Q2 2021 Generac Holdings Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, thank you for calling please remain on your line is your conference call will begin momentarily. Thank you for your patience.
[music].
Good day, ladies and gentlemen, and thank you for standing by welcome to the second quarter of 2021 generic holdings incorporated earnings 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 then 1 on your telephone keypad. If you require any further assistance. Please press Star then zero at this time I would like to turn the conference over to your host Mr. Mike Harris, Vice President corporate.
Element and Investor Relations Sir please begin.
Good morning, and welcome to our second quarter 2021 earnings call I'd like to thank everyone for joining US. This morning with me today is Aaron Young 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 General Karnes 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 second quarter results were incredibly strong with broad based revenue growth of 68% and with all time records. Once again for the company this quarter for net sales adjusted EBITDA and adjusted EPS from.
I'm, particularly proud of achieving this tremendous top line growth along with the record levels of adjusted earnings. Despite the ongoing significant cost pressures logistic challenge and various capacity constraints.
In the quarter across the supply chain.
I'd like to thank our teams for their ongoing commitment to our customers their dedication and tireless execution have helped us to largely overcome the incredible supply chain challenges that have become commonplace in today's post pandemic operating environment.
Second quarter revenue adjusted EBITDA and adjusted EPS were all ahead of our expectations.
We fade revenue outperformance was highlighted by higher shipments of home standby generators as build rates for the quarter were ahead of our previous guidance due to strong operational execution.
Demand for home standby generators remains incredibly robust due to a variety of factors, including continued traction with the home is a sanctuary megatrend as well as significantly higher power outage activity over the past several quarters.
Quarters.
Revenue from global C&I products also outperformed expectations during the quarter, both domestically and internationally highlighted by national Telecom and rental customers and growth within the European region.
The revenue outperformance in these areas was partially offset by lower than expected shipments of portable generators, primarily due to supply chain constraints, which has led to lower price.
Stocking levels with our retail channel partners.
Adjusted EBITDA dollars were also ahead of our previous forecast driven mainly by the higher shipping levels, but EBITDA margin was slightly below our expectations given the higher important input costs in the quarter.
Year over year overall, net sales increased 68% to $920 million and also increased.
<unk> is essentially at a strong rate relative to the first quarter of 2021, which was the previous all time record.
The growth in the quarter was driven by broad based strength across the business as both residential and C&I products grew dramatically as compared to the prior year.
The growth in residential product was led by robust shipments of home standby generators, which nearly doubled over the prior year due to record production levels.
Additionally, shipments of power cell energy storage systems experienced tremendous growth both over the prior year and sequentially as demand for clean energy solutions continues to rise alongside the rapidly expanding solar plus storage market.
Shipments of C&I products also grew significantly in the quarter as demand continued to recover off the prior year Covid lows at an accelerated.
Across a number of markets and geographies and are now solidly above 2019 levels.
Adjusted EBITDA increased 77 percentage compared to the prior year with a corresponding margin, increasing 120 basis points and adjusted EPS increasing 71%.
Now discussing our second quarter results in more detail despite strong prior year comparisons.
Due to the emergence of the homes at home is a sanctuary megatrend and elevated outage levels home consultations or sales leads for home standby generators remains strong during the second quarter and increased approximately 50% as compared to the second quarter of 2020.
Consistent with the trends seen over the past year. The strength was broad based across the U S with nearly all states experiencing growth again in.
<unk> with more than half of those half of all states showing triple growth triple digit growth led by Texas.
Activations of home standby generators, which are a proxy for installations also grew again at a strong rate compared to the prior year with broad based strength across all U S regions, including exceptional growth in the northeast and south central regions.
Overall outage.
Quarterly as measured on a trailing 4 quarter basis continued to be much higher relative to the prior comparable period and was well above the long term baseline average helping to drive awareness of the home standby category.
In addition, we continued to expand our distribution footprint as we ended the second quarter with more than 8000 residential dealers, adding over 300, new dealers in the quarter.
The build out of distribution distribution remains a critical focus area as we have added approximately 700 dealers since the start of the year and 1300 dealers over the last 12 months, which includes the addition of a number of new dealers in California, and Texas that represent nearly 1 third of the increase.
Early in the third quarter. These key demand metrics for home standby have continued to trend.
Even higher relative to prior year levels, including home consultations, increasing at a strong double digit rate.
We believe the ongoing strength of 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 are working learning shopping entertaining and in general spending more time in.
Their homes.
Earlier this month, we achieved a significant milestone by starting production of home standby generators at our new manufacturing facility in Trenton, South Carolina.
This facility will provide much needed capacity to further ramp our daily home standby build rates in an effort to reduce lead times, which remain elevated at approximately 28 weeks.
With the successful.
We'll start up a trend combined with a number of other capacity expansion activities. We're now anticipating higher production levels relative to previous expectations and as a result, we are moderately increased our shipment outlook for these products during the second half of 2021.
In addition, we remain on track to an approximate doubling of our current build rates by the end of the second quarter of 2020.
2 which is nearly 4 times greater than our previous baseline output levels at the beginning of last year.
I also want to provide an update on our rapidly growing clean energy product offering.
As previously mentioned, we experienced a dramatic increase in shipments of power cell energy storage systems. During the second quarter, which was aided in part by a softer prior year comparison as the overall solar.
<unk> market was negatively impacted by a sharp drop in installations due to the onset of COVID-19 pandemic shipment.
Shipments of power cell systems also experienced strong growth sequentially as we gained further traction in the rapidly expanding solar plus storage market.
In addition to the strong revenue growth key performance indicators for clean energy continue to show favorable trends.
In home and virtual consultations expanded at very strong rates as compared to the prior year and sequential trends were also encouraging.
System, Activations, which are a proxy for installations and commissioning grew at a tremendous rate during the second quarter as compared to the prior year and also improved on a sequential basis in.
In addition, we further built out our installer network during the quarter and we end.
<unk> ended the first half of the year with approximately 200 trained and certified dealers with nearly 900 of those dealers registered on our powerplay CE selling system.
As we indicated on the previous quarter's earning call earnings call demand for clean energy product has been outpacing supply, which is limiting our growth rates for the category.
Throughout the second quarter strong end market dynamics.
Mix around energy storage, coupled with our marketing and distribution initiatives.
Resulted in further strengthening of demand for clean energy products.
In addition, our teams made important progress during the quarter with our supply chain execution execution regarding power cell energy storage components.
As a result, we are increasing our full year revenue outlook and now expect clean energy shipments to approximately.
As compared to the prior year.
In addition, we are driving profitable growth within the product category as we scale volumes and optimize the supply chain.
As we've also discussed on recent calls we have an exciting pipeline of innovative clean energy products expected to come to market over the next several quarters.
These launches include generator integration with our power cell storage systems.
<unk> the ability to more efficiently add a power cell system to an existing solar install the launch of a new DC output generators that can be combined with solar and storage to allow an end user to operating independently of the power grid and a new loan 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.
In addition, we're making our power cell systems, smart grid, ready, which will enable them to be used in virtual power plant applications using embolic concertos software platform.
We believe these product launches will further enhance our competitive position and differentiation in the energy storage monitoring and management markets as we look to further build out our clean energy offerings into a complete <unk>.
Ecosystem of products and solutions for installers and end users.
Consistent with this approach in early July the large and growing micro inverter market for solar applications with the acquisition of Chillicothe power.
Based in Los Angeles, California, Silicon as a designer and provider of grid interactive micro inverter and monitoring solutions for the solar market.
We call it the solar plus storage attachment rates are currently between 20 and 25%.
Which essentially means we werent participating in 75% to 80% of the market that is focused on solar only installations.
This strategic acquisition will dramatically increase our served market and help us deepen our relationships with solar channel partners and installers.
As we expand our clean energy product suite to include microphone burgers.
Industry sources estimate the global market from micro Inverters and optimizer is used in residential applications to be approximately $2.5 billion for 2020.
And is projected to grow to approximately $4.5 billion by the end of 2023.
We have a proven track record of developing.
<unk> energy solutions, and we intend to apply the same playbook that we have previously used for other acquisitions in this space with a focus on scaling the business through our innovative lead generation capabilities are omni channel distribution approach the implementation of a variety of cost out actions and by leveraging <unk> extensive supply chain expertise.
I'd also like.
To provide a brief update on <unk> power networks, a leading grid services technology provider that we acquired last fall.
We are making good progress with the deep integration of Embolic concertos software platform with our existing products and today. We now have this smart grid ready functionality available for all of our C&I natural gas generators home standby generators, and our power cell energy storage systems.
<unk> also over the last several quarters and <unk> has been working closely with <unk> commercial sales teams on potential projects with utilities cooperatives and energy Aggregators, which has led to a considerable increase in quoting and proposal activities for the business so far in 2021.
As the market for grid services continues to develop we believe combining our equipment hardware with.
So software is a critical first step by making <unk> product smart grid ready, thereby allowing them to operate as distributed energy resources known as <unk>. These.
<unk> can be aggregated into a virtual power plant or <unk> PPP solution and bundled with turnkey services that should enable us to improve our value proposition to end.
With involves utilities and grid operators, allowing us to develop various new revenue streams in the years ahead.
This will not only include the existing software as a service platform that embolic. Currently offers but could also include a variety of vertical operational services that enable a more turnkey solution and ultimately even performance services that could deliver megawatts of power to various potential.
End user tumors.
The recent heat waves experienced in the U S. This summer are an important example of the growing need for utilities and grid operators to expand their use of grid services and <unk> assets.
At 1 point in late June Embolic enabled the deployment of hundreds of megawatts of its connected fleet to maintain grid stability predominantly in the Pacific northwest and northeast.
East in response to the extreme temperatures that created enormous demand spikes for power in those regions.
In these instances the combination of grid services.
Software and systems, along with the ER assets were used for flexibility response purposes to supplement traditional power plants.
We believe systems, such as <unk>, <unk> platform and <unk> assets like those.
As provided by <unk> will become critically important going forward for utilities and grid operators, who will be tasked with providing stability and resiliency across their networks as more renewable power, which is highly variable is brought online and as end users dramatically increase our consumption with the electrification of everything from heating and cooling to transportation over the next decade.
In addition to the great performance of our residential product in the second quarter. Our C&I products also had a tremendous quarter as demand across a number of markets and geographies continued to recover at a faster pace than we had previously expected.
Net sales with C&I stationary generators through our North American distributor channel grew again in the quarter at a solid rate with quoting project activity.
Quarter volumes further recovering from the pandemic related lows of last year with growth well ahead of 2019 levels and we expect attractive growth for this channel for the full year.
We're also experiencing encouraging growth with the energy systems business, our industrial distributor distributor in northern California that we acquired last year as our investments integration activities.
While increased focus are producing excellent 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 as capital spending by several of our larger telecom customers accelerated and led to a further increase in projected shipments during the current year.
Overall catalyst for the additional spending on backup power in this important vertical continues to be driven by an 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 Buildout of wireless carriers <unk> networks.
The long term demand outlook for telecom backup power remains very.
Driven by the increasingly critical nature of wireless communications as this infrastructure shifts to the next generation architecture.
Shipments of mobile generated mobile products to national rental account customers were also higher during the second quarter as compared to the very soft prior year, which was negatively impacted by the pandemic.
We still expect shipments of mobile product for full year 2.
'twenty 1 to improve dramatically from prior year levels as national rental account customers significantly increase their spending on fleet equipment with utilization and rental rates continuing to improve.
Longer term, we remain optimistic about demand from mobile products with the compelling mega trend around the critical need for infrastructure improvements, which could finally benefit from economic stimulus plans being.
Compelled by the current administration.
Additionally, we continue to gain important traction with our lead gas initiatives through increased quoting activity and improved project close rates for our natural gas generators used in applications beyond traditional emergency standby power generation such as Theyre using micro grids are other distributed generation applications.
Quoting activity.
Activity and the sales pipeline is growing significantly for these project opportunities and revenue for these applications increased at a substantial rate during the second quarter as compared to the prior year and the outlook is further increase for full year 2021.
This is an emerging part of our C&I business that had good momentum entering the year and with the major winter related outages in Texas.
This and the extreme heat waves occurring this summer, we're seeing increased interest and demand for these solutions.
To support the growing opportunities, we see in our C&I business, we announced the closing of deep Sea electronics on June <unk> and advanced.
Controls designer and manufacturer headquartered in the United Kingdom.
We believe deep sea as high level of technical expertise and the added engine.
And with their team will give us will be critical to helping us develop and accelerate our product roadmap for the future bolstering, our electronics and control capabilities and supporting further innovation to meet dynamic needs of the evolving energy technology solutions market.
As we advanced the use of our products and applications beyond standby power the need for complex systems levels.
Controls for distributed generation storage and other day, our assets used in Microgrid applications will serve as a key enabler of the decentralization of the power grid in the future.
Similar to our domestic C&I products demand internationally has also rebounded strongly in recent quarters with shipments increasing at a core rate of 45% in the second quarter compared to the prior year.
Nearing this growth was primarily due to strength in the European and Latin American regions, which experienced a sharp increase in demand as end markets recovered off the pandemic induced prior year lows.
While some COVID-19 impacts and restrictions are still lingering in several international regions larger project quoting and overall order activity continue to recover at a faster than expected pace.
This is leading to growth in our international backlog at the end of the second quarter with the order strength continuing early on here in the third quarter.
Longer organic growth combined with the deep Sea acquisition are both driving our revenue outlook for the international segment higher than previously expected for the full year.
In addition, adjusted EBITDA margins are expected to expand considerably in the second.
Second half of the year, primarily benefiting from the impact of the inclusion of <unk> results as well as from improved operating leverage on the higher sales volumes.
In closing this morning, we believe our recent strategic acquisitions are important examples of our ability to leverage our strong financial position to further expand our capabilities and advance our strategy as we continue our transition into.
In energy Technology solutions company.
We remain focused on developing innovative solutions that enable protect and improve the efficiency of next generation power communications transportation and other critical infrastructure and going forward. We intend to continue investing aggressively in a number of strategic initiatives, both organically and through acquisitions that we believe can help to accelerate.
These efforts.
I'd now like to turn the call over to Europe to provide further details on our second quarter results and our updated outlook for 2021.
Thanks Aaron.
Looking at second quarter 2021 results in more detail net sales increased 68% to $920 million during the second quarter of 2021 and.
An all time record.
Compared to $546.8 million in the prior year second quarter.
The combination of the energy systems mean, green Ambala, and deep sea acquisitions, and the favorable impact from foreign currency had an approximate 4% impact on revenue growth during the quarter.
Briefly looking at consolidated net sales for the second quarter by product class.
<unk> residential product sales increased 76% to $600 million as compared to $341.4 million in the prior year.
As Aaron already already discussed in detail home standby generator sales continue to experience robust growth, which nearly doubled during the second quarter as shipments benefited from much higher production levels for these products.
As compared to the prior year.
Shipments of power cell energy storage systems also grew at a dramatic rate as compared to the prior year as the solar plus storage market in the U S continues to rapidly expand and as we build out our marketing and distribution capabilities are selling into the clean energy space.
Portable generators also increase.
At a solid rate versus prior year due to the higher power outage severity in recent quarters.
And shipments of <unk> products also improved at a strong rate in part due to due to the electrification of our product lines.
Commercial and industrial product net sales for the second quarter of 2021 increased 64% to 250.
$54.3 million as compared to $154.9 million in the prior year quarter.
There was an approximate 7% benefit to net sales during the quarter from the impacts of the deep sea acquisition and favorable foreign currency.
The very strong core revenue growth that was in part aided by the softer prior year comparison due.
Increased to 19 pandemic. However, C&I revenue also grew 6% on a core basis as compared to 2019 levels.
The strength in shipments compared to prior year was due to broad based growth across a number of markets and geographies as demand is recovering at an accelerated rate both domestically and internationally in the following areas.
Domestically the growth was due to a substantial increase in shipments to telecom national account customers, resulting from much higher capital spending as they continue to harden their wireless networks.
Shipments of mobile products recovered significantly compared to the soft prior year comparison, as our rental account customers accelerated their fleet replacement given higher utilization.
The COVID-19 and rental rates.
Also contributing to the increase was solid growth with our industrial distributors as well as an increase in other project opportunities as we gained 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 in the European.
European and Latin American regions that are recovering sharply from the impacts of the pandemic that existed during the prior year.
Net sales for the other products and services category, primarily made up of aftermarket service parts product accessories extended warranty revenue remote monitoring and grid services subscription revenue and other services.
<unk> offerings increased 30% to $65.7 million as compared to $50.6 million in the second quarter of 2020.
There was an approximate 9% 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 <unk> parts as a result of the higher power outage activity in recent quarters.
A larger and growing installed base of our products and additional extended warranty revenue also contributed to the increase versus prior year.
Gross profit margin was 36, 9% as compared to 38, 2% in the prior year second quarter, which was impacted.
<unk> by higher input costs in the current year that were partially offset by improved pricing and more favorable overhead absorption from the higher sales volumes.
Operating expenses increased $37.4 million or 31, 3% as compared to the second quarter of 2020, but declined 460 basis points.
Our market is 460 basis points as a percentage of revenue excluding intangible amortization due to the strong operating leverage on substantially higher sales volumes in the current year quarter.
As a result, adjusted EBITDA before deducting for non controlling interest as defined in our earnings release was an all time record of $217.7 million or <unk>.
23, 7 percentage of net sales as compared to $123.1 million or 22, 5% of net sales in the prior year.
This 120 basis point improvement in EBITDA margin was primarily the result of the improved leverage of fixed operating expenses on the much higher sales volumes.
Being partially offset by the aforementioned decline in gross margin.
I will now briefly discuss financial results for our 2 reporting segments.
Domestic segment sales increased 70% to $784.1 million as compared to $460.8 million in 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 200.
$9 million or 26 percentage of net sales as compared to $121.3 million in the prior year or 26, 3% of net sales.
International segment sales increased 57, 8% to $135.8 million as compared to $86.1 million in the prior year quarter with the impact of acquisitions and foreign.
Foreign currency contributing approximately 13% of the revenue growth for the quarter.
Going forward the financial results for deep Sea electronics will be included in our in our in our international segment, primarily within C&I product class.
Adjusted EBITDA for the segment before deducting for Noncontrolling interest was 13.
$3.7 million or 10, 1 percentage of net sales as compared to $1.9 million or 2.2% of net sales in the prior year.
The increase in international segment margin was primarily due to improved operating leverage on the higher sales volumes and the impact of the deep C acquisition.
Now switching back to our financial performance.
<unk> second quarter of 2021 on a consolidated basis.
As disclosed in our earnings release GAAP net income attributable to the company in the quarter was $127 million as.
As compared to $66.1 million for the second quarter of 2020.
GAAP income taxes during the current year second quarter was $46.
$4 million.
Or an effective tax rate of 26, 6% as compared to $18.5 million or an effective tax rate of 22, 5% from the prior year.
The increase in effective tax rate was primarily due to a discrete tax item, resulting from a legislative tax rate change in the United Kingdom, which revalued deferred.
Tax liabilities by $7 million or approximately 4% tax rate impact during the current year quarter.
Diluted net income per share for the company on a GAAP basis was $2 <unk> in the second quarter of 2021 compared to $1 <unk> from the prior year.
Adjusted net income for the company as defined in our earnings release.
<unk> was $153.2 million in the current year quarter or $2.39 per share, which wasn't also an all time record.
This compares to adjusted net income of $88.5 million in the prior year or $1.40 per share.
Cash income taxes for the second quarter of 2021.
With $37.4 million as compared to $13.9 million in the prior year quarter.
The current year reflects an expected cash income tax rate of approximately 21% to 21, 5% for the full year 2021, which.
Which is higher than the previously expected rate of approximately 25% for 2021, primarily the result of higher <unk>.
Amortization from a deep sea acquisition, which is not deductible for tax purposes.
Also the 21% to 21, 5% cash tax rate compares to the prior year rate of 17% that was anticipated in the second quarter of 2020.
The increase in the current year cash tax rate versus prior year is primarily due.
Tangible and a significant increase in domestic pre tax income, which is taxed at a higher statutory rate.
Cash flow from operations was once again robust at 100 at $122.5 million as compared to $101.8 million in the prior year second quarter and free cash flow as defined in our earnings release was <unk> 90.
Due to <unk> 3 million as compared to $89 million in the same quarter last year.
Both operating and free cash flow represented records for the second quarter of a year.
The increase in cash flow was primarily due to higher operating earnings in the current year quarter, which was partially offset by a higher level of income taxes paid and.
90 cyclical expenditures in the current year, which included a new facility in Trenton South Carolina.
Before discussing our updated outlook for 2021 I want to comment briefly on our strong liquidity position at the end of the second quarter of 2021.
In May we amended our ABL facility, increasing its size from $300 million.
<unk> $500 million and extending the maturity date from June 2023 to May 2026, along with reducing the LIBOR spread to 100 to 125 basis points, depending on availability under the revolver.
As of June 32021, we had $830 million of liquidity comprised of 390.
So cash on hand, and $440 million of availability on the ABL revolver.
Also total debt outstanding at the end of the second quarter was $871 million net of unamortized original issue discount and deferred financing costs.
Our gross debt leverage ratio at the end of the second quarter was only 1.1 times.
And as reported basis.
Further enhancing this attractive capital structure is our strong cash flow profile with free cash flow over the last 12 months at $561 million, which allows us to confidently operate our business accelerate our strategy and further enhance shareholder value.
I.
<unk> on and provide some additional details on our increased outlook for full year 2021.
As Aaron highlighted earlier there are several areas of the business, where we are performing better than expected and as a result, we are raising our full year revenue outlook for 2021.
In particular, the company continues to make better than expected progress in increasing.
<unk> production rates for home standby generators and as a result, we are modestly moderately increasing our shipment outlook for these products for full year 2021.
In addition, we are experiencing stronger than expected demand for our power <unk> energy storage systems, and combined with additional supply chain execution and the closing of the recent Silicon acquisition. We're also.
I'd now like to see our shipment outlook for clean energy products as well.
The outlook for C&I products has also improved due to a further broad based rebound in demand highlighted by a continued pickup in activity from telecom national account customers overall stronger demand from international markets and the closing of the deep C acquisition.
As a.
A result of these factors we are increasing our full year 2021 net sales guidance.
To now be approximately 47% to 50% growth compared to the prior year, which includes approximately 3% of favorable impact from acquisitions and foreign currency.
This is an increase from our previous as reported guidance of 40% to 45% growth with.
The majority of the improvement being organic growth.
Importantly, this guidance assumes a level of power outages for the remainder of the year in line with the long term baseline average 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.
Looking at seasonality.
<unk> for the second half of the year revenue is expected to increase sequentially in the third quarter as compared to the second quarter with an even higher sequential improvement anticipated for the fourth quarter as we further scale home standby production and clean energy shipments.
Updating our margin outlook for the full year 2021, we continue to experience higher.
Cost relative to our previous guidance due to rising commodities and significantly higher logistics costs to.
To address these higher input costs, we implemented additional pricing actions during the second quarter across our product lines and we continue to focus on cost reduction initiatives through our profitability enhancement program.
However, given our current.
Input clock situation, we do not expect to realize these margin enhancements until the fourth quarter and into 2022.
As a result of these factors we now expect gross margins for full year 2021 to be approximately flat as compared to the prior year, which compares to the previous expectation of an approximate 50 basis point increase.
Adjusted EBITDA margins before deducting for Noncontrolling interest are now expected to be approximately 24, 5% to 25% as compared to the previous guidance range of 24, 5% to 25, 5% and up from the 23, 5% margin in the prior year.
From a seasonality perspective, we expect adjusted EBITDA.
<unk> during the third quarter to be slightly lower relative to the second quarter, primarily due to the startup of the Trenton, South Carolina facility and higher operating expense investments.
However, adjusted EBITDA margin is forecast to forecasted to improve sequentially in the fourth quarter, returning closer to the first quarter levels as a result of.
Pricing realization improved sales mix favorable overhead absorption and other margin enhancement initiatives.
Several additional guidance items that we provide to assist with modeling adjusted earnings per share and free cash flow also require updating for 2021.
As mentioned previously our cash income tax rate.
EBITDA is now expected to be approximately 21 to 21, 5% for the full year 2021, which.
Which is higher than the previously expected rate of approximately 25% for 2021.
Interest expense is now expected to be approximately 32 million, assuming no additional principal payments and flat LIBOR rates for the remainder of the year.
This compares to the previous guidance of approximately $34 million with the decline primarily due to a lower weighted average interest rate for the year.
Our capital expenditures for 2021 as a percentage of forecasted net sales are now projected to be at the higher end of the previous guidance range of between 2.5% to 3% due to additional.
<unk> capacity expansion actions.
GAAP intangible amortization expense for 2021 is now forecast to be approximately $49 million to $50 million as compared to the previous guidance of approximately $34.35 billion, which is due to the closing of the deep sea and silicon acquisitions and their related preliminary purchase price allocations.
Stock compensation expenses now expected to be approximately $24 million, which at the high end of the previous guidance range of between 20 to 24 million also due to the recent acquisitions.
Finally, the following our remaining miscellaneous guidance items remain unchanged.
Our GAAP effective tax rate is still expected to be between 22.5 to.
To 23, 5% for the full year.
Depreciation expenses still forecast to be approximately $40 million in 2021, given our assumed capital spending guidance.
Operating and free cash flow generation for the full year 2000.
Full year 2021 is expected to remain strong with the conversion of adjusted net income net income to free cash flow is still.
Still anticipated to be approximately 90%.
And our full year diluted share count is still expected to be approximately 64 to 64.5 million shares.
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 or comment at this time. Please press Star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue simply press the pound key.
Order to facilitate as many participants as possible. We ask that you. Please limit yourself to 1 question. If you have any additional questions.
To rejoin the queue again, we are strictly enforced day, 1 question per person.
Q&A at this time, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.
Our first question or comment comes from the line of Mike Halloran from Baird. Your line is open.
Everyone. Thanks for taking the question.
You May I just wanted to clarify.
The comments that were just made by New York there.
If I heard you right based on the timing of the capacity additions coming in you should see acceleration in <unk>.
Basically throughput through the facility <unk> into <unk> concurrently.
We you should see some margin normalization as you know it's the right pricing comes through as you get a little more normalization. So is the implication therefore that the jumping off point into 2022 should be at a higher run rate relative to what you're seeing today is all of those things start normalizing out for you or am I thinking about that wrong.
Yeah, Mike. This is York. So I think you know like I said in my comments, we do expect Q4 margins to return closer to Q1 levels. As Q2 Q3, we see these the the transitory impact of our higher input costs.
So I I.
To that end in Q4 looking similar to Q1, I guess, that's the jumping jumping off point into 2022, obviously.
You need to roll up our our 2022 budgets to figure out what that looks like next year, but.
We feel we feel good and confident that margins will.
Well at least get back to where they were in Q1.
By Q4.
Thank you. Our next question or comment comes from the line of Tommy Moll from Stephens. Your line is open.
And thanks for taking my question.
Good morning.
Good to hear you've now cut the ribbon.
Ribbon in Trenton.
And are on track to hit the run rate, thereby I think you said Q2 of next year, which would reflect the doubling of capacity.
Capacity.
So could you walk us through the operational goals you have to get from here to there and then when you get there next year just doing the rough.
Path would be would we be wrong to think about your residential revenue potential is just a doubling of the $600 million that you just put up or is that not the right way to think about it. Thank you.
Yeah Tammi this Aaron the doubling is that the Max capacity that we.
Would have in total 4.
From a standby product by Q2 of next year, the doubling that we referred to the doubling of where we're at today once everything in Trenton is online.
And again, we what we're trying to do is build some surge capacity into the system. We've lost that over the last couple of years as the markets.
Growth in home standby has outstripped our.
Our homes are pacing of output. So we're hoping to build some additional surge capacity because that business needs that they're they're just you know that the.
Periods of growth, our hallmark by outage events and other.
Types of things that happened in the external markets and you have to react to that and.
And we've lost a little bit of we've lost the ability to get some upside as a result of where we're at today. So that's what we're building out in terms of operational.
You know kind of milestones or things that we're focused on here over the next call. It 9 months as we bring that facility fully online.
Right now we're in the initial startup phase.
We actually were fortunate to get in there right at the beginning of the of the month, which is just amazing as 4 and a half months from when we took occupancy of the facility. So what our team has done there I'm incredibly proud of and they've worked very very hard to to bring that facility up we've got about 300 and some employees in the facility today, we've just brought on a second.
Shift and so we're pacing to is to have about 800 employees in that facility by the end of the year.
And that won't get us to the doubling that we're talking about here what gets us. Even further is the addition of some.
Further manufacturing tooling and automation equipment that will be adding into the facilities in Q1 and Q2.
And so the addition of that equipment those those additional pieces of equipment is really what takes us to the to the full potential run rate of that facility by Q2 of next year.
Thank you. Our next question or comment comes from the line of Ross Gilardi from Bank of America. Your line is open.
Hi, guys good morning.
<unk>.
Just just further on that question I just wanted to verify.
When you quote the backlog in weeks I think you said it was still 28 weeks, which is similar.
2.
What you said last quarter is that.
Moving to apples.
On the you know the denominator in other words when you quoted the 28 weeks last quarter was that based on the capacity free trends in and now you're basically on the capacity.
With the <unk>.
With strength in or how do we think about that what does the 20.
Apple actually based on what we've we've written in our notes that we think the backlog is closer to.
$1 billion.
In dollar terms I'm, just trying to get a sense if that is.
Still directionally in the right ballpark.
Yeah, Ross the way to think about that as the quoted lead time would be the lead time.
Today right. So when we gave that update on the last earnings call.
We were quoting it based off of what our expected production rate was going to be in the future.
That is how that account and based on order volume in the.
The quantum of the backlog.
You you noted.
There in your question.
<unk> that all goes into calculating the backlog so when we're giving that update again this quarter and the fact that it hasnt changed but we yes, we have higher production levels in the future. We've also as we indicated in the prepared remarks, we have been experiencing higher incoming order rates, so that kind of matches up with the higher expected production.
Production at this stage now what remains to be seen as we've said throughout is kind of how the season plays out.
In terms of Hurricanes in terms of power safety shut offs around the.
Potential for wildfires out west and in other parts of the country.
Our guidance doesn't contemplate any of that in there now.
We're not guiding lead times, but what would happen mathematically is as the order rate as the output excuse me as the production rate kind of outstrips the order rate over time, but the lead times would come in.
We're still expecting a considerable backlog at this point by the end of the year.
I don't know what that exactly will translate to in terms of lead time.
We need to understand what the order rate is at that point and also where we're at on the output levels.
How we're thinking about our ability to hit that doubling that we've talked about by Q2. So.
It's a you know theres a lot of math that goes into it and then theres a bit of a forecast as well obviously on where we think things are going but at this stage.
Because it's.
The demand has been incredibly robust we've said this in the prepared remarks as well even here early in the third quarter in July.
Our IHG as our home consultation sales leads for home standby or are up again, you know I'm very difficult comps compared to last year. So I mean, it's just it continues to amaze us the interest.
Level in the category and how that's translating into.
The real demand. So we're encouraged that that's very supportive of where we're going with the category in terms of our our expanded capacity. We think we're going to be in good shape for that.
And then again as I said, we'll let the season play out here to see how things shape up as we exit 2021 and go into 2022.
Thank you. Our next question or comment comes from the line of Philip Shen from Roth Capital. Your line is open.
Hey, guys. Thanks for taking my questions.
To what degree.
To what degree are you guys, considering yet another round of capacity expansion.
Q2, 'twenty 2 is.
It's not right around the corner, but you have such visibility into the business now.
That.
Arguably at some level, maybe that's not enough.
Do you think.
Beyond Trenton, there's no either more.
And there or maybe some more in Wisconsin or in yet another.
<unk> location altogether.
Yes, it's a good question, Phil and 1 obviously we watch.
I am very closely.
Mainly on the you know the context that we were we've been unable to largely unable to get ahead of.
Demand with our output and that's why we've gone very heavy here with the Trenton investment.
And essentially what's going to amount to a quadrupling of our output potentially a quadrupling of our output by Q2 of next year versus where we kind of came into the year last year.
As a baseline if you want to use that as a baseline.
In terms of adding additional capacity I think a lot of that for us is going to come down to what kind of a season plays out this fall.
I think we feel pretty good about and remember capacity is not just about getting a building and equipment and hiring people. It's about the supply chain to support that so today. We're actually this is this is a process we've gone through pretty rigorously over the last several years is we're constantly sizing the supply chain to be greater than.
Then our ability to produce so we're oversizing the supply chain because it takes longer to get your supply chain to grow it's just it's a longer.
A lot of times Youre looking for secondary or even tertiary sources you have to qualify if not only find those sources to qualify them.
And get them ramped and that generally.
As long or as I said, it took us 4.5 months.
To get in to get the building get in there and get it ready to run and get it get it producing product.
And while it is not producing at the top right that we expected to at this point, where there is kind of the.
Startups getting behind us here, and we're growing but really the supply chain. So we're sizing the supply.
Chain actually larger than that.
<unk> point in Q2 of next year and so if we see a really strong season. This fall.
And surges in demand off of that we could react we do have some room to expand in Trenton.
That facility that the area there that we acquired is <unk>.
Expandable to about 2 and a half.
Really take size, if we chose to do that.
We'd have to analyze whether or not that made sense or if maybe more of the growth is out west. It really kind of depends you know it might make more sense to have a facility located closer to wherever we see the demand growth. So we're going to watch it very closely we're going to react very quickly and I think we're going to be in pretty good shape given.
Times expansion in our own capacity by Q2, and then also the supply chain.
Expansion that we've been working on.
Thank you. Our next question or comment comes from the line of Brian dry up from William Blair. Your line is open.
Good morning, I'm, just going to ask a question about the Chilcot acquisition.
And can you comment on.
What sort of demand are you seeing from channel partners for you to carry.
That.
The product line that silicon enables.
And is there potential to see.
Step function increase.
And the shipments and revenue.
The power sale business in general just by opening up New channel relationships and then do you have the capacity in Chile.
Silicon to serve all day.
Yes, let me try to unpack some of that Brian because it really good questions.
Silicon as a.
We're very excited about this acquisition.
Acquisition.
Mall company basically startup today really liked the technology really like what they've done with the product line in its early stages.
We've got work to do to scale. It of course, you know that today its contract manufacturer here in the U S.
We think that we can.
Again, as we stated in.
In our prepared remarks, we kind of put a playbook together here for our approach to this with what we did with pica.
Recall that <unk> was also a startup.
Pretty nascent the demand was it was a very small company.
And here we are.
Turning it into.
Just an amazing growth.
And for US going forward, we think silicon is going to be all of that.
The reason we went after this we love storage and we think storage fits really really well with with our approach to the market from a resiliency standpoint in particular, but remember youre only talking about attachment rates to new solar of 20% to 25%. So.
No.
In effect as we try and develop channel partners and as we try and develop our brand in this market.
We're not participating in 75% to 80% of what goes on in the market and the solar only side. So the acquisition of Silicon as really a way for us to continue to build out what we're referring to internally as a supermarket I think in our prepared remarks, we said.
An ecosystem of product with this suite of products, but this is truly a.
Supermarket approach, we want to have a really broad product offering here from the micro inverters themselves all the way through to the storage pieces to our power generation assets that have been also well received by the solar.
Solar channel the channel partners there so.
In terms of step function change to answer your question directly.
More to come on that we've got an investor day here at the end of September we are going to be debuting these products at the solar power International show down in New Orleans in mid September.
Our first kind of area.
Cause here is to take the existing chicken product.
And in order to scale. It there are some things we have to do it there's some design for manufacture ability considerations alongside the development of the supply chain, we really intend to launch kind of a.
Branded <unk> portion of general <unk> solution, if you will of the kind of existing silicon technology.
<unk> really early Q2 of next year.
And I think that's when you would see and we would expect to see some inflection much. The same again, it's like pica. It took us a good 6 months by the end of the year. We bought that we bought pica I think it was in April or May of <unk>.
<unk> 19, and it took us till really.
Some timing of 2020 before we were in the market with a <unk> branded solution there kind of a similar again similar playbook and similar approach here and but I think that the resolve.
I mean look the.
The served market that we have.
Basically acquired here is massive.
Huge.
To begin its dominated by 2 players and everybody at least in the U S. And every every particular channel partner that we've talked to on the solar side has told us that theres room for more competition. We're excited to hear that we think that competition should have a generic brand on it we think we're going to be able to use a lot of the things that we've done to be successful in the short time, we've been involved.
This market with Python with Mario we think we're gonna be able to replicate that success very quickly with silicon so pretty exciting stuff I had.
Thank you. Our next question or comment comes from the line of Joseph Osha from Guggenheim. Your line is open.
Good morning, guys. Just wondering if we can return to power.
We're still a little bit you've given us some comments about this Europe and I'm wondering as we sort of exit the year into 2022, if you could talk a little bit about the run rate you hope to achieve.
Yeah, No I think we as we said in our prepared remarks, we upped our guidance.
To basically look we're looking to double.
Will that business here in 2021 relative to 2020. So I think we've we've publicly said we did about $100 million to $115 million of sales last year looking at double that here in 2021 and sequentially that's going to ramp.
From Q2 to Q3.
And then again into Q.
Q4, so that we're looking to successful 6.
<unk> and.
Ramp or output of those products over the quarters here and and really into next year. That's the expectation in the markets there the demands there.
We've said publicly that that the demand is outstripping our supply.
And.
That's what we're working on right now to ramp up in 'twenty, 2 and Joe I would just add to that.
We look at other people in the center, serving this market and Theres some fairly high profile players that are.
They are constrained on supply as well and maybe even I would say, maybe even more so than where we're at I mean, we.
Just in the second quarter our growth.
In the category of York was.
So 500%.
Over the prior years.
That is a.
We're ripping higher with that product category and we're looking for big things as we exit this year and going into 2022, and I think again you combine that.
So marcia on Silicon and you put that all together and I think.
We're incredibly bullish about the future with clean energy.
In terms of not only the size of the Tam and the speed at which it's growing but when you think about storage the speed at which attachment is growing as well I mean, there are forecast for solar alone to grow 40%, 50% next year.
Previous accident rates are going to grow 30% next year from the 2025. They are at this year you put all that together and for US. It's as York said demand is outstripping supply. So we're we're really scrambling to add additional supply. So that we can satisfy that that increase that is coming at us here. So a lot of a lot.
It keeps being put on that.
Internally and with our supply chain and.
Like what were building there is something thats going to be really exciting in the future.
Thank you our next question or comment comes from the line of Mark Strouse from JP.
P. Morgan your line is open.
Yeah. Good morning, Thanks for taking our questions York I just wanted to go back to the guidance. Please.
I understand the.
The EBITDA dollar outlook is increasing the margin goes down just a tad though.
I'm wondering if you could breakdown between.
A lot of effort input costs versus just mix I mean, it sounds to me like C&I might be a bit stronger than you were expecting.
And then just a quick follow up sorry, just to not to steal your Thunder from the analyst day, but do you do you intend to update your long term targets relatively soon.
Oh, Yeah to your point, where we're looking to schedule an analyst day at the end of September.
That's when we would be updating our long term target. So appreciate the.
The the ability to get that out there.
Relative to the EBITDA margin bridge versus previous guidance, you're right. It only ticked down at the midpoint.
So the range, it's only about a 25 basis points.
Moderation there and.
There are some moving points inside there so so you're right about.
The cost bucket, the higher input costs probably.
Probably did have about a 1% impact on that on that guidance change but.
But we were able to given the volume leverage on the higher sales volume as you are talking about that's probably that probably.
Clawed back about 50 basis points of that 1% and then.
From an M&A.
Mixed standpoint, maybe there's another 25 basis points that you are clawing back so.
So those are good guys.
Setting the input cost bad Guy and so net net we just believe that there is going to be some moderation. Once you get through the reality is steel costs have really gone up a lot since our last our last call. Our last guidance and so has our logistics costs as you know the cost of a 40 foot containers are up.
4 times in that window here, so just battling through that and the good news is we've got some price increases out there.
When we start realizing those in Q4, we start ramp.
Ramping up and absorbing Trenton South Carolina.
More and.
Just a better mix.
When you when you ship more home standby coupled with some other cost reduction efforts. We're working on that's why we just we feel confident that we're going to be able to bring our.
Our gross margins back up in Q4.
Thank you our next question or comment comes from the line of Christopher Glynn.
From Oppenheimer. Your line is open.
Thanks, Good morning, good morning.
So I think in the cash flow statement, so $419 million acquisition wanted to unpack that a little bit I don't know if the funding of silicone pulled forward into the.
Second quarter.
The early July close and I don't know if there are any earn outs in any prior deals, but just wanted to kind of unpack that and.
Maybe I think you gave commentary on deep C being.
1 of them being sort of startup wondering if the other 1 has more run rate business entering generality.
Despite the other day.
The cash flow statement.
Predominantly all of that was in fact deep Sea Chillicothe did close in July so that's a Q3 event.
But deep sea Youre right. Its a that's an established business that's been around for a real long time, well known in the power generation industry in terms of advanced controls and.
Global business.
You know we've talked about how it's looks looks a little bit like acquisitions, we've done in the past with that we're in.
That $50 million to $100 million range of established business, what was very different about deep sea, though is that their margin profile as it is.
Is.
<unk> is much higher than what we've acquired in the past in fact, that's it's actually much higher than our corporate average here of <unk>.
24, 5% to 25%, so so that acquisition actually will be accretive.
From a margin standpoint and.
We really like what.
What that business is going to do for us.
Thank you. Our next question or comment comes from the line of Jeff Hammond from Keybanc Capital. Your line is open.
Hey, guys just 2 final questions..1 if you can quantify the startup cost you had in <unk> and what do you think that's going to be enter into the second.
Second half and then just you mentioned the portable kind of being held back by supply chain I was just wondering what's unique about.
The portable dynamic that held that back thanks.
Yeah, I think the startup question I think it was specifically around the Trenton facility. There there was some.
Small startup costs in Q2.
They're always going to be you know.
You know a a more site start up costs in <unk> in Q3, which again is part of the weighing down our margins here in Q3, but.
But it's not huge you know if its you know if its a few million a.
5 million net that would.
B a lot but.
But there will be some startup costs in Q3 more so than there were in Q2.
And then Jeff on the portable to comment there. So interestingly enough, there's kind of a little bit of something going on there in the portable industry.
Many of the large customers are requesting or even mandating.
Carbon monoxide.
2 went off technology be put on all portable generators. So the large DIY retail chains have done that which has created a bit of a challenge around the.
The technology itself is.
As you can imagine with semiconductor limited supply.
Slide show our technology, they are onboard a portable generator than what traditionally have been involved so that created.
A problem with the supply chain, we're working through it effectively what's going to happen is we're not we weren't able to fill the channel to the level that the channel wanted nor that we wanted here in Q2, when we would normally do that ahead of the season. So we do have a lot.
Out of those products.
Coming out of here in the third quarter.
And I think the idea would be there may be more opportunity if the if the season plays out there could be opportunity to not only satisfy that increase in demand, but also the channel <unk>.
Restock on top of that so.
Could be a bit of a double hit if the season plays out.
We'll have to see how that works again, our guidance doesn't contemplate that at this point because.
We don't have any any major outage events in our guide, but but it's really kind of a unique thing with those with those product lines.
[laughter].
Thank you. Our next question or comment comes from the line of JP low from Citi. Your line is open.
Hey, Good morning, Aaron and York Mike.
Just wanted to follow up on the cost aspect of the guidance what does the what does the new margin guidance contemplate in terms of what the cost will do from here, both on commodities and logistics.
And then I guess on the pricing increases and is any of that net.
Pricing is that all just gross pass through.
So yes in terms of like our assumption on steel copper aluminum, we effectively assume that it flat lines from where we're at today and staying with logistics costs, maybe go up a little bit more because we're seeing that.
Currently as we're as we're bringing product in the door.
What was the second question I'm sorry.
Yeah.
Oh gosh.
Yeah.
I missed the second question was.
Yeah I'm sorry.
Okay Circle back with you Yeah, we can circle back with J P on on that 1.
Hi.
Our next question or comment comes from the line of Pearce Hammond from Piper Sandler Your line is open.
Good morning, I'm, just curious how you see the relationship between the power cell product in home standby generators do they compete with 1 another or are they complementary just want to understand how the growth in that power cell business could impact home standby generators.
Yes, it's a great.
Question Pearce from at this stage of the game there, they're actually very complementary what we're fine.
<unk> is that.
The person who buys a home standby generator is worried about long duration outages, so multi day events that.
The kind that you typically see during a hurricane or.
And ice storm or what you saw in Texas over that winter event or even some of the power safety shut offs that have been multiple days in length.
As much as we love the storage category today, the technology from a performance and cost standpoint, or just not competitive with long duration outage protection that you can get from.
In engine.
Thank you for that.
And where storage has been largely coming in and coming on strong as for somebody who's really already contemplating a solar system, so theyre going to be able to generate their own power on the rooftop and they want to store that power at.
At for use at a later time, either because they can sell it advil.
<unk> back to the utility or grid operator.
At a point in time when rates were higher during the day and gain that arbitrage between their cost to produce versus our cost of sale.
Or they want some limited outage protection certainly resiliency is a piece of what people are looking at in the storage market, but.
Yes.
We would just as we've continued to say throughout.
Each of those kind of markets the home standby market in the storage market are kind of concentric circles and there is a bit of overlap of course and over time as storage technology continues to improve and as the cost continues to come down.
No.
It's plausible that you could use storage products for long duration outage, but it's got a long way to go before it gets to that point on a on a cost effective basis. So.
And in fact, we actually see.
Quite a few customers that who have a solar system and they have the storage device. They also want to add a generator.
<unk> for the long duration protection right. So they have a short duration protection with the battery product and also the ability to arbitrage on rate help them save some money on their power bills, but then they want to have a generator also for long duration outage protection. So we have customers who have all all of the products actually so very interesting to watch how the market.
<unk> develops but but at least at this stage that they seem to be very very complementary to 1 another.
Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Mike Harris for any closing remarks.
We want to thank everyone for joining us. This morning, we look forward to discussing.
Our third quarter 2021 earnings results with you in late October Thank you again and goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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