Q1 2021 Generac Holdings Inc Earnings Call
[music].
Yeah.
Good day, and thank you for standing by welcome to the first quarter 2021 Jenna.
<unk> Holdings earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your Speaker today, Michael Harris. Please go ahead.
Thanks, Alicia good morning, and welcome to our first quarter 2021 earnings call I'd like to thank everyone for joining US. This morning with me today is Aaron <unk>, 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 for.
Bided from time to time by <unk> 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 or 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 U S. GAAP measures is available in our earnings release and SEC filings I will now turn the call over to Aaron.
Thanks, Mike Good morning, everyone and thank you for joining US today, our first quarter results were incredibly strong as net sales adjusted EBITDA and adjusted EPS were all time records for <unk>. Despite Q1, historically being the low point for the year seasonally for our business.
First quarter revenue margins and profitability were all significantly ahead of our previous expectations.
The revenue outperformance was very broad based and was heightened highlighted by increased shipments of residential products, primarily due to home standby and portable generators.
Home standby build rates were ahead of plan for the quarter and demand further accelerated due to continuing traction with the home is a sanctuary megatrend as well, it's being driven by significantly higher power outage activity in recent quarters, including the major event in Texas, which also led to a sharp increase in demand for portable generators.
Revenue from C&I products also outperformed expectations during the quarter domestically with our industrial distributors national telecom customers and rental customers as well as internationally, mostly in the European region.
Also in terms of profitability adjusted EBITDA margin came in considerably higher than our previous forecast driven mostly by greater operating leverage from the significantly higher revenue achieved during the quarter.
Year over year over net overall overall net sales increased 70% to $807 million and also increased sequentially from the fourth quarter of 2020, which was our previous all time record.
Growth in the quarter was broad based led by a dramatic increase for residential products that more than doubled compared to prior year as shipments for home standby generators were much higher due to record production levels.
Shipments of portable generators also increased driven by the major outage event in Texas and higher average activity overall in recent quarters delay.
Deliveries of chore products on clean energy products, such as our power <unk> energy storage system also grew at a significant rate as compared to the prior year and shipments of C&I products returned to growth strong growth in the quarter.
Gross margin expanded 370 basis points compared to prior year and adjusted EBITDA margin increased 840 basis points over the prior first quarter to 26, 5%, which was the highest EBITDA margin reported since the fourth quarter of 2013.
Before discussing our first quarter results in more detail I'd like to spend a few minutes on the major outage event that occurred in Texas in mid February.
This was a very unique winter event with unusually cold weather in a state that represents our second largest addressable market opportunity for home standby generators and highlighted yet. Another example of the vulnerabilities of the current electrical utility model.
This was a high profile power outage in fact, the fifth largest event recorded since we began tracking outages more than a decade ago with rolling blackouts across the state that lasted for several days and impacted over $4 5 million utility customers at its peak.
With the backdrop of the ongoing home is a sanctuary trend. We believe the outage in Texas was a dramatic reminder of the pain of losing power in today's day and age and further amplified the importance of having power security for your home or your business.
Driven by this event, we experienced yet another dramatic acceleration in demand for home standby generators from the already elevated levels, increasing our lead times to approximately 28 weeks for our most popular models as of today.
As a result, we have further increased our capacity expansion plans for home standby as we target even higher production levels in the second half of the year through a faster ramp of our new South Carolina facility and further expansion of capacity on our Wisconsin facilities.
When combined with the broad based strengthening of demand across the rest of our business, including a significant recovery in C&I products, which are also benefiting from the major Texas event, we are significantly increasing our full year revenue and earnings outlook for 2021.
We will provide additional details regarding our updated guidance and the outlook portion of our prepared remarks. This morning.
Now discussing our first quarter results in more detail.
Several key metrics that we monitor closely for home standby demand continued to be exceptionally strong and Roes even further during the first quarter benefiting from the major event in Texas.
The combination of in home and virtual consultations once again increased dramatically compared to the prior year with year over year appointments more than five times higher during the first quarter as compared to the first quarter 2000 22020.
The strength was broad based across the U S with the vast majority of states showing triple digit growth once again, which we believe provides further validation of the need for backup power given the home is a sanctuary megatrend.
Activations, which are a proxy for installations grew again at a strong rate compared to the prior year and were also broad based on strength across all U S regions.
The power outage severity environment continues to be very active during the quarter and trended well above the long term baseline average driven by the Texas event, but also ice storms in several states severe storms in the Pacific Northwest outage events in California, and smaller scale rolling blackouts in other states due to severe cold temperatures.
In addition, we continued to expand our distribution footprint as we ended the first quarter with approximately 7700 residential dealers a sequential increase of about 400, new dealers as compared to the fourth quarter of 2020, and approximately 200 dealers higher over the last 12 months, which includes the addition of a number of new dealers in California and Texas.
Early here in the second quarter. These key demand metrics for home standby have continued to trend much higher relative to last year as home consultations are running more than double the prior year's level through April.
We continue to believe that the ongoing strength in the product category can be attributed to several factors, which are leading to home standby generators, becoming more mainstream as homeowners have an increasing awareness of the need for power security as they continue to work more from home learn from home entertained from home and shop from home.
Now I want to provide an update on our rapidly growing clean energy product offering the secular growth opportunity within the U S market for renewables energy storage energy monitoring and energy management remains very compelling and has gained further momentum so far here in 2021.
As previously mentioned.
Shipments of our power cell energy storage shipment systems grew at a significant rate as compared to the prior year and demand paced ahead of our expectations during the first quarter.
In addition to the strong demand key performance indicators for our clean energy related initiatives continue to show favorable trends.
In home and virtual consultations grew rapidly as compared to the prior year and were very encouraging sequentially as compared to the fourth quarter.
System, Activations, which are a proxy for installations and commissioning also grew at a tremendous rate during the first quarter as compared to prior year and orders for clean energy price, we're very strong on a sequential basis during the first quarter and this strength has continued here in April.
We also have had encouraging success further building out our installer network is we've trained and certified approximately 2000 dealers as of the end of the quarter with approximately 800 dealers registered on our powerplay CE selling system.
As we discussed during our last earnings call. We have an exciting pipeline of innovative clean energy products, which are expected to come to market throughout the current year.
New product launches include deep integration of our power self storage systems with our legacy generated products the ability to more easily on cost effectively add power cell system to an existing solar installation and the launch of a new purpose built generator that can be combined with solar and storage to allow an end user to operate independently of the power grid.
Additionally, later this year, we expect to launch a new load management system that will be paired with our existing power view energy monitoring platform to allow a homeowner to more fully control their power generation and consumption.
We believe these product launches will further enhance our competitive position and differentiation in the energy storage monitoring and management markets as we focus on whole home storage solutions with load management capabilities that provide both the energy independence and flexibility that we believe consumers really want and these types of systems.
The solar plus storage market continues to expand rapidly within the U S and we are making good progress on building considerable momentum for our energy storage products occur.
Accordingly, we are increasing our full year revenue outlook as a result of higher demand and our expanded distribution in this growing market.
Now expect shipments of clean energy products increase between 75% to 100% as compared to the prior year levels of approximately 115 $115 million, which is an increase from the previous forecast of 50% to 75% growth.
In addition, we achieved a second consecutive quarter of profitability for clean energy products. During the first quarter and we expect this trend to continue sequentially for the remainder of the year as we further scale power cell system volumes.
Recall that on in October of last year, we acquired Ambala power networks, a leading grid services technology provider and I'd like to provide a quick update on the progress we're making in developing a roadmap for integrating embolic concerto software platform into our existing generator and energy storage products.
As the market for good services continues to develop we believe integrating embolic technology will allow us will enable us to improve our value proposition to end users with our legacy products as well as allowing us to develop various new revenue streams in the years ahead.
These will include the existing software as a service platform that <unk> offers as well as a variety of operational services that enable a more turnkey solution and ultimately performance services that could deliver mega megawatts of power to various potential customers.
During the first quarter, we began marketing our initial solutions, which involve our legacy products delivered with built in capabilities to connect to the <unk> platform.
These involve already generate assets known as distributed energy resources on <unk> can be available to bundled together to form a virtual power plant or <unk> solution.
We're excited to currently offer this initial capability with our C&I natural gas generators and as the year progresses, we will begin to introduce this feature with our home standby generators and our power cell energy storage systems.
Also over the last several quarters, the ambala and generate commercial sales teams have been working closely together on potential projects with utilities energy cooperatives, and energy Aggregators, which has led to a considerable increase in quoting and proposal activities during the first quarter.
In addition to the great performance of residential products to start the year C&I products were also very strong as revenue returned to growth during the first quarter and increased at a strong rate compared to the prior year broadly across a number of markets and geographies as demand continues to recover at a faster pace than we had previously expected.
Net sales of C&I stationary generators through our North American distributor channel returned to solid growth in the quarter with project quoting activity continuing to recover from the beginning of the pandemic last year and once again growing at a solid rate as compared to 2019 levels.
This is leading to an improved overall order outlook for the sales channel and as a result, we're expecting attractive growth during the year.
We also are expecting solid growth from the energy systems business. This is our industrial distributor in northern California that we acquired last July as our investments and integration activities are producing results in this large and rapidly growing power generation market.
Shipments to telecom National account customers increased significantly during the quarter as compared to the prior year and were well ahead of our expectations.
Several of our larger telecom customers have materially raise their capital spending outlook for the year, leading us to now expect a substantial increase in telecom shipments during the current year relative to our prior forecast.
The catalyst for the additional spending on backup power in this important vertical can be attributed to a number of factors, including the elevated power outage environment over the last several years the power security mandate in California, requiring a minimum of 72 hours of backup power at all tower locations and the build out of wireless carriers next generation networks.
The long term demand outlook for telecom backup power remains very compelling driven by the increasingly critical nature of wireless communications networks as this infrastructure shifts to the next generation <unk> architecture.
Additionally, we gained further traction in the quarter with our lead gas initiatives through increased quote activity and improved project close rates for our natural gas generators that are used in applications beyond traditional emergency standby power generation, including their use as distributed generation assets.
This is an emerging part of our C&I business that already had good momentum entering the year and the major outages in Texas have created additional demand for these products.
Shipments of mobile products for National accounts rental customers were lower during the first quarter, but exceeded our previous expectations as the rate of decline slowed relative to recent quarters and we expect a return to growth for these products during the second quarter.
As we mentioned during our last call, we expected shipments of mobile products for full year 2021 to improve from prior year levels as national rental account customers increase their spending on fleet equipment due to improving utilization and rental rates.
Several of our large national rental customers have recently increased their capital spending plans, even further and as a result, we're increasing our outlook for these products as it appears a fleet replacement cycle has begun.
We remain optimistic about the long term opportunity for mobile products with the compelling megatrend around the critical need for infrastructure improvements, which could finally benefit from economic stimulus plans recently announced by the current administration.
Outside of North America, we returned to growth during the first quarter with revenue increasing at a solid core rate of 10% compared to the prior year, primarily due to growth in the European region that is recovering from the impacts of the pandemic.
COVID-19 impacts from restrictions are still being felt in several international regions larger project quoting and overall order activity is recovering at a faster pace than previously expected leading to a significant increase in our international backlog at the end of the first quarter.
As a result, our revenue outlook for the International segment has further improved as we now expect strong growth for the full year with adjusted EBITDA margin expected to expand considerably year over year benefiting from improved operating leverage on higher sales volumes.
Lastly, our international teams continue to make encouraging progress on several important global initiatives around increasing the penetration of natural gas generators for residential and C&I applications and expanding our share on the market for telecom backup power in key regions around the world.
In closing this morning, 2021 is developing into a year, where our megatrends and macular secular themes macro sector secular themes appear to have significant momentum and are moving in the same direction as we anticipated.
We are anticipating tremendous growth for our residential products and a significant rebound in demand for C&I products as compared to the prior year.
A key focus for our teams is expanding capacity across the business, both within our own facilities as well as ramping our supply chain to enable our ability to continue to scale.
Our operations and supply chain teams have been working aggressively to address ongoing sourcing and logistics delays component availability constraints and the increasing cost pressures we've been experiencing.
We have largely mitigated the impact of these issues up to this point, but the situation remains fluid that being said, we believe we have appropriately risk adjusted our latest guidance to reflect potential disruptions and additional inflationary pressures that will likely continue to materialize as the year progresses.
Lastly, I have to give a shout out to our more than 7000 employees of <unk> that have helped us successfully navigate the pandemic, while still providing an incredible level of service to our customers and our partners around the world.
The hyperscale growth that we're experiencing is a reflection of their commitment to the execution of our strategy and their dedication to our success.
When you combine the strength of our team with our financial strength, we believe <unk> is incredibly well positioned to aggressively invest in a number of strategic initiatives to further accelerate our strategy and build out our capabilities as we continue our evolution into an energy technology solutions company.
I'd now like to turn the call over to York to provide further details on our first quarter results and our updated outlook for 2021 you're thanks Aaron.
Aaron.
Looking at first quarter 2021 results in more detail.
Net sales increased 70% to $807 4 million during the first quarter of 2021, an all time record.
As compared to $475 9 million in the prior year first quarter.
The combination of contributions from the energy systems mean, green and embargo acquisitions and the favorable impact from foreign currency had an approximate 3% impact on revenue growth during the quarter.
Briefly looking at consolidated net sales for the first quarter by product class.
Residential product sales more than doubled to $542 1 million as compared to $257 6 million in the prior year, representing a 110% increase.
Also residential products improved 9% on a sequential basis as compared to the fourth quarter of 2020 benefiting from the significant backlog for home standby generators entering 2021, which is in contrast to the normal seasonally lower volumes experienced during the first quarter that have averaged at 26% sequential decline over the past five years.
As Aaron already discussed in detail home standby generator sales continue to experience robust year over year growth, which more than doubled during the first quarter as we made further progress increasing production levels for these products.
Portable generators also experienced dramatic growth versus the prior year due to the due to the much higher power outage activity highlighted by the impacts from the major event in Texas.
In addition to this strength shipments of power cell energy storage systems also grew at a significant rate as compared to the prior year as a solar plus storage market in the U S continues to expand and as we build out our capabilities selling into the clean energy space.
Lastly shipments of <unk> products were also much higher during the quarter in part due to the home is a sanctuary trend continuing to positively impact demand for outdoor power equipment.
Commercial and industrial product net sales for the first quarter of 2021 increased 18% to $202 4 million as compared to $172 1 million in the prior year quarter.
This represents a return to growth for C&I products for the first time since the third quarter of 2019 with.
With the previous four quarters being negatively impacted by the COVID-19 pandemic.
The strength in shipments was due to broad based growth across a number of markets and geographies as demand is recovering at a faster pace than previously expected both domestically and internationally in the following areas.
Domestically the growth was driven by a substantial increase in shipments to telecom national account customers due to capital spending further improving for these customers as they continue to harden their wireless networks.
Also contributing to the increase was solid growth with our industrial distributors as well as an increase in other project opportunities as we gain traction with our lead gas initiatives.
Internationally the increase in C&I products as previously mentioned was primarily due to an increase in market activity, mostly on the European region that is recovering from the impacts of the pandemic, which began during the first quarter of last year.
Net sales for the other products and services category, primarily made up of aftermarket service parts product accessories extended warranty revenue remote monitoring subscription revenue and other service offerings increased 36% to $62 9 million as compared to $46 2 million in the first quarter of <unk>.
On 'twenty.
There was an approximate 7% benefit to net sales during the quarter from the impacts of the energy systems, and <unk> acquisitions and favorable foreign currency.
In addition, we experienced very strong growth in aftermarket service parts as a result of a higher level of power outage activity in recent quarters.
A larger and growing installed base of our products also contributed to the increase versus prior year.
Gross profit margin improved 370 basis points to 39, 9% compared to 36, 2% in the prior year first quarter.
Operating expenses increased $23 2 million or 21, 2% as compared to the first quarter of 2020.
But declined 610 basis points as a percentage of revenue excluding intangible amortization due to the substantially higher sales volumes in the current year quarter.
As a result, adjusted EBITDA before deducting for Noncontrolling interest as defined in our earnings release was an all time record of $214 2 million.
We're a very strong 26, 5% of net sales as compared to $86 million or 18, 1% of on net sales in the prior year.
This substantial 840 basis point improvement in EBITDA margin was driven by the significant gross margin expansion during the quarter due to favorable sales mix improved pricing and favorable overhead absorption.
Coupled with improved leverage of fixed operating expenses on the much higher sales volumes and tight cost control.
Note the favorable impacts on margins during the first quarter were partially offset by the onset of higher input costs, primarily relating to higher commodities currencies labor freight and logistics costs.
And these are expected to have a more more of an impact on profit really starting in the second quarter.
I will now briefly discuss financial results for our two reporting segments.
Domestic segment sales increased a robust 84% to $693 million as compared to 376 million on the prior year quarter with the impact of acquisitions contributing approximately 2% of the revenue growth for the quarter.
Adjusted EBITDA for the segment was $207 1 million, representing a very healthy 30% margin as compared to $82 8 million in the prior year or 22% of net sales.
International segment sales increased 15% to $115 million as compared to 100 million in the prior year quarter.
Core sales, which excludes the favorable impact of currency increased approximately 10% compared to the prior year.
Adjusted EBITDA for the segment before deducting for Noncontrolling interest was $7 1 million or six 2% of net sales.
Compared to $3 3 million or three 3% on net sales in the prior year.
Now switching back to our financial performance for the first quarter of 2021 on a consolidated basis.
As disclosed in our earnings release GAAP net income for the company in the quarter was $149 million as compared to $44 5 million for the first quarter of 2020.
GAAP income taxes during the current year first quarter were $35 4 million or an effective tax rate of 19, 1%.
As compared to $9 4 million or an effective tax rate of 17, 9% from the prior year.
The increase in effective tax rate was primarily due to the significant increase in the mix of domestic pretax income in the current year, which is tax on an approximate 25% statutory rate.
Diluted net income per share for the company on a GAAP basis was $2 33 for the first quarter of 2021 compared to 68 in the prior year.
Adjusted net income for the company as defined in our earnings release was $152 $7 million in the current year quarter or $2 38 per share, which was also an all time record.
This compares to adjusted net income of $55 1 million in the prior year or <unk> 87 per share.
Cash income taxes for the first quarter of 2021 were $37 9 million as compared to seven 3 million on the prior year quarter.
The current year reflects an expected cash income tax rate of approximately 25% for the full year 2021, which is at the lower end of the previously expected range of 25 to 21, 5% for 2021.
This compares to the prior year rate of 14% that was anticipated in the first quarter of the prior year. The increase in the current year cash tax rate versus prior year is primarily due to the significant increase in domestic pre tax income, which is taxed at a higher statutory rate.
Cash flow from operations was robust at $152 5 million as compared to $11 3 million in the prior year first quarter.
And free cash flow as defined in our earnings release was $125 8 million as compared to a negative $1 million on the same quarter last year.
Both operating and free cash flow represented seasonal records for the first quarter over year.
The substantial increase in cash flow was primarily due to higher net income and a lower level of working capital investment in the current year quarter.
Partially offset by higher capital expenditures, which included the new facility in Trenton, South Carolina.
Before discussing our updated outlook for 2021.
I wanted to comment briefly on our healthy liquidity position at the end of the first quarter of 'twenty, one which allows us to confidently operate our business and accelerate our strategy.
As of March 31, 2021, we had over 1 billion of liquidity comprised of 745 million of cash on hand, and 300 million of availability on our ABL revolving credit facility, which matures in June of 2023.
Also total debt outstanding at the end of the first quarter was $872 million net of unamortized original issue discount and deferred financing costs.
Our gross debt leverage ratio at the end of the first quarter was only one two times on an as reported basis.
In addition, our term loan doesn't mature until December 'twenty.
December 2026, we did not have any required principal payments on this facility until the maturity date and it has a low cost of debt of LIBOR, plus 175 basis points.
We also have interest rates swap arrangements that fixed our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026.
Further enhancing this attractive capital structure is our strong cash flow profile with free cash flow over the last 12 months of $554 million.
I would now like to provide some additional details on our increased outlook for the full year 2021.
As Aaron highlighted earlier, we are significantly increasing our full year revenue and earnings outlook for 2021.
The major the major outages in Texas have led to an acceleration in demand and backlog for home standby generators and as a result, our operations team has further increased their capacity expansion plans and this is leading to a significant increase in the shipment outlook for these products for the full year 2021.
The Texas outages also had a notable impact on portable generator shipments and with an active sell through at retail where.
We are increasing our outlook for these products as well.
Also contributing to the improved outlook as higher demand for our power cell energy storage systems as we continue to make further progress on building out distribution partners in the clean energy market.
The outlook for C&I products has also improved considerably with a significant pickup demand for telecom national account customers stronger outlook for domestic industrial distributors traction with certain projects and beyond standby applications. A further recovery in demand for mobile products and an improved outlook for C&I products within the international markets.
As a result of these incrementally positive end market trends, we are increasing our full year 2020, net sales guidance to now be approximately 40% to 45% growth compared to the prior year, which includes only approximately 2% unfavorable impact from acquisitions and foreign currency.
This is an increase from the previous as reported guidance of 25% to 30%.
At the midpoint of the range. This updated sales growth guidance would result in a year over year increase in net sales of over $1 billion.
This revenue outlook now assumes shipments of residential products increased at a variable robust rate of over 50% as compared to the prior year.
Revenue for C&I products is now expected to rebound at an even stronger rate as compared to the softer prior year comparison.
Right approximately in the mid 20% range.
Importantly, this guidance assumes a level of power outages in line with the longer term baseline average for the remainder of the year.
Consistent with our historical approach this outlook does not assume the benefit of another major power outage event in the second half of the year.
[laughter].
Given the additional capacity expansion for home standby generators that is targeted to increase as the year progresses. We are now expecting the seasonality for revenue in 2021 to be a bit more weighted towards the second half of the year with sales in the first half being approximately 47% weighted in sales in the second half being approximately 53% weighted.
Updating our margin outlook for the full year 2021, as we've discussed there continues to be significant cost pressures ongoing logistics delays and various capacity constraints in several areas across the supply chain, which are resulting in higher input costs relative to our previous guidance.
Including rising commodities foreign currency headwinds increased logistics costs additional tariffs and higher wages.
Furthermore, we still expect these inflationary cost pressures together with new facility start up costs to be offset by favorable sales mix pricing and cost reduction initiatives across the organization through our profit enhancement program.
As a result, we expect gross margins for the full year 2021 to expand approximately 50 basis points as compared to the prior year.
In addition, we continue to make operating expense investments to scale the business support innovation and drive future revenue growth into new and existing markets. However, due to the much higher anticipated sales volumes, we should experience improved leverage on our operating expenses relative to previous guidance.
As a result of these factors adjusted EBITDA margins before deducting for non controlling interest are now expected to be approximately $24 five to 25, 5%, which is an increase from the 24% to 25% previously expected.
And an expansion from the 23, 5% margin in the prior year.
From a seasonality perspective, we now expect adjusted EBITDA margins during the second and third quarters to be moderately lower relative to the first quarter, primarily due to the impact of rising input costs.
However, we believe this impact will be temporary with adjusted EBITDA margins forecasted to improve in the fourth quarter back to first quarter levels as the rising cost pressures are anticipated to be offset by more favorable mix additional pricing and cost reduction initiatives are expected to be realized towards the end of the year.
Operating and free cash flow generation for the full year 'twenty. One is expected to remain strong with the conversion of adjusted net income to free cash flow is still anticipated to be approximately 90%.
Our GAAP effective tax rate is now expected to be between 22, and a half to 23, 5%.
Which is slightly lower as compared to the 23, 5% to 24, 5% previously expected.
Our capital expenditures for 2021 as a percentage of forecasted net sales are still projected to be in the previous guidance range of between two 5% to 3%.
Although with a much higher revenue outlook. This represents an increase in absolute dollar investment compared to our prior expectations, primarily due to additional capacity expansion.
The remaining guidance items provided in our previous earnings call are not expected to change.
This concludes our prepared remarks at this time, we'd like to open up the call for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key as a reminder, questions will be limited to one per analyst. Thank you. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Tommy Moll of Stephens.
Yeah.
Hey, Tommy.
Good morning, Eric.
Thanks Tommy.
Thanks for taking the questions.
No worries.
Aaron I wanted to start on <unk> and some other grid services opportunities you referenced.
You gave a little bit of detail to start but anything else you can give us just in terms of.
How active that pipeline is what.
What strategies, you're pursuing there how optimistic.
Now versus maybe a quarter ago, and then you also referenced from some potential for product integration, specifically referenced a purpose built generator I think that's on the home standby side.
But what details can can you give us there as well sure good question Tommy on them.
<unk>.
I think our confidence grows daily with that acquisition. It just continues to reinforce.
Our strategic direction around.
Participating more fully in the.
Shift to grid to point out right I mean, that's really what that acquisition was.
It was about and it really was about helping us take our legacy assets are our generators. If you will.
As well as our our clean energy assets like power cell and load management devices and really expose those distributed energy resources for the benefit of grid operators utilities energy Aggregators and ultimately the end customers the owner operators of those those piece of equipment.
I can say over the last quarter is we continue to dive pretty deep into the pipeline debt embolic had previous to our acquisition.
It is substantially larger today than it was that pipeline substantially larger today than it was when we acquired it. We believe there are a couple of reasons for this one.
During the acquisition of course that was COVID-19 hit was we were in the middle of that and there was some retrenchment by utilities and others.
On a lot of things, but certainly programs that grid services were kind of put down they were shut down and as they were working on other things, but the volumes have picked up dramatically here based on the fact that COVID-19 has abated, but probably more importantly, many of these customers are telling us that they feel like now.
They they get debt Ambala has a partner in <unk> that is one financially stable and two has access to all these wonderful assets right. So what ambala with settlement was selling before with software and it's agnostic software to the OEM and the agnostic to even the the type of day.
We are.
Storage or be it a generating asset, but and we want to maintain that because we think thats important, but I think having the opportunity to provide a full turnkey solution to a utility is really important it really reduces the friction around which platform should the utility choose if our assets deeply integrate with it.
And they have a lot of confidence in our ability to execute and our financial wherewithal to be able to do that.
What we believe that's led to is just a lot more opportunities that we're seeing so really good things to see there on the product pipeline you mentioned, the we keep calling it the purpose built generator. This is really our off grid generator. If you will it's a machine that will produce direct current power.
So it will be able to charge the battery it wont provide power to your home during a blackout, but it will be able to provide power to your battery as you deplete the battery, which could be during a blackout or or some other time.
We think that's a really important kind of a critical missing link for those homeowners that really wanted to defect from the grit and so think of it as grid defection enabler that product will be available later this year and we're pretty excited but there's been a lot of interest in it we'll see how many people really want to truly defect from the grid there'll be able to do that after this.
It fits the market but.
It's a it's going to be an exciting launch we're going to launch it at Spi here in September so it should be should be a lot of fun.
Your next question comes from the line of Ross Gilardi of Bank of America.
Hey, good morning, guys, Hey, Ross.
I'm just curious like as you guys are scaling up the new capacity in the interim where do you keep finding the extra capacity to get you through these quarters and are you just.
Yeah.
Driving continuous efficiencies out of your existing footprint are you able to sell about some.
Additional assembly, we keep thinking uratic capacity, you can't possibly produce.
And other unit out of your existing sort of trying to keep doing it which is I mean that is a comp obviously, but just like.
How are you doing that yes.
Yes.
It's a great question Ross and this is where I'll give a huge shout out to our our operations teams are.
Yeah.
It's a fight every day every hour I mean, they literally half hour by hour.
Kind of metrics that they're pacing against not only obviously for output, but the ability to hit the kinds of output levels that we're achieving and do it safely and to continuing to produce a quality product. These are top of mind for everything we do.
It's just it's amazing.
In full disclosure I think if you had asked me as the CEO of this company, even six months ago, if we'd be able to achieve the levels. We're at today in the existing footprint.
I would have probably taken the under on that Pat I just.
Maybe more of a realist at heart.
Maybe you know maybe just would've you never want to bet against your own team, but these these folks on our team just continue to outperform there.
They are working very closely with our supply chain. That's obviously a major component of this too to make sure we get continuous supply we've been expanding our supply chain to dual and triple source, which has been incredibly helpful. That was an initiative. We actually started back a couple of years ago now, but its paying off very handsomely, we invested very heavily on automation.
Over the last several years, which is also paying off quite nicely and really the way the teams to answer your question at the root of it is the teams are are continually looking at ways to improve.
The operations of the business how do we.
Squeezing out a half a point of efficiency or a quarter point on productivity out of our equipment out of our teams out of our supply chain makes a big difference at the kinds of rates that we're running right now.
Again, we don't know what the future holds supply chain is just a.
Really challenging area right now everything from logistics to component availability on everybody's talking about this.
And we're no different we have taken up.
I would say I think we.
Properly reflected that in the guidance, we'll just say that I think we.
We kind of handicap it in a way that we believe.
These numbers that we're going to put out are achievable based on everything we know today.
If we have some improvement in the supply chain situation, maybe they go higher.
We will see but I'm just I'm incredibly proud of the team, they're just they're doing a great job and really.
I can't say more about it.
Your next question comes from the line of Philip Shen.
Roth capital partner.
Good morning, good morning, Phil.
Hey, congrats on the strong results.
And just kind of piggybacking off that last question on let's say, we get a huge hurricane wildfire season this year.
What kind of capacity do you have to be able to serve.
Increased demand can you help us bridge.
Where you're at now relative to what that potential scenario could be.
Can you talk about the capacity expansion plans, Aaron I know you've talked about adding more on Wisconsin more in South Carolina and you can do it earlier, but what do we can quantify that.
Wait times continues to just go longer Aaron I think you talked about 28 weeks, but our recent dealer checks suggest the dealers are waiting 35 weeks for the 'twenty two kilowatt engine. So what is the plan to reduce that wait time served.
The busy season, if you will when that comes from Q3 and four thanks, Yeah. Thanks, Phil.
The capacity discussion here as a daily discussion.
We had a we had a plan.
That we had in place that we were gonna bring Trenton on online here mid year.
Is effectively.
If you think of it this way.
We're calling it the double double right. So we're effectively.
We're going to double our capacity, where we're at today is somewhat kind of double where we were running maybe a little more than a year ago 12 to 18 months ago, and we had a pretty good line of sight to exit this year at that level, we felt pretty good that we tune that we'd start chewing into the backlog pretty well.
Notwithstanding again to your point about.
An active hurricane season that was going to be a wildcard, but what happened here in between kind of our last plan and today was Texas.
And so as the Texas event was unfolding.
Basically we went back to the drawing board and we said look we had a plan it's not enough how do we get more cash.
Can't have lead times going out on 28 weeks is terrible.
And that's the average across all channels all customers all products, but.
Those those lead times are that's too long to wait.
And we're working hard to bring those in but that debt recalibration of the capacity plan simply put I'll just.
Without getting too detailed is to take our level that we're at today, which we anticipated would go up somewhat by the end of this year as we brought Trenton online, but effectively we've now made investments and plans to completely double where were at today a year from now so that will ramp throughout the year and the way we're going to do that is we're going to bring Trenton up quicker. So we are going on.
Need more people.
We're going to need more equipment.
And we're going on we've made those investments we've made those decisions and we're executing against that but we're also making more investments here in Wisconsin. So the initial decision was to shift.
To a secondary location down on Trenton, that's not going to be enough. So we had stood up a temporary line in one of our facilities just outside of Whitewater, Wisconsin, where we build the lion's share on these products and that temporary line, we're going to actually add another line in that facility and we're going to augment that production through some sub contracting of component supply so our.
Strengths are a couple of other major components that go into the units.
We're going to subcontract supply, we've got a line of sight on that that'll come online here.
Really kind of end of Q3, beginning of Q4, so that call. It second line in Wisconsin and that temporary facility. So the second line that we're adding in Wisconsin, the quicker ramp of Trenton.
And then bringing on more equipment early next year is what gets us to doubling kind of where we're at today to where we can be tomorrow. So if we do get an active hurricane season, we feel like debt that we'd be ready for that.
We may still have longer lead times exiting the year than we want but the kinds of capacity numbers. We're talking about here by the time, we get get out 12 months from now are really quite big so the ability to scale. Even further I think is.
He is going to be.
It's going to be possible once we get.
Once we get through that investment process.
I mean, we will we will sell more portable should we get a major event. That's that's part of it that's part of it too.
Your next question comes from the line of Brian Drab William Blair.
Thanks for taking my question and Amazing pronunciation of my name that's a first.
I am just wondering from my one question about margins.
Six 5% first quarter youre going to exit the year around that level do you expect.
Given all the puts and takes you won't have.
I would I would guess.
Severe headwinds as severe headwinds from cost going into 2022, but you'll have a lot of additional capacity. So can you just help us at all think about does that 26% to 27% EBITDA margin run rate at the end of the year carry into 2022 or is it reasonable to expect that to kind of come off of that really high level given.
You're running so hot.
Yes.
Think.
We've said.
We most likely would not be catching the backlog here in 2021, so we will be coming into 'twenty, two with that backlog. So.
Conceivably, while we're running full full steam in terms of production.
You know that those types of EBITDA margins would be sustainable.
Sustainable.
I haven't necessarily rolled up my 2022 guidance yet but.
Thinking out loud, that's how I'm thinking about it.
Ultimately when we once we catch the backlog.
That's I guess, that's yet to be determined we don't know what type of.
A hurricane season, we're going to get this year, so I guess more to come.
On how that will play out in 2022, but.
Yes, I guess.
I.
I haven't necessarily laid out 2022 margin profile yet.
Well I think the key areas, where we're to input cost go how.
How much higher day go I think the messages, we believe that we have where the things we're doing from a <unk>.
Rice.
Cost.
Cut cost efficiency cost reduction standpoint, and then elements are on mix will help offset those inflationary pressures that we're seeing today.
The impact of that we believe is going to be transitory here in the middle part of the year of 2021 net.
Should it should alleviate murder on the backend to your point Brian.
Your next question comes from the line of Mark Strouse of Jpmorgan.
Yes. Good morning, Thanks for taking our questions most of them have been answered I just wanted to go back to the the.
Fly chain issues.
Can you just remind us what kind of the specific.
Raw materials are or I guess, what the major headwinds or is it specifically raw materials is it any kind of semiconductors like we're hearing with other companies.
Maybe just give us an indication what that could be yes, no market. It's a it's an important question and there's two types of headwinds here theres cost headwinds and then theres availability headwinds and so from a cost headwind standpoint, we use a lot of copper aluminum and steel and our products. So obviously as those have run here over the last six to 12 months we've.
Scene.
A sizable increase and thats kind of the cost pressures that Europe was alluding to on the last question.
We're offsetting that with pricing and other cost out actions.
Interestingly enough the second headwind, which is availability. We're also seeing some availability issues within some of those basic materials, which is not something we typically experience. So finding electrical grade steel as an example for the Alternators, we manufacture which is the business end of the of a generator.
That's been challenging.
Having to go out to the mills and buy coil stock.
We're kind of jumping the supply chain and a lot of cases to get upstream to find a rockwell stock to provide to our.
Our electrical grade steel elimination manufacturers.
That would be one instance of it I would say more broadly, though electrical components are in terms of availability.
We use a lot of semiconductors lot of microprocessors in all of our products I would say much more heavier use on our clean energy products much lighter use on products like <unk> products.
But nonetheless, there is still a lot of microprocessors across the board.
Think that one thing for us.
Maybe just a little bit on how we've been insulated from some of the the current shortfalls youre reading about in automotive and some other areas.
You know as much as I'd love to say, we're where we're incredibly lean.
Supply chain in terms of inventory levels and whatnot. The fact on the matter is because of the nature of our business in terms of needing to react to exogenous.
Elements of demand, we have to keep a fair amount of safety stock and our suppliers have to keep a fair amount of safety stock.
On hand to feed us when we need to double or triple our output. So there was a fair amount of inventory in the channel. If you will our supply chain channel that is as well as our own our own inventories and so thats been helpful. In kind of absorbing some of those those shortfalls that being said we definitely are look.
King at some problem areas ahead now again, we've reflected this we think appropriately in our guidance.
So there are some areas of our business that I'll just point out clean energy I mean, the demand for clean energy is much.
Much higher than what we can produce simply because of some of the constraints we have on availability.
At the electronics level also battery cell production levels, Theres theres constraints, there as well and we're monitoring that and we're looking at ways. We can we can mitigate that but we've more heavily reflected that in the guidance for free.
For that business and still we're saying, we're up 75% to 100% clean energy year over year. So.
Got.
It's been a challenge and we're going to continue to manage it the best of our ability but.
There's quite a few headwinds out there, but I think our teams have a have a pretty good handle on it and we're going to continue to to keep fighting here.
Your next question comes from the line of Christopher Glynn Oppenheimer.
Hey, Thanks, good morning.
Nice work.
A lot of high level questions been asked I'm curious, what you're seeing in terms for HSV, what youre seeing for emergency replacement and upgrade market.
As well as.
New construction penetration.
Yes.
That's a great question.
And we watch this very very closely.
We've said in the past.
The replacement rate is roughly about 10% today and we get quarterly updates that's up that's up nicely, we get quarterly updates on.
What the replacement rates are we as we survey.
People, who buy products are they buying for replacement or are they buying it as a new home.
Are they buying it as an existing home so.
In new construction, it's 15% to 20% other products going into new construction. So.
Both of those trends are favorable and have been favorable over the long haul the replacement trend I think is maybe the most favorable because when you when you're really just peel back the math on it and I think we showed this a couple of years ago on an Investor day, and we may have to update this coming up here in our Investor day in September but that that.
On the the replacement rate itself was.
It was worth quite a bit of money there just over the long haul and so and that I think as technology continues to improve and the products and in particular as those products become.
Grid services enables right Ambala ready the idea of the newer products being in ball already on the old ones not that becomes an asset that could be producing for somebody in.
In a different way than just protecting their home.
It could be something that.
It is.
Cable to be monetized, so pretty interesting stuff there other remote monitoring capabilities that we've added to products over the years also don't exist in generational product channel.
10, 15 years ago. So.
Really interesting trends longer term and I think they're bullish for us and bullish for the category.
Your next question comes from the line of Jed door Shimer of Canaccord Genuity.
Yeah.
Alright, thanks, guys.
I'll Echo the sentiments congratulations on great execution.
So I guess from my question.
On the home standby.
Sort of an easy trend to call with respect to the work from home phenomenon and you guys have executed flawlessly on that.
Just maybe my question on turning to sort of the commercial and industrial.
And.
If we look at the trends and I'm, if I'm, a REIT and I own either industrial property or even an office or hospital post ERCOT.
And knowing that this work from home phenomenon is that theres going to need to be a lower too.
Get tenants to come back into the.
The properties I'm curious, where you think.
From the conversations where we're at in terms of.
To use a baseball analogy sort of the earnings of using.
Guaranteed power.
Is.
Is one of the benefits in.
In terms of that.
And whether or not the fact that the structure of that REIT and having to spend the money from a tax perspective, if youre starting to see that that benefit yet and that's what we saw in in these results.
Yes, I think it might be a little early to be saying its reading through today, maybe a little bit, but really we've always looked at the sales cycle and just that the those products because they are budgetary items generally for a business or.
Even our hospital in some cases those are a little more code driven but really we bifurcate the C&I world into two markets. There is the code driven and then theres the optional standby market within just purely standby right. So co driven markets are clear where you've got to provide.
Backup power because of our wastewater treatment plant a hospital some other installation where codes require that.
A simple.
Our bid process and would be something that is about half of the market. The other half of the market that is made up of what we refer to as this optional standby market and Thats really a decision for a business or a business owner, who says look I have interruption of my maybe it's my revenue streams or I've spoilage or inventory or I have.
Some other.
Thing that happens when the power goes out it's a negative for my business and I want to protect that and protect against that so I invest in backup power I think.
The idea there and what we've typically seen is we'll see a follow on period here for a couple of years, especially after.
An event like Texas, the magnitude of that debt.
We will see increased quotation activity, which we're seeing today increased activity around what types of solutions makes sense you can talk to the specifying engineering firms that are involved in projects like this down in that region of the country and they will tell you that there is a lot of inbound interest around businesses and other other types of properties looking at adding.
Backup generator I think what gets really interesting for me is when you can take that backup generator on C&I is really it makes a lot of sense here you can turn it into a distributed energy resource now youre talking about a big chunky blocks of power debt you can take 400 501 megawatt.
<unk> hundred kw 500 kw, one megawatt two megawatts of power in a single installation with a single owner that you can put back into the grid.
That's incredibly valuable for ERCOT or four.
Any of the other grid PJM any other.
Any of the other grid operators out there or utility companies, even themselves, who can use that asset to help them balance supply and demand and so that's kind of the new frontier right and that's why we invested in Ambala youre going to see us continue to push even further on this and I mentioned it just briefly on the prepared remarks about we call it on.
<unk> gas initiatives here, which is really about using a natural gas generator for those purposes because.
Those instances youre, just talking about a cleaner burning machine the economics are much better around gas.
We use a rich Byrne configuration machine. So it can do quick startup to protect against blackout blackouts as well as provide power back to the grid. So we're the leader in that industry and have been for many many years.
And we're incredibly excited and that's where we've been getting the most interest actually with the <unk> acquisition as I was mentioning those sales teams and Bala and our teams working together many of the projects that we're talking about our natural gas generator projects and larger blocks of power four distribution centers four manufacturing plants.
For other types of installations critical or non critical and I think that's going to be really important because that's really more of an energy as a service. If you think about it down the line, that's where it turns into.
I think that's going to be a really exciting part of the growth story for C&I as we go forward.
Yeah.
Your next question comes from the line of Jerry Revich of Goldman Sachs.
Yes, hi, good morning, everyone. Let me add my congratulations on a strong performance as well.
Gary I'm wondering if I'm.
I'm wondering if you could talk about how much your power. So production was up in the quarter and you mentioned you increased your expectations for the year, maybe just quantify.
Quantify that for us and if you could just touch on whether you have enough.
Battery capacity with your existing supplier.
The supplier relationship.
Any additional plans.
On the supply base.
Yeah. Thanks, Jerry on power seller has been incredibly well received them.
We're doing well to take some some good market share there on a growing market, which is awesome.
And we continue to rollout new products as we've talked about in the prepared remarks, but as it relates to supply chain and capacity I mentioned briefly the <unk>.
Battery cell capacity constraints, which anybody who's electrifying anything today is dealing with the same.
Situations and we're no different.
Brought on a second source here.
In the first quarter to augment our primary source of battery cells battery packs will be bringing on in the second half of the year, a third and potentially even fourth source to continue to kind of broaden the supply base for those products that being said again as I said before we've kind of reflected in our guidance.
Even though we're talking about a 75% to 100% growth rate year over year for clean energy products.
We're really.
It could be higher the demand is much higher I mean, the inbound demand that we're seeing in those product categories.
Is phenomenal.
Very exciting and I think this is really ahead of any kind of all the major policy changes that are being proposed out there right. We really didn't even touch on that today much but the current administration has a whole host of Av.
Kind of plans and proposals out there related to increasing and extending the investment tax credit.
Actually, giving an ITC credit I'm, making that available for storage only which is something that would be a very interesting I think for people who are looking to add storage to an existing solar array or use storage, perhaps as an arbitrage opportunity. So we need to continue to work on capacity as the the I think the takeaway.
Here our teams are looking at that very hard and.
And longer term.
We're going to need to do.
Some other things there that I think will probably be prepared to talk a little bit more deeply about once we get to our investor day in September but.
As it relates to what we did in Q1 I guess you archive.
We said in the prepared remarks, so shipments obviously did grow dramatically I think what was encouraging where orders or demand actually was was was up sequentially from Q4 to Q1.
Actually better than expectations, so that that was the driver.
Taking our outlook up there's a lot of momentum on the distribution side for these products took our outlook up two growing 75% to 100% at the midpoint of that range that would be about a 100 million dollar increase in shipments of those products year over year. So.
A lot of encouraging signs on again.
That's better than we had originally expected so.
And I think that the key there is we will be ramping volume throughout the year margin profile will ramp throughout the year end.
And we're gonna have attractive margin profile as well on top of that.
Your final question comes from the line of Ross Gilardi of Bank of America.
Thanks, guys I just had a quick follow up whereas the backlog by the end of the year. If you get your capacity, where you wanting to get normal order activity for the balance of the year based on NAV. Roger on trying to question, Yes, I think it's a great question and obviously the big wildcard in that kind of equation or formula is what kind of a season.
Do we see this fall and so.
I think it's really difficult for me to just kind of it's spelled out a number here because I don't know what the season holds for us.
We really want to bring the backlog down in terms of the lead times.
We'd love to see that get a lot shorter.
As we as we go forward.
And that's something that we're working hard to as we ramp capacity as I said, the South Carolina facility. The team there. We've got a we've got a plan that basically doubles, where we thought we were going to be at the end of the year in terms of exiting the year down on Trenton, we want to be twice as high as we thought we'd be and then again augmenting that with more production in Wisconsin here.
So.
We're going to grow into a really big capacity number by the time we hit.
You know kind of Q2 of next year.
But.
On the season could if the season plays out to be an active one and there are quite.
<unk> forecasts out there, saying that and that's just the hurricane season, I guess I haven't touched on.
The fire season out west its been incredibly dry out west in very dangerous situation there.
Always you're already seeing fire activity out in the northwest in Washington.
Californians I think are really on edge with where that could go so lots of interest in Texas tons of interest and taxes coming off of the outages. There. So again, we're trying to reflect what we what we think is an appropriate level of.
Either way, we're not going to be catching her back we're not going to catch it you are going to come out of the year with them are crude of it yes, we're going to catch.
We're gonna commodity here with a fair amount of backlog. It's just a question of what the magnitude of that number is just not in a position yet to size that.
Yeah.
There are no further questions at this time.
Great we want to thank everyone for joining us. This morning, we look forward to discussing our second quarter 2021 earnings results with you in late July and thank you again and goodbye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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