Q3 2021 Generac Holdings Inc Earnings Call
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Good day, and thank you for standing by and welcome to the third quarter 2021 January Holdings incorporated earnings call.
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With that I would now like to hand, the conference over to your Speaker today, Michael Harris, VP corporate development and Investor Relations. Thank you. Please go ahead.
Good morning, and welcome to our third 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 provided.
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 or SEC filings I will now turn the call over to Aaron. Thanks, Mike Good morning, everyone and thank you for joining US today, we experienced another quarter of exceptional demand as interest in our home standby generators clean energy.
<unk> and C&I products remained incredibly strong.
Production levels were also the highest we've ever experienced in a quarter with shipments of home standby generators, increasing at a substantial rate over the prior year as we continue to ramp output at our new facility in Trenton South Carolina.
This led to record revenue growth of 34% in spite of significant operational obstacles faced across the supply chain environment that deteriorated further during the third quarter.
Even with the higher output levels demand remained very strong and broad based leading to higher backlog levels, particularly for home standby generators, providing us with good visibility into significant revenue growth for 2022.
Additionally, we recently announced several strategic acquisitions that will accelerate our new powering a smarter world strategy and provide additional avenues for growth as we continue our evolution into an energy technology solutions company.
Year over year overall, net sales increased 34% to $943 million, an all time record and also increased sequentially relative to the second quarter, which was the previous all time record.
The growth in the quarter was driven by strength in both residential and C&I products as compared to the prior year.
Residential product growth was led by a 50% increase in shipments of home standby generators as production levels continue to increase significantly relative to prior year levels as well as tremendous year over year growth in shipments of power cell energy storage systems, which also grew double digits on a sequential basis.
Shipments of C&I products were also up dramatically in the quarter with revenue of these products now growing materially above 2019 levels due to strength across a number of end markets and geographies.
Adjusted EBITDA margins of 22, 2% were lower as compared to the prior year as they were unfavorably impacted by higher logistics and commodity costs.
In response to the escalating costs, we're experiencing we've undertaken a number of additional pricing actions and cost reduction initiatives to mitigate the longer term impact to margins.
Now discussing our third quarter results in more detail the mega trends driving consumer interest in backup power continued in the third quarter, most notably the home is a sanctuary trend combined with more extreme weather, which again resulted in elevated power outage activity.
Overall baseline outage activity for the trailing four quarters grew on a year over year basis in the quarter. Despite a very strong prior year comparison and remains well above the long term baseline average.
In fact, since we began tracking the impact of outage activity more than a decade ago.
More of the top 10 power outage severity quarters have occurred since the second half of last year.
The convergence of the heightened power outage activity broader electrification trends and people spending more time at home has driven unprecedented demand for home standby generators.
As a result home consultations are sales leads increased again at a strong double digit rate in the third quarter over the robust prior year comparison and broad based growth continues to be experienced as almost all U S regions grew on a year over year basis in the third quarter.
It's also relevant to note that home consultations in the third quarter increased over three times, the comparable 2019 levels and on a year to date basis or more than four times 2019 levels.
Activations of home standby generators, which are a proxy for installations also grew at a double digit rate compared to the prior year.
We continue to experience a strong expansion of our distribution footprint as we ended the third quarter with approximately 8100 residential dealers an increase of 1100 dealers over the last 12 months.
<unk> in Texas alone continue to account for nearly one third of the year over year increase.
Early in the third quarter, we achieved a significant milestone by starting production of home standby generators at our new facility in Trenton South Carolina.
We continue to make encouraging progress increasing production levels for home standby generators across our operating footprint with daily build rates much higher compared to prior year levels.
Despite the higher output demand for home standby generators continues to outpace our ability to produce them, which has caused lead times to further grow to approximately 30 weeks.
These significant lead times provide excellent visibility as we head into 2022 with our home standby backlog projected to be well over $1 billion entering the next year.
As we consider the longer term capacity requirements for home standby production, we have made a number of strategic decisions to further expand our footprint.
Yesterday, we announced plans to expand warehousing and distribution capacity at our Trenton facility by adding 200000 square feet, which will increase the current size of the building by nearly 50%.
In addition, we recently made commitments to purchase additional long lead time automated manufacturing equipment that would be available to come online in 2023 further increasing our capacity for several key components to provide for needed search production as the as the category continues to grow.
In addition to these capacity expansion actions last week, we introduced the industry's largest air cooled home standby generator, our new 26 kilowatt unit build.
Building upon the success of the launch of our 24 kilowatt unit last year. The new 26 kilowatt unit will allow homeowners to access the kind of power only previously available and larger sized liquid cooled generators at a significantly lower cost.
As the trend to Decarbonize accelerates electrification of everything in the home, including heating cooking cleaning and ultimately transportation will lead to much greater residential electricity consumption.
The new 26 kilowatt home standby unit will be capable of providing the kind of resiliency needed with these larger electrical loads and we'll provide an ability to future proof of home as these electrification trends intensified in the years ahead.
With a strong outage environment and Mega trends like home is a sanctuary underpinning tremendous demand for home standby generators. Those same factors along with the increasing penetration of solar installations are also driving rapid growth for our clean energy product offering.
As previously mentioned shipments of our power <unk> energy storage systems grew significantly as compared to the prior year and also grew at a double digit rate sequentially.
Despite numerous supply chain challenges also impacting clean energy products, we continue to experience growth well above the broader U S residential solar market driven by ongoing increases in storage attachment rates and continued market share gains.
In addition to strong revenue growth key performance indicators for clean energy products continued to show favorable trends.
Home consultations expanded as compared to the prior year and accelerated throughout the quarter.
System, Activations, which are a proxy for installations and commissioning more than doubled in the third quarter as compared to the prior year and also increased sequentially.
In addition, we further built out our installer network as we entered the third quarter with approximately 2300 trained and certified dealers with nearly 1000 of those dealers registered on our powerplay CE sales platform.
Despite the industry wide supply chain and logistics challenges, we expect clean energy revenues to approximately double for full year 2021 on a year over year basis.
In addition, we continue to drive profitable growth within the product category as we scale volumes and optimize the supply chain.
Building on the early success, we've experienced with our clean energy product offering we formally announced several exciting new clean energy related products. During the third quarter that we believe will further grow our competitive advantage in this exciting new market.
We introduced the industry's first purpose built dedicated battery charging generated during the quarter. The power generator, which is a one of a kind power product, enabling a homeowner to create a solar plus storage system that is completely grid independent.
We also introduced our new power manager load control system that maximizes battery performance and offers homeowners the ability to control specific electric loads from a mobile device via our existing power view energy monitoring platform.
And building off the early integration success with the recent Silicon acquisition, we introduced the power micro <unk> branded micro inverter that allows us to fully participate in the residential solar solar only market a meaningful expansion beyond the solar plus storage space. We previously addressed.
And another example of our focus on continued innovation, we announced the acquisition of a precision and advanced engineering and product design company focused on developing energy technology solutions.
The team at a precision brings expertise in designing and prototyping energy related products to increase reliability add functionality and improved performance.
The company has also developed a unique smartwater heater controller that is used as a grid edge device by utilities in demand response, and other energy conservation programs.
Bringing this talented group on board, we will accelerate our efforts in expanding our clean energy offerings and increase our speed to market for key clean energy and grid services products and solutions.
To further build upon <unk> evolution into an energy technology solutions company yesterday, we announced an exciting agreement to acquire <unk>, which accelerates our capability to provide a home energy ecosystem with a dual value proposition for both homeowners and grid operators.
<unk> is a pioneer in the smart thermostat market and offers a full line of intelligent thermostats and home monitoring products that deliver significant energy savings security and peace of mind and enable the monitoring and control of a significant portion of the home's electrical load.
<unk> <unk> systems represent the single largest energy consuming devices in a home today and <unk> has created an intelligent system using smart thermostats and sensors to effectively balanced comfort and conservation.
With over 5 million connected devices and more than 2 million homes equal be customers in North America have saved more than 20 Terawatts of energy, which is the equivalent of saving enough energy to take all of the homes in Los Angeles off the grid for an entire year.
Importantly, <unk> adds to <unk> growing suite of residential power generation energy storage and energy management solutions that we believe will play a pivotal role in helping to solve the challenges of the growing supply and demand imbalances of today's electrical grid.
Thermostat controls represent one of the largest opportunities within the grid services addressable market involving the connection of grid edge devices to our grid services platform like our concerto software platform, thereby enabling participation in grid services programs.
Adding eco vs devices to our product portfolio considerably expands our served market opportunity and increases our capabilities to provide end to end solutions for turnkey virtual power plant projects.
Adding <unk> innovative team of over 500 employees gives us the ability to further advance the development of an intelligent and intuitive user interface platform that would integrate and synchronize our generation and storage equipment and our existing grid edge devices, providing seamless access and control for homeowners through a smartphone tablet or PC.
We believe this approach will create one of the broadest home energy ecosystems available on the market today and allow for easy connection to our <unk> platform empowering homeowners to make smarter energy production storage and consumption decisions, while providing grid operators more efficient access to the home in aggregate.
Device level for grid support programs.
I'd also like to provide a brief update on <unk> grid services, a new group within <unk> that was formed in the third quarter that builds upon our October 2020 acquisition of Embolic power networks.
<unk> services was established to directly engage and serve utilities energy retailers and grid operators to provide an array of solutions and enabling entirely new value streams that leverage a range of products from our portfolio.
We took another major step towards unlocking significant value on the grid services space in the third quarter with the formal announcement of smart grid ready capabilities across our home standby generators are C&I natural gas generators, and our power cell energy storage systems.
In addition to the peace of mind that they are receiving from generic products customers now have the opportunity to also obtain additional return on investment by leveraging their products to support grid reliability resiliency and sustainability.
Within the expanding grid services marketplace, we believe generate grid services is a unique and differentiated market leader due to our comprehensive set of hardware plus software plus services offerings, including through our smart grid ready capabilities for legacy products. Our recent acquisition of <unk> smart water heater controllers, and our pending acquisition of <unk> and its home energy management.
<unk> solutions.
Our increasing integration of hardware with grid software and services is leading to a number of contract wins, along with a significant increase in proposal requests and an overall expanding sales pipeline.
These include several examples of the new revenue streams within our grid services model as we layer on higher value turnkey virtual power plant programs utilizing <unk> hardware and performance contracts on top of the <unk> software as a service platform.
We are in the very early innings of the evolution of the power grid, but as consumer awareness grows and demand from utilities and grid operators materializes. We remain incredibly excited about the potential long term growth trajectory of <unk> services.
The excitement around our expanding energy technology solution capabilities extends into the C&I product range, as well where offerings such as energy as a service micro grid solutions and mobile energy storage systems are helping drive the long term growth trajectory and an increasing mix of energy technology revenues.
Our core C&I business experienced strong momentum in the third quarter as a number of end markets and geographies continue to recover strongly after COVID-19 weakened prior year quarter.
Specifically C&I product sales grew 47% as compared to the prior year and 31% on a core basis. We also have a considerable backlog that is growing for C&I products that provides good visibility for meaningful growth heading into 2022.
In addition to strong quoting and order activity in our North American distributor channel shipments to telecom National account customers increased dramatically again during the quarter as compared to the prior year as capital spending by several of our larger telecom customers continued at elevated levels and have led to further increase in project shipments during the current year.
The 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 build out of wireless carriers <unk> networks.
The long term demand outlook for telecom backup power remains very compelling driven by the increasingly critical nature of wireless communications.
We also experienced very strong growth within our national accounts national rental account customers as shipments of mobile products continue to recover at a significant rate off the COVID-19 driven lows of 2022 2000 2020 excuse me 2020.
We still expect shipments of mobile products to improve dramatically for the full year 2021 as the prior year as national rental account customers invest heavily in fleet equipment with utilization and rental rates continuing to improve.
We remain optimistic about the long term demand outlook for mobile products, given the important megatrend around the critical need for infrastructure improvements, which could benefit from the potential economic stimulus plans being pursued through the federal infrastructure spending bill.
Additionally, we continue to build great momentum with our C&I beyond standby initiatives.
We are experiencing ongoing strength in project quoting for our natural gas generators used in applications beyond traditional emergency standby power generation such as they are used in energy as a service micro grid solutions and other distributed generation applications.
During the third quarter, we announced a five year agreement with Enchanted rock to build and supply the advanced natural gas generators and control systems that are used in ultra low emission dual purpose micro grids that enchanted rock designs and operates.
These solutions provide commercial industrial and governmental customers with affordable and reliable backup power and supply electric grid operators with critical grid stability services that accelerate the adoption of wind and solar without sacrificing overall grid reliability.
The micro grid solutions are based on <unk> Richburg gaseous engine technology, and our newly acquired deep Sea Electronics control systems, which provides quick start utility grade backup power and a much cleaner format when compared to traditional diesel generator solutions.
We remain very optimistic regarding customer and grid operator interest in beyond standby applications of our C&I natural gas generators, it's being driven by the need for enhanced grid stability and resiliency that these large blocks of power can offer as well as the tangible and meaningful return on the investment opportunity for asset owners.
Our international business continues to see strong momentum as well with net sales growth of 61% on a year over year basis during the third quarter and 32% core net sales growth when excluding the benefit of the deep sea and off grid energy acquisitions, and the impact of favorable foreign currency.
The core sales growth was driven by strength across all major regions that continue to experience a sharp increase in demand off the prior year Covid lows and have also recovered well above 2019 levels.
Larger project quoting and overall order activity continuing to recover at a strong pace in key international markets, which drove growth in our international backlog during the third quarter with the order strength, continuing thus far in the fourth quarter.
In addition, the segment third quarter EBITDA margin expanded to 14, 1% from seven 9% in the year ago period due to the higher margin profile impact from deep deep sea and off grid energy acquisitions and improved operating leverage in the base business on higher sales volumes.
With regards to off grid energy. This acquisition closed on September one and brings a diverse range of energy storage solutions that provide cleaner and more flexible energy for industrial and mobile applications.
Off grid provides us an entry point into the rapidly growing market for industrial grade energy storage systems and accelerates our hybrid generator in C&I energy storage product roadmap.
Awkward continues to see robust demand for its products and its core European markets and work and we're working to bring these solutions to the rest of our geographic footprint, given our strong global relationships with rental equipment customers.
Our integration efforts are off to a strong start with some legacy customers across Europe, having already placed orders for off grid products highlighting early momentum in the sales synergies that we expect to realize.
In closing today, we have tremendous momentum in our business as we close out the current year and head into 2022 with incredible home standby demand and expanding energy technology solutions portfolio are growing grid services sales pipeline and strong global demand for our C&I products.
This provides support for yet another year of significant revenue growth with recent pricing and cost initiatives driving an improving margin profile.
Day to day execution of navigation of the supply chain challenges clearly remains a near term priority for our teams, but we're also keeping a clear focus on our new long term powering a smarter world strategy with our ultimate purpose to lead the evolution to a more resilient efficient and sustainable energy solutions.
With the combination of aggressive organic investment and a series of strategic acquisitions over the past three years generally is uniquely positioned with our products our services our distribution our brand and importantly, our expertise to deliver the solutions necessary to facilitate the transition to the next generation electrical grid.
Importantly, we retained significant financial flexibility to further invest and expand our capabilities and continue to advance our evolution into an energy technology solutions company.
I'd now like to turn the call over to York to provide further details on third quarter results and our updated outlook.
Thanks Aaron.
Looking at third quarter of 2021 results in more detail.
Net sales increased 34% to $942 7 million during the third quarter of 2021, an all time record as compared to $701 4 million in the prior year third quarter.
The combination of contributions from the mean green and Bala deep sea silicon and off grid 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 third quarter by product class.
Residential product sales grew six grew to $608 8 million as compared to $458 9 million in the prior year.
Representing a 33% increase despite a strong prior year comparable.
As Aaron already discussed in detail home standby generator sales continued to experience robust year over year growth advancing by 50% during the third quarter as we made further progress increasing production levels for these products despite challenging supply chain headwinds.
Shipments of power cell energy storage systems grew at a significant rate as compared to the prior year, our storage attachment rates and market share gains continued to drive growth of <unk> clean energy solutions.
This growth was partially offset by a decline in shipments of portable generators, which faced a strong prior year comparison from a record level of shipments to the hurricanes in the prior year.
Commercial and industrial products net sales for the third quarter of 2021 increased 47% to $258 3 million as compared to $176 2 million in the prior year quarter.
There was an approximate 15% benefit to net sales during the quarter from the impact of the deep sea and off grid acquisitions, along with a favorable foreign currency.
The very strong core revenue growth was in part aided by the soft prior year comparison due to the COVID-19 pandemic. However, C&I revenue also grew approximately 7% on a core basis as compared to 2019 levels.
The strength in core sales was driven by growth across a number of end markets and geographies as demand is recovering at a strong rate 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 much higher capital spending levels from these customers as they continue to harden their wireless networks and prepare for <unk> rollouts.
Also contributing to the increase was strong growth for mobile products to a rental channel customers.
They are investing heavily in their fleets due to higher utilization and rental rates.
We also experienced higher shipments of natural gas generators used in beyond standby applications.
Internationally the increase in C&I products was broad based from a geographic standpoint, most notably in Europe, and Latin America. As these markets continue to experience a sharp increase in demand of the prior year Covid lows and it recovered well above 2019 levels.
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 service offerings increased 14% to $75 6 million as compared to $66 3 million in the third.
Third quarter of 2020.
There was an approximate 4% benefit to net sales during the quarter from the impact of acquisitions and favorable foreign currency.
Heightened power outage activity over the past several quarters continues to drive strong growth in aftermarket service parts.
A larger and growing installed base of our products and higher levels of extended warranty revenue also contributed to the increase versus prior year.
Gross profit margin was 35, 6%.
Impaired to 39, 4% in the prior year third quarter as higher input costs had a significant unfavorable impact during the quarter.
Specifically rising commodity prices labor rates and logistics costs, along with the Trenton plant startup all pressured margins in the current year quarter.
The early impact of pricing actions, partially offset these margin pressures with the full impact expected to be realized throughout 2022 as these price increases worked through our backlog.
Operating expenses increased $41 9 million or 34, 8% as compared to the third quarter of 2020, but declined 13 basis points as a percentage of revenue excluding intangible amortization due to the substantially higher sales volumes on the current year quarter.
The increase in Opex dollars was primarily driven by additional variable expenses from a significant increase in sales volume higher employee costs and marketing spend and the impact of acquisitions, specifically recurring opex from the mean green and Bala deep Sea <unk> and <unk> acquisitions.
<unk> higher amortization expense and incremental transaction costs during the current year quarter.
As a result, adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release was $209 2 million or.
Or 22, 2% of net sales as compared to $178 8 million or 25, 5% of net sales in the prior year.
This EBITDA margin decrease was largely driven by the aforementioned decline in gross margin.
I will now briefly discuss financial results for our two reportable segments.
Domestic segment sales increased 30% to $791 million as compared to 607 million in the prior year quarter with the impact of acquisitions contributing approximately 1% of the revenue growth for the quarter.
Adjusted EBITDA for the segment was $187 7 million, representing a 23, 7% margin as compared to $171 4 million in the prior year or 28, 2% of net sales.
International segment sales increased 61% to $152 million as compared to 94 million in the prior year quarter.
Core sales, which excludes the favorable impact of acquisitions and currency increased approximately 32% compared to the prior year.
Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $21 5 million or 14, 1% of net sales as compared to $7 4 million or seven 9% of net sales in the prior year.
The strong growth in international EBITDA margins was primarily due to the favorable impact of the deep sea and off grid energy acquisitions and incremental operating leverage on the higher sales volumes.
Now switching back to our financial performance for the third quarter of 2021 on a consolidated basis.
As disclosed in our earnings release GAAP net income attributable to the company in the quarter was $131 6 million.
As compared to $115 million for the third quarter of 2020.
GAAP income taxes during the current year quarter third quarter.
$32 6 million.
Or an effective tax rate of 19, 7% as compared to $32 1 million or an effective tax rate of 21, 8% for the prior year.
The decline in effective tax rate was primarily due to a discrete tax item, resulting from a higher stock compensation deduction during the current year.
Diluted net income net income per share for the company on a GAAP basis was $1 93 for the third quarter of 2021 compared to $1 82 for the prior year.
Adjusted net income for the company as defined in our earnings release was $151 1 million in the current year quarter or $2 35 per share.
This compares to adjusted net income of $132 9 million in the prior year or $2 eight per share.
Cash income taxes for the third quarter of 2021, with $31 3 million as compared to $23 6 million in the prior year quarter.
The current year now reflects an expected cash income tax rate of approximately 20% to 25% for the full year 2021.
Compared to our previous expectation of approximately 21 to 21, 5% the.
The decrease primarily driven by a higher than expected level of stock compensation deduction.
This expected full year cash tax rate compares to the prior year rate of 16% that was anticipated after the third quarter of the prior year.
The increase in the current year cash tax rate versus prior year is primarily due to a significant increase in domestic pre tax income, which is taxes a higher statutory rate.
Cash flow from operations was $74 million as compared to 155 million in the prior year third quarter.
Free cash flow as defined in our earnings release was $42 million as compared to 148 million in the same quarter last year.
The decline in free cash flow was primarily due to a higher working capital investment in the current year quarter.
And higher capital expenditures, partially offset by an increase in operating earnings versus prior year.
The higher working capital investment was driven by elevated inventory at the end of the current year quarter, resulting from extended logistics in transit timing continued.
Supply chain constraints ramping production rates and the startup of our new Trenton, South Carolina facility.
Updating our liquidity position as of September 32021, we had $873 million of liquidity comprised of $424 million of cash on hand, and $449 million of availability on our ABL revolving credit facility.
Also total debt outstanding at the end of the third quarter was $910 million net of unamortized original issue discount and deferred financing costs.
Our gross debt leverage ratio at the end of the third quarter was only one one times on an 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 $455 million.
I would now like to provide some additional details on our outlook for full year 2021.
As mentioned in our press release earlier. This morning, we are maintaining our full year 2021, net sales growth guidance range of approximately 47% to 50% compared to the prior year, which includes approximately 5% of favorable impact from acquisitions and foreign currency.
The expected benefit from acquisitions is moderately higher than previously anticipated due to the impact of the off grid energy take utility and <unk> acquisitions not included in our previous guidance.
Updating our margin outlook for the full year 2021, as we've discussed we are continuing to experience significant supply chain challenges logistics delays and rising commodity prices, which are resulting in higher input costs relative to our previous guidance.
As a result of these factors.
We now expect gross margin for the full year 'twenty, one to decline approximately 150 basis points as compared to the prior year.
Which compares to the previous expectation of approximately flat versus the prior year.
Due to the reduced gross margin outlook adjusted EBITDA margins before deducting for Noncontrolling interests are now expected to be approximately 23, 5%, which compares to the previous guidance of 24, 5% to 25%.
As a result, we expect to maintain EBITDA margins compared to the prior year. Despite the significant margin headwinds and acquisitions executed during the current year.
Providing some quick comments regarding our initial thoughts looking into 2022 the company is.
<unk> backlog has increased considerably since reporting our second quarter results, most notably for home standby generators, but also across a broad range of other residential and C&I product categories.
For example, and as Aaron mentioned, our home standby backlog alone is projected to be well over $1 billion entering the new year.
The substantial overall backlog expected at the end of this year provide support for another year of projected significant revenue growth in 2022 with an improving margin profile as we begin to as we begin to realize the full impact of various pricing actions and cost reduction initiatives.
Throughout 2021, we have implemented multiple rounds of price increases across all product categories with differing realization lags depending on lead times.
We expect increasing realization of all 2021 pricing actions throughout the first half of 2022 with the full benefit realized by the second half of 2022.
We also are pursuing certain cost reduction initiatives to combat the significant increase in input costs, including important projects focused on profitability enhancement and continuous improvement activities.
We will now provide additional guidance details to assist with modeling adjusted earnings per share and free cash flow for 2021.
As mentioned previously our cash income tax rate is now expected to be between 20% to 25%, which compares to prior guidance of 21 to 21, 5%.
GAAP intangible amortization expense for 2021 is now forecasted to be approximately $45 to $47 million as compared to the previous guidance of approximately $49 million with the decrease primarily due to updated purchase accounting adjustments related to recent acquisitions.
Stock compensation expense is now expected to be approximately $26 million to $27 million as compared to previous guidance of $24 million, primarily due to the impact of additional acquisitions since our second quarter update.
Our GAAP effective tax rate is now expected to be between 22% to 22, 5% for the full year.
Impaired to the previous guidance range of 20 to $22 five to 23, 5%.
The decline is primarily due to a higher level of stock compensation deduction during the current year.
Our fourth quarter weighted average diluted share count is now expected to be approximately $64 5 million shares assuming a December one closing of the <unk> transaction.
This concludes our prepared remarks at this time, we'd like to open up the call for questions.
Thank you at this time I would like to take any questions from the conference today and to ask a question.
Simply press Star then the number one on your telephone keypad.
Please note that.
Alright allowed one question and one follow up question.
Thank you please standby, while we compile the Q&A roster.
The only taken humor.
We have our first question comes from the line of Tommy Moll from Stephens. Your line is open. Please go ahead.
Good morning, and thanks for taking my questions.
Tommy.
And then I wanted to start on the spin.
Specifically on the go to market there how do they go to market or how have they gone to market. Historically, how does that change when you took it into your portfolio and when you think about the edge that <unk> will bring.
Owner of this business going forward, where there is some fairly stiff competition, how would you frame that for us.
Yes, thanks for the thanks for the question on that Tommy.
<unk>.
It's going to be I think we will look back a couple of years from now and that's going to be.
Really critical turning point for us as we continue on this journey.
Yes.
The evolution, we talk about any way of becoming an energy technology company.
Specific to your question on distribution, while we really like about them is they refer to their go to market or their distribution strategy is omni channel, which is exactly what.
We will refer to our own they sell through retailers big box retailers. They sell online on those platforms. They sell through dealers. They have over 40000, HVAC contractors that represent them in the marketplace. So real.
A pretty wide net.
Net in terms of just the way to go to market they sell to distributors HVAC distributors.
So it's really truly omnichannel, so we like that it fits well, we think theres going be a lot of interesting synergies there.
Our electrical channel can certainly install a thermostat and Conversely, there trades can install some of our other products as well. So we think there's a really good fit there.
Thermostat market. If you just look at thermostats the definition youre right its a pretty big market.
This is truly I would say beyond that though this is about the intelligent thermostat platform and the smart thermostat platform and there really are only a handful of true competitors to what <unk> does he could be created this category basically Stewart Lombard.
Great the person who runs that business up there a great entrepreneur began that business in 2007 and by 2090 <unk> introduced.
The market's first true smart thermostat.
And others have joined Youre right, but I think what when we think about our differentiation going forward. The combination of the smart thermostats as just one of the elements of what we keep referring to as a home energy ecosystem right. This is more than just a thermostat it's more than just a water heater controller it's more.
Just a single storage device or.
Solar on the roof top or a generator right or a load management device. This is about the integration of all of those things and what we really like about <unk> is it gives us a platform and it gives us a team of over 500 people up in Toronto that are steeped in user interfaces and user experience.
That is what we need to bring all of these assets together to combine them in a single pane of glass for view and controlled by the consumer and then for easy attachment to grid programs through our <unk> platform. So we think that this is kind of the middle layer that is it's much more than just the thermostat. It's it's the middle layer that we need.
Going forward to bring all of this stuff to bear.
As the grid continues to change and as the home energy ecosystem continues to develop so we're just really excited about this is a cool product if you've ever looked at the product itself and just the quality of it the premium.
It fit and finish of the product itself and the platform if you've ever used the <unk> platform. It's.
It's definitely I think going to be.
We are really cool platform to put all of our devices into.
Yes.
That's very helpful.
As a follow up I wanted to talk to your.
Your Hsp business were recently at the Investor Day, you gave some directional insight on really favorable cost per lead trends.
So youre still supply constrained there.
Notwithstanding some major efforts to alleviate that bottleneck, but.
But if you werent supply constrained in this environment, there and how many more sales and marketing dollars could you deploy efficiently into that customer acquisition funnel, we're talking 25% more dollars 50%.
I think what's interesting time, because we really havent backed off on deploying the dollars, even though we're supply constrained and this is maybe why the lead times continue to grow which is not what we want to see for our customers, but I think we've got our arms around some really good longer term plans here to continue to expand capacity all of the things that we are we have been working on that.
Will come online next year, and then we made some pretty big commitments here in the third quarter very recently around not only the expansion of the Trenton facility, which I think is an important commitment but.
Commitments towards additional automated manufacturing equipment to help us scale, even further there but.
Your question is a good one I would tell you that our marketing team watches the statistics very very closely and if they were to see.
The cost per lead.
Turning to change right around where we're spending and where we are deploying dollars. They would throttle back the spending and so far that really hasnt been the case, so I think what people sometimes don't realize this.
Home standby generator project was already kind of a long term or longer I would say project timeline for most people because there is <unk>.
Permitting involved there's contractors involved you have the work itself you have inspectors.
Clearly it wasn't seven months before but it generally was two three months and I think people realize in today's environment that.
We are supply constrained on a lot of things not just home standby generators appliances vehicles.
Hey, Matt.
It's tough to find things today. So I think there is call. It an acceptance level I don't know what it is but I think people are somewhat accepting of the fact that you have to wait and I don't think it also speaks to just how in tune people are with the importance of having backup power. The outages have been increasing they have been lasting longer I think.
Our spending a ton more time in their homes and they realize just how vulnerable they are and what that means to the ability to work from home their kids' ability to learn from home all the things that we need to do from home only happen with a continuous source of power. So.
Think of generator I was just going to be it.
It's going to be.
An appliance that we all have here going forward, we're going to need that as the grid continues to change and.
That's why we're committed to expanding our capacity we've got a lot of confidence in where this is going longer term.
And I think that as it relates to marketing dollars, we're going to continue to spend there too as long as it makes sense financially.
Thanks, Dan I appreciate the insight and I'll turn it back.
Our next question comes from the line of Ross <unk> from Bank of America. Your line is open. Please go ahead.
Hey, good morning, Thanks, guys.
Hey, Ross.
I just had some questions just on your preliminary comments on the 22.
Revenue growth just wanted to see if I'm thinking about it right but.
It would seem if you deliver the backlog alone and I think critical planning assumption that you had at the Investor day.
Work that backlog.
Down to essentially zero by the end of 2000 $22 billion plus backlog.
That alone is close to 30% revenue growth.
Next year.
Am I thinking about that correctly.
From a installer and distribution perspective are you confident that you've got.
Distributors installers on the ground right now.
Get those all installed or.
Do they just end up sitting in limbo for a period of time.
Yes.
Ross This is Aaron I'll take some of those questions I'll kick It to York here too if he wants to jump in and maybe just on the backlog I think directionally, you're thinking about it right. I mean, we've got clearly we're going to have a bigger backlog coming into 'twenty two than we originally thought because demand has just been stronger I mean, it's outstripping supply.
We are hitting record output levels on hsp, we could go higher if not for some of the and a lot of our constraints are pure logistics related I mean, just the nutty ness of getting components from point a to point B right now.
Just the amount of dwell time, that's going on with components in and the ports and trying to find trucks everything else you've you've heard about from every single company.
In America, we are no different and that is.
Kind of holding us back a bit, but we think thats temporary that will resolve.
We're confident that we'll get our get our feet under us as a country here around getting our supply chain is repaired but.
Directionally you are right I think the real question is.
We talked about this double double in terms of our capacity thats theoretical capacity, if the supply chain constraints persist into the first half of next year that could obviously create some headwinds right.
What we originally thought of in terms of ultimate theoretical capacity. So that's something we've got to watch longer term again, we feel like we've got a good plan to go even higher to go even further with home standby capacity. We've got the confidence to do that I think you may have hit on something that's really important here is in the distribution net.
In terms of installation.
We have 8100 dealers today, we're growing that number we've grown at 1100 dealers over the last 12 months. The most in any last 12 month period, we've ever grown.
And we're going to need to grow a lot more the reality of it is we're going to have to pick up the pace of installations.
So that we can keep pace as we deliver more products going into next year now remember that dealers arent. The only people who do installations installations are also done generally by contractors. There's over 70000 electrical contractors out there and there is over 100000 HVAC contractors in both of those trades do hsp.
<unk>. So it's beyond just our our dealers they do the lion's share, but but it's also other trades that are involved who may not be dealers for us. So we have a pretty wide availability of contractors, but we really need to do a lot more training, we need to find more dealers and we've got a I would say an outsized effort.
An outsized focus on that for next year I don't know York, if theres any additional comments you want to make I think you hit that.
What is the supply chain environment next year.
And will we catch backlog next year I think it's all a function of.
What is the supply chain look like and what does the outage environment look like so.
But it is setting up to be a monster year, just based on the backlog we've got alone.
Okay great.
I ask a follow up question.
Yeah.
The original plan I think.
At least last quarter was to get EBITDA margin back to Q1, 'twenty one levels.
The fourth quarter and obviously that's changed as you look like in your guidance, but do you get back there in the first half of 'twenty, two and can you give us sense of run with the run rate pricing contribution to revenue growth and Turing.
Next year.
Yes, no I think I think as I mentioned, we've had multiple rounds of pricing.
Cross really across all categories.
I mean with home standby there was roughly four that went in place.
One earlier in the year like call. It December January another you can call. It May June another one September another one were contemplating recently so when you think about how all of those are going to pace into next year.
The may increase we'll start seeing that probably at the beginning of 2022. The September increase will actually see because that was on shipments will we'll see that here in Q4 that was a smaller one.
The one coming up here that probably won't realize till let's say July given our lead times. So I think and then you look at other products. We're also we've rolled out pricing as well. So I think I would say by the by the end of the first half of 2022.
We will get full realization of all of our pricing.
That should get us to gross margins that were at least look more similar to where they were on the beginning of the year, we're putting our budgets together as we speak so.
Not giving clear clear guidance as to what that looks like but it's definitely going to improve will definitely improve that sequentially. Throughout next year I would say Ross, it's interesting kind of as we unpack. This what the way that the costs rose so rapidly in particular around logistics I mean that was that was.
And steel certain commodity costs that are heavy in our products two things happened. One we got we had this we've just got long lead times on the products, so getting pricing to realize.
Got constrained there just because of the outsized demand for for HSV in particular, but then also I would say our cost lags. If you will have shortened because we're burning through materials. So much quicker the pace of production is increasing at such a volatile piece, where I think lags of increases in the past with commodities and other things might have.
US a while longer to get through and start to show and read through in the EBITDA margins are even the gross margins. They are reading through quicker right now so temporary we've got a good plan to get ahead of it.
I feel really good about where we're going to be next year.
Our next question comes from the line of CLO Shen from Roth Capital. Your line is now open. Please go ahead.
Hey, guys. Thanks for taking my questions. The first one.
Hey, Thanks again, the first one is around capacity.
You announced.
That expansion in Trenton yesterday, just wanted to check to see if that was a.
Part of the.
Double by 2020 Q2 'twenty two.
And then you mentioned there that you have.
Secured equipment for 2023.
I'm wondering if you could expand on whether or not you've made the decision on.
Capacity expansion beyond the Q2 'twenty to double.
Have you guys locked in.
<unk> chain agreements, which I believe are critical.
<unk>.
Have you made any commitments there and then finally the Jefferson facility.
I think you guys have converted that to being permanent is that.
Key for reaching that Q2, 'twenty two double as well thanks, guys got it thanks, Phil Yeah capacity in HSV, let's let's just kind of run through a couple of things in your question. So the expansion of Trenton first so that.
That expansion to add 200000 square feet to that facility.
Is that is really about warehousing and distribution. So I wouldn't say it would impact our double double at all what it what it is representative of all of US our confidence that we're going to be able to run at an elevated rate down there for an extended period of time, we would have had to do the warehousing and distribution and of that with <unk> by bringing in in house. So we just we get a nice payback.
On.
On that project pretty quickly so that just made a lot of sense and I think is indicative of kind of longer term feelings that we have about not only trend we like the facility, we like the labor pool.
But also just the category home standby in general now on the additional capacity that we talked about on our prepared remarks with a long lead time automated manufacturing equipment.
Really what's going on there is as we've talked Phil we have some internal components, we manufacture that of which the tooling to make that equipment has just gotten crazy long I mean, we're talking 60% to 70 weeks long in terms of.
Ordering the equipment and getting it delivered and starting to run it off.
So what we're doing there is we're basically saying look we have confidence in the category we have confidence in the demand we're seeing let's get our let's get our tooling on order, we don't even know where we're going to put the tooling right. We're not exactly sure if it's going to go and.
Another expansion of trend or maybe.
Squeezing into whitewater or maybe we put into the Jefferson and I'll address that here in a second or maybe it's a whole another facility. We don't really know yet what we do know is it will allow us to go further than the double double that we talked about right. So it gets us set up to do that so now we start the rest of the ground game that has to get done there around supply chain around all the other elements.
That have to fall into place and we will be able to provide more color on that as we get closer to it but we just we felt like we had to take the first step here given the lead times on that equipment. We just wanted to make sure that we got.
We got ahead of it and we didn't want to get getting a situation where.
We couldnt react so we're kind of putting our markers down for the future. There and then on Jefferson Youre right. We kind of took a facility, where we're making portable generators power washers chore products and we've added capacity for Hsp. We added another production line. There here recently in the third quarter. So we're producing more out of Jefferson and we.