plant type of program same thing for Sina and same on Cnine correct.

Yes. Our next question from the line of Philip Shen with Roth Capital. Your line is open.

Hi, guys. Thanks for the questions I wanted to dig a little deeper on a couple of topics.

First one on the new site location.

[music].

Can you share.

When you think you will finalize that decision as to where it might be in and where could it be maybe a.

The short list of where it might be and then.

You talked about it's not quite a double so I'm guessing kind of in that 70% to 80%.

Increased capacity and then.

Following up on the slower season, typically is first half of the year.

Possible that you guys end up with no slow season at all this year effectively where kind of the exit run rate of Q4 volley.

Volume could kind of extend at least for home standby into Q1 and two.

Yes, let me I'll deal with the first part of the question, Phil and I'll, let you are kind of tackle the second part as it relates to.

How.

The seasonality again, we've been talking about the distorted seasonality I think given some of the some of the things are going on right now, but on the site selection.

We are evaluating a number of sites.

We have most of our manufacturing base here in the U.S. in Wisconsin, we have six factories here, we love the state of Wisconsin.

Our customers, though as we develop the home standby markets and and our storage markets. They're out west there are further down south so we're looking at when evaluating Wisconsin in the mix of course, but.

Frankly, I would think that where you are probably likely to see something is if you think anything from northern Texas across to the Carolinas, we're kind of evaluating through there.

Just really just based primarily on reduced logistics.

Cost and timelines.

Should have a decision finalized here I would say in the next 30 to 60 days.

We want to negotiate.

With.

Locally to make sure we've got the right.

Understanding of the local codes and things I mean, obviously that always comes into play when you're manufacturing so.

We're picking a site, though that can move for speed speed is a critical element here, we want to have this facility up in operating by midyear next year.

And really fully ramped by the end of next year at the latest.

We've already put down.

Orders for all the machine tooling and things that are going to go into this a longer lead time type of things that we know.

We're going to need to equip this factory. So we got that on order. We just don't know where it's going to go so we haven't given them a shipping address yet but.

But thats kind of how we're thinking about capacity and then again you mentioned that it's like a 70% to 80%.

Increase overall in in the production capabilities or ultimate capacities products, and then youre cutting down in terms of seasonality for next year now, while we're not giving guidance for next year as interns when talking about our backlog.

His significant now and we're going to continue to evaluate what that looks like at the end of the year and what it's going to look like coming into next year, but I guess.

From a production standpoint, you're absolutely right, we're going to be producing.

Full speed.

Really throughout all of next year, and which which means from a production standpoint, you won't have that low right in the first quarter and then building into the second quarter and then.

Then maxed out in the second half, it's we're going to be producing full out.

All pretty much all of next year right.

Great. Thanks for that color really helpful as it relates to.

Any pinch points in the manufacturing are you constrained on any of your inputs at all engine blocks or anything like that and then.

Shifting to clean energy.

With the success that you guys are seeing in the marketplace based on some of the checks that we've done are you from.

Possibly going to be able to deliver on more than 125 megawatt hours of storage.

2021 point you guys were.

Had a range of 125 to 150, but just wanting to understand if you guys have some upside there. Thanks.

Yeah. Thanks, Thanks, Phil.

Yes, I'll just address just pinch points.

Supply chain is tight.

We are working actively with all of our suppliers to continue to improve their output levels, but they have a lot of the same challenges we have with manpower I mean, just managing factories today in the cobot.

19 World is.

Well I don't know Theres, an easier way to say is a pain in the but I mean, it's difficult. It's just it's presented to a new kind of.

Layer of complexity, there that none of us really need.

When you're trying to run a factory and that extends all the way up supply chain. So we're good right now and we'll have to continue to work with these guys. Because obviously, if we're going to increase Max capacity longer term that means supply chain has got to get there too that's probably going to come in the form of adding new suppliers in second and third type of sources in some cases, where.

And broadly we have a lot of secondary sources already on you may have to go to third sources, So thats thats, where thats habit, but we're we're managing kind of day to day.

And then a clean energy, yes, again, we've reiterated our guidance there we feel really good about the V shaped recovery, that's taken hold and clean energy I think it really you know everybody's been talking about it.

No Phil you.

In particular, you talked to a lot of the companies involved in this space.

We saw exactly what everybody else saw just a pretty a pretty solid recovery there in third quarter.

And accelerating here in the fourth quarter I think thats the exciting thing about it and then I just step back from the whole thing and I look at where we were a year ago with the startup businesses. I mean this business was I don't know what was it yorkers $10 million of revenues soon.

And we're running towards that and kind of that 115 number whatever that the previous guidance and I think that was our previous guidance I mean to do that in a year and then have the kind of runway that with our new product pipeline and I'm looking at.

I am really excited when our teams have been working tirelessly here, Russ minnick, who heads up that business for us.

As has been really driving the team's doing a nice job, bringing startups together and then you put in balance the mix there going forward and just really kind of positive compliant on longer term, where we're going and turning profitable in Q4 and that's about as another September was our first September was our first month of profit in that business and Q4 is going to be.

Actually profitable for us as well and we anticipate accelerating off of that as we kind of laid out previously.

[music].

Yes. Our next question from the line of Mark Strouse with Jpmorgan. Your line is open.

Yes. Good morning, Thank you very much for taking our questions.

In an effort to completely beat a dead horse so I'd like to go back to the capacity.

Can you just kind of give some color on how you came up with that 70% to 80% expansion.

Is there a target utilization rates that you are going for.

And I guess, how much wiggle room do you foresee leaving yourself before you are looking for a third site yes.

Yes, it's a great question, Mark and the way our business works.

We have these we have obviously some some pronounced seasonality spikes in demand that can happen from time to time. This what we're seeing right now is abnormal to anything we've ever seen but but do you think about the way we think about sizing a factory in the way we think about this this new site, we really wanted to give ourselves. So we think about utilization being in that kind of Max you go.

About 80% to 85% utilization and facility start to you start to.

Run the risk of.

Fitment shutdowns and other things and you run a lot of overtime generally when you're up in those levels. So we're kind of sizing it thinking around that 80% number in terms of utilization between the two sites that we would have.

The 70 to 80 that we called out as an increase is it's a function on the one end of of using that 80% utilization assumption, but then it's also a function of saying a seasonally we know that our our incoming demand can spike you know upwards of could be 52.

This case, you know a lot more than that but let's say on average 50% higher at certain peak points. So we wanted to size the facility to give ourselves some room that even if we were operating at that 80% effective or utilization rate that we would have the ability once demand returns to more normal patterns, that's kind of the assumptions underpinning all of this by the way if it doesnt well.

We're talking about a third facility will have to add right, so, but assuming it returns to more normal levels.

In the future along the lines of what our long range plan kind of indicated.

We would get the new factory would give us basically some expansion capacity or between the two facilities, depending on how we want to balance it out.

I would give us some expansion capacity to take those seasonal demand increases if you see a hurricane or an ice storm or.

A power shut off a safety shut off out in California, or something like that so that's that's how we're sizing it and that's how we're thinking about it going forward.

Okay. That's very helpful. Thank you and then just a quick follow up yours.

Are you able to say what percentage of the increase in the guidance for this year was organic versus the acquisitions.

Oh, the acquisitions were relatively small to the to the increase in guide. If we went from five to eight to 10 to 12. It was maybe a percent of about a percent maybe roughly not even a percentage not even a full price not even a full percent some hall, especially will mean green seasonally they don't have them, they're they're they're they're holding company said think of.

It all roughly about $10 million businesses, and you get obviously a quarter to quarter and a half of them.

Roughly almost two quarter to two quarters of revenue there.

Your next question comes on the line of Brian Drab with William Blair. Your line is open.

Hey, good morning, obviously very impressive results just wondering on the capacity expansion can you talk at all about.

How much it will cost to set up this facility and then I mean, I guess, if you are seeing.

Around 80% expansion, we're talking about.

The facility the can do something like 800 million in revenue.

That that's the ballpark maybe from the capacity and trying to get a sense for what the return on investment is for for this expansion.

Yes, I mean at the.

Great question, Brian and one that we don't make any decision around here unless we're looking at the return that we can we can get for.

Money that we invest on anything really I mean, and the new facility would would would be no no different than how we think of everything else I would say this home standby being pretty unique and special category of product for us.

It's almost very difficult for me to come up with any kind of investment number that we don't get a great return on given the profile of the financial profile those products and the and the growth rates of the product so in.

In terms of the quantum around the investment necessary you know some of that still up in the air in terms of whether we lease the facility or whether we own it.

We're working through that as part of the site selection, so I'd be premature to give any kind of a number around that.

Yeah, but again in the context of how we think about capital spending here you know our kind of we've always said.

2% to 2.5% of revenues is kind of our capital spending.

Benchmark, you know and what we need now.

Next year.

Frankly, we're probably going to be in that two and a half to maybe 3% at the outside edge of that because of some growth capex, but it we're not talking about hundreds of millions of dollars here for new facility.

It's it's something quite a bit less than that.

Okay. So yes, I mean thats knows my impression is that I mean this is.

I have no idea, but I think you are in the 50 million range or less and that you can do.

Generate a couple of hundred million in EBITDA out of this facility. It seems like the early season chart. So I was trying to give you a softball, there great returns.

The ROI is that is excellent and its.

I mean, it seems like it's like well.

Well over 100%.

Okay.

I'll be I'll follow up with some more later on that and then can you just comment quickly on the C. and I know the rental capex is down for the year, but are the trends that are improving and does that bode well for growth on easy comps for Cnine in 2021, yes.

The cnine business actually the the stationary seen I've been just kind of our legacy Siem. Because this is actually decent was better than we thought it was going to be in the quarter.

But mobile is mobile just continues to be a struggle for us for mobile equipment sector.

And.

From everything we've seen in the marketplace and in talking to our customer base.

I think were pretty much in line with everybody else I don't think it's a generac specific issue. It's a it's an industry wide issue on fleet utilization rates and just capital spending pullback by the large nationals were eagerly watching them to understand kind of their guidance for next year on spending we are having conversations with them right now.

I would tell you I mean just me. This is this is aaron thoughts around this but.

Based on everything that I've seen if it's a recovery next year, it's a back half of next year recovery in my opinion.

Yes.

I don't know I just.

Yes, there could be maybe that could accelerate if theres. Some magical stimulus thing that hits around infrastructure earlier, but I don't hold out a lot of hopes we've been talking about stimulus for a long time here and we just can't even get seem to get.

No.

Get everybody's head on straight with getting that done it needs to get done and when it does eventually hit on.

We're going to be a really good spot for that but until that happens I. Just think that I think 2021 will be a recovery year of I think it's probably.

I'm handicapping, it's more how back half of the year than front half.

Our next question from the line of Roski Lardy with Bank of America. Your line is open.

Hey, good morning, guys. Thanks for squeezing me in at the end.

Good morning Ross.

Good morning, I just was wondering is there any pricing opportunity here beyond the norm. The major Youre sold out the lead times are extended it dominates the market here.

Is that something that could generate some upside or you are just like what's what's your pricing philosophy in this type of market.

Yes, it's a great question Ross I think theres two angles on pricing that I would I would address one one is.

The normal seasonal discounting cadences that we would have.

We haven't had to do right. So in effect by doing less discounting we're getting more price I mean, that's that's kind of how I view price I still think price as I think about home standby you know.

That that idea of affordability.

It's still a really important thing there and so the second piece of pricing. So first is less discounting, which effectively gets us a little bit better pricing position. The second part, though is we continue to introduce products that help us raise the ASP, which is effectively it will give us the 24 kilowatt machine that we introduced earlier this year.

Oddly enough the way it works out for the homeowner it feel it's actually a little bit better deal.

On a per kw basis, so at a retail price point, they actually when it's fully installed because installation really isn't costs more so.

So they actually get a better deal.

In terms of just on a per kilowatt basis, and we get a better deal on an ASP per unit basis. So.

Fact, I think we have taken some pricing there through new product introduction and less discounting but.

As we as we kind of put together our 2021 plan. So we always talk about pricing. We look really what we look at is what are the cost headwinds that we might be facing next year. So as those become maybe a little bit more known I think rather than say, we will or won't take pricing at this point in the game I think I'll probably have reserve those comments for kind of the 2021 guide one.

So we put all that together.

Alright, and then I will ask you on top of that just distribution, obviously your footprint has expanded dramatically, particularly.

California, but you guys have pointed out and you can see in the data I mean, the demand is coming from everywhere. I mean, I think there are 300000 people out of power in Oklahoma yesterday, if I thought right on your your database you had the Midwest storms in the in the ice dates I think Utah was out I mean do you have distribution in all of these plays.

Since to monetize that demand and are there any investments that you think you need to make even though you've got third party distribution to make sure you are stupid up all the clients here because it seems like they're they're everywhere beyond the big obvious.

Centers of demand for Generac.

Yes, I think that's the unique thing about this business Ross and I've seen this over Mike My career here is that.

The.

When you get events, whether it be an ice storm in Oklahoma or whether it's.

An outage in Utah, you're right I mean.

Salt Lake City doesn't get a lot of outages and so those areas of the country you will see distribution kind of fill in after an event right. So initially the initial surge of demand is generally satisfied by people who are maybe in our database as as dealers they maybe our contractors buying through.

Who could be through retail or online or or perhaps an electrical wholesale types of.

Entities and that's why the Omnichannel distribution strategy is so important in this category because.

The dealer channel is absolutely.

In our in my opinion, the best way to acquire this product if you're a homeowner you want a turnkey solution right. The dealer can take care of it from the beginning of the process all the way through and make that as pain free as possible as you, possibly can make a home improvement project.

But you're right I mean, the fill in that has to happen in the areas of the country, where we havent had these types of events and were going through that curve right now it's a maturity curve, we're going through a win in California, we're adding a lot of distribution out there. It's an area of the country that's not.

They are not as familiar with the product category the familiarity.

Challenges run not just from finding good representation in the market and then onboarding the representation Theres actually a full education process all the way through the value stream going back to the top.

The permits right I mean, you might have to talk to an inspector who has never ever written a permit for a generator before and so they have questions about the product they have questions about the placement of the product the operation of the product.

And as you can imagine that's an education process, a learning curve for everybody involved the friction gets reduced over time as people get more familiar and as we fill in with more dealers, but generally theres theres quite a bit of friction on the front end to get these markets started so I think what's great about US is we got a lot of learning cycles here, we've been through this a lot in terms of investment.

We continue to invest in things like training in our powerplay selling platform, which is really critical especially for new dealers coming on board to give them a ready made sales process and put that in their hands. It makes them that much more successful out of the gate, which gets them really engaged with the category and with US which is just a good thing for all of us.

Long term, so we're going to make.

We're going to continue to make those investments.

At at elevated levels, we're going to continue to put.

Marketing dollars into these regions that we havent weve never advertised and Utah before but we've got infomercials running in Salt Lake City today.

In Iowa, and Illinois in Oklahoma, we will be on the air probably the next couple of weeks, California, We're blessing the California.

Markets with with a lot of media right now and so it's it's the development of those markets market development and this is.

Not to belabor the point, because we're getting long winded here, but yes.

Of going in and creating a market versus simply going into an existing market and fighting for share are two completely different things for our business I think to deal with creating a market you have to burn a lot more calories with distribution and brand awareness category awareness all those things that we just talked about that is high.

Hard work, it's really quite missionary and it really pays off over the long run and we're going to see the need to do that and a lot of these markets as you as you pointed out.

We have our next question from the line of Jeff Hammond with Keybanc. Your line is open.

Hey, good morning, guys or Jeff Jeff.

So my questions are on the CE side of the business. Just I think you talked about a 30% attach rate on new solar installs can you just talk about what you think the long term opportunity is and then just kind of update us on where you are in terms of introducing something that could go at the retrofit side.

Yes, so on the attachment rate, Jeff you know the.

Yeah, we think that the attachment rate out first of all it's completely blown past I think all the expectations right in terms of it it was coming from something like high mid to high singles to 10% last year to almost 30%. This year. Its coal is approaching 30% now so.

So its surprise I think everybody in the market with the the just and a lot of that I think underpinning that back to what I was talking about before the resiliency element is driving I think that attachment rate a lot quicker the need and that's really.

I think indicative of the power outage environment, the elevated power outage environment that we're in.

In particular in states like California, where we have a lot of solar going in and already installed so where it could go long term.

Yes.

There have been some projections out there that say.

50% attachment rate, maybe long term, we've got some customers that are over 60% and approaching 70% some of our some of our solar channel partners are already at that level, because they're operating in certain states or regions, where maybe net metering is always is reducing in terms of the impact so in order to get the right ROI on a solar installers.

Got to add a battery right. So it's kind of coming at it from both the resiliency side and in some markets than necessity side economically to make the math work. So it could where it could go I think 50% is probably an easy target long term as far as the retrofit market.

You're going to hear from us. So again this robust product pipeline that I've been talking about we've got some cool things come in.

I really think next year around there and a little bit more cleanly at that retro market.

We think it is a decent marketing theres theres a couple of million rooftops out there that have solar on them already and if and if attachment rates on new solar are approaching 30% than existing.

Should be.

Opportunity as well so we don't want to ignore that there are some technical things that.

We can get there we can do it today, but there's some new product offerings coming next year that will.

Reduce the complexity technically two to making that happen to make it easier to to retrofit a system.

Okay, great. Thanks, guys.

Yep.

Our next question coming from the line at Tommy Mall with Stephens. Your line is open.

Good morning, and thanks for taking my question.

Dominic.

I wanted to follow up on the home standby business. So this has been a great year sounds like with backlog continuing to reach new record levels next year shaping up to be a good one as well.

And then today.

Theres been a lot of commentary around the increased capacity, which is the decision I know you don't make.

Without a lot of consideration. So my question is.

In order to get comfortable to invest in a new facility.

What are the things.

You have seen change in terms of the.

Medium term, let's say demand outlook here and what I mean is obviously with the home as a sanctuary trend you've had some event specific demand to pick up but.

But my hunch is you're seeing a broader base and more durable.

Improvement in that market and so I'm curious how you would describe that for US is your as you get closer to turning.

Turning dirt on a new facility yeah.

Its something were.

We're thinking about it at a.

At a very high level, even in that you know in our boardroom, obviously, we're talking about these things in terms of.

And what we've kind of what we've kind of.

The words were using or are we at a tipping point.

Are we at a tipping point for the category right. So we're approaching as we said probably about 5% penetration of single family households.

Single family Unattached homes greater than a $100000 of value Thats. The total addressable market is 53 million homes or something like that that 5% of that number is where kind of the market will be at the end of the year.

That still means 95% homes don't have it.

And when you look at.

The the things that have transpired this year and you think about let's just think about home is a sanctuary that trend and what the pandemic has done.

You know I think the pandemic as as a lot of companies are pointing out has has accelerated some of the longstanding trend that we are already happening things like telecommuting American we've been talking about telecommuting for decades, right the way to cut down on having to drive to work and the amount of time you spend your car and the technology today.

Is is far greater.

In in its capabilities to allow for some of the things that have happened in fact, I can't even imagine like if we had had this pandemic 10 years ago five years ago, just how much more difficult. It would have been for society in general to deal with.

The idea of being.

Kinda mandated to stay in your home today, you can work from home. Your kids can learn from home I was on a call recently one of our customers did a top to top.

CEO Forum and.

The call on the call. It was mentioned you think about school as an example appear Wisconsin will have a couple of days a year, we get some heavy snow we have a snow day kids love that I loved it has a kit going forward kids are going to have snow day. So on virtual learning days right. So there, but but in order to enable that you've got to have the technology, one which is the ability.

To do that you got a power to enable that technology and I think the conclusion that people are reaching is that look our my home is going to become my office, it's going to become my my classroom, it's going to become my Jim It's going to become my you know where I shop, all of those things are going to happen in the home and none of them happen without a source of power.

You if your power is out and look at the outages that are going on and the more people that experienced outages. The more people are concluding that look this is not this is not an option anymore, where it was maybe a nice to have before and this is the tipping point tipping point from nice to have two necessity and that's really what we're talking about as a tipping point so as we.

We think about the future of the category, we think about where this is going I think we see a future where backup power whether its a generator or whether thats an energy storage system as that technology continues to develop we think it's going to be imperative that all homes and businesses have some level of that resiliency built in going forward.

Yes. Our next question from the line to have Joseph Osha with JMP Securities. Your line is open.

Hey, guys. Thanks for taking my call I wanted to return.

To this issue of 20 to 22 and this notion of distributed energy our energy.

Energy assets. So if you look at.

Storage, it's mostly third party owned that at this point right and that makes it relatively straight forward sorry, no. If you look at your network of generators, which are mostly owned by the people that bought them how.

How do you go about this process of signing them up to distribute in something like a grid services deal no you're onto it Joe in terms of just some of the additional complexities and that's why I hesitated to kind of talk about how we would monetize that because you do have that added complexity that is different from storage and that.

You got it you are dealing with an individual homeowner right I mean, thats, where the that the unit is owned and operated by the homeowners. So the programs that could be available that homeowner they don't they're not necessarily different than the programs that could be available to a third party operator, there's just a lot more individual conversations and having a conversation with say one.

Third party that might own and operate.

A couple thousand megawatt hours of storage right. So it's just it's a different conversation, it's and it's and there are numerous ones right. There are numerous conversations but you could see I could still find a path there that would give you a a conversation to engage with the homeowner, let's say you've got a homeowner out in Florida and.

Or Michigan, or California doesn't really matter, where it is but but if you had a utility company locally that had a need for this kind of balancing.

Opportunity that exists with as an example, with imbalance network.

And with their approach to things.

That that opportunity is.

That asset I should say is valuable to that utility company. So it might actually be just pairing the utility with that owner dealer. It makes the introduction just making the introduction to the utility company utility company could have the program they have that homeowners information because it providing power today. So we kind of see it probably looking more like that longer term is that utility kind of based type of.

Approach, where the utility companies could enroll those assets using maybe it's up and a volatile platform to help enable.

There could be some pieces of technology that you put into that too. So theres, you're talking about maybe it's not thousands of dollars maybe a couple of hundred dollars a piece of equipment, but again it depends on how valuable that asset is to the to the utility and there are certain utilities around the U.S. that are going to find that very valuable because they have constraints and they have kind of this volatile.

City around the supply side that they've got to deal with as renewables become a bigger percentage of their supply.

We have our last question from the line have Jerry Revich with Goldman Sachs. Your line is open.

Hi, good morning, everyone.

Hey, Jerry.

And can you talk about your update in terms of points of light. If you will a clean energy distribution site, where are you today.

Im sure you have a pipeline that youre working on can you just give.

Give us look forward on where do you think you'll be.

If we look at a couple of quarters, yes.

Yes, so we continue to pick up.

Users of our Powerplay C platform, that's kind of how we're looking at you know people are actually quoting to the platform today, it's about.

Getting closer to 700 users on that platform.

We think that we can be close to 1000 by the end of the year.

And so we've got a lot of work to still do with clean energy and that's part of just kind of leaning into building out the distribution there.

Also I would just point out as we announced previously this partnership that we have with Sonova.

We're really excited about that they've got some great dealer partners as well so getting them up the curve, we actually began to transact here in Q3 with Sonova and that's going to accelerate through.

Through the back half of the year here.

But we're doing a lot of training right now in introducing people to generate the name for those that aren't familiar with us in the space and more specifically our solution our power cell solution and our our hems, our home energy management solutions.

And that's going to be a major focal point for us going forward because for US we successful here if there's anything that we've learned that the home standby business is the importance of the points of light around distribution and that is a critical area of focus going forward.

There are no further questions at this time.

I will now turn the call over back to Mike Harris.

We want to thank everyone for joining us. This morning, we look forward to discussing our fourth quarter and full year 2020 earnings results with you in mid February of next year, Thanks, again and goodbye.

This concludes today's teleconference. You may now disconnect.

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