Q3 2024 Generac Holdings Inc Earnings Call
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Thank you for standing by and welcome to Generac Holtings, third quarter, 2024 earnings conference call. At this time, all participants aren't listening only mode.
After the Speaker presentation, there will be a question and answer session.
Speaker Change: to ask the question during the session, you will need to press star 1-1 on your telephone to remove yourself from the queue you may press star 1-1 again. I would now like to hand the call over to Kris Rosemann Director of Corporate Development and Investor Relations. Please go ahead.
Good morning and welcome to our third quarter 2024 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer, and York Ragen Chief Financial Officer.
Speaker Change: We will begin our call today by commenting on forward-looking statements. Certain statements made during the presentation, as well as other information provided from time to time by General Accomfords employees, making tape forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.
Police, CR 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-gap measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. Gap measures, is available at our earnings release and SEC filings. I will now turn the call over to Aaron.
Aaron: Good morning, everyone. Thank you for joining us today. Our third quarter results were ahead of our previous expectations, as elevated power out of Jequivity, drove a return to robust growth and overall net sales, and strong execution helped to deliver significant margin expansion.
The recent increase in OuterJekivity pushed year to date power out of Jowd hours through September to the highest level since we began tracking the state in 2010.
As a result of the third quarter out performance and the higher than expected outerjectivity, specifically the impact of Hurricane Haleen and Hurricane's Milton. We are raising our 2024 outlook.
Speaker Change: You're over year, overall, in that sales in the quarter increased approximately 10% to $1.2 billion. Residential product sales increased 28% from the prior year due to accelerating demand for home standby importable generators in the quarter.
Global CNI products sales decreased 15% from a strong prior year as CAPX spending for U.S. based rental, telecom and beyond standby products remained lower in the quarter and as market conditions further weakened in Europe.
Speaker Change: The software and market conditions were partially offset by continued growth and shipments to our domestic industrial distributors as we continue to reduce our lead times.
Additionally, favorable sales mix, lower input and logistics costs, and improved production efficiencies, drove significant expansion and gross and adjusted EBTA margins in the quarter with gross margins reaching their highest level since the third quarter of 2010.
This margin expansion, together with our return overall net sales growth, demonstrates the earning power here at General Act as we continue to execute our strategic vision.
Home Stand by shipments in the quarter increased at a high 20% rate from the prior year as a result of the elevated outer activity.
Outer Jowers during the third quarter were at their highest quarterly level since the fourth quarter of 2012, and drove home consultations to an all-time quarterly record and continued to be strong in October due to the combined impacts of Hurricane Alene and Milton.
Consistent with historical trends following periods of elevated outerjectivity, close rates have moved lower relative to the first half of 2024.
The suspected compression and close rates is expected to be temporary as our dealer network absorbs the rapid increase in home consultations and as we anticipate a return to the longer term trend of improving close rates over time.
We continue to invest heavily in lead optimization, sales to enhancements and improved lead nurturing practices to help improve the longer-term trajectory of close rates.
Speaker Change: We ended the third quarter with our residential dealer count at approximately 9,100, and increase a 400 dealer from the prior year with notable growth in Texas.
We expect our dealer count to grow further in the region's recently impacted by severe weather, which not only helps drive overall category awareness, but this expansion and distribution also plays a critical role in supporting a new and higher baseline level of demand for homestay and by generators going forward.
Our Aligned Contractor Program, also brewed during the quarter, and is quickly becoming an important new element of our distribution network, particularly with the additional installation bandwidth they provide. Aligned Contractors, which now number over 2000, purchase products through our wholesale channel partners and have access to several important sales and service tools.
The scale of our installation network, including dealers and non-deler contractors, is an important advantage for Generac, particularly following accelerations in demand as we have seen in recent months.
Activations or installations of Homestand by Generators, return to your rear-growth in a third quarter, driven by strength in the South Central region and to a lesser extent the Northeast and Southeast regions.
Activations have continued to increase early in the fourth quarter, supporting our expectations for ongoing growth throughout through year and despite a strong prior year comparison.
With unmatched scale in this industry, we are uniquely positioned to meet the rapid increase in homeowner demand for residential backup power.
In addition to our scale and logistics capabilities, our industry-leading distribution network and scalable call centers provide 24-7 consumer support and service to homeowners in their time of need.
We also have unique marketing capabilities with the resources and capacity to drive additional awareness of our products and generate sales leads for our distribution partners, both within the impacts of regions and more broadly across the nation.
Additionally, we are further ramping our homestay and by production rates and have increased hiring in our Whitewater Wisconsin and Trenton South Carolina plants to meet the elevated demand levels we're seeing after pulling a Milton.
Speaker Change: Given our prior investment in additional home standby manufacturing capacity, we have been able to increase to accelerate production at a much quicker pace.
In fact, as a result of these investments and the tremendous effort of our teams, we expect to ship approximately $200 million of incremental homestambi-importable generators in 2024 related to the impact of the major hurricanes in the second half of the year.
The combination of hurricanes, barrel, halene, and Milton is also expected to result in higher levels of awareness for back up power, longer term, as homeowners and businesses look for solutions as protection against power outages.
Speaker Change: With a nationwide, homestay and by penetration rate, it only approximately 6% and the combined penetration rate of the states recently impacted by severe hurricane activity being slightly below that level. We believe there's significant runway for future growth in the category as a mega trend around lower power quality continues to play out.
The man for portable generators also serves in the quarter as a result of the dramatic increase in power outerjack activity over the last four months with third quarter shipments increasing in a very strong year over year rate.
Speaker Change: These products not only provide an essential solution for many homeowners and emergencies, but they also often serve as an introduction for most first-time buyers to the backup power market, helping to drive a generic brand awareness.
In addition to the recent storm to the benefit, we are leveraging our product breadth and our ability to react to sharp demanding increases to further expand our relationships with the major retailers that serve as primary distribution channel partners for portable generators.
Speaker Change: Now moving to our residential energy technology products and solutions. Our energy storage system sales benefited from initial shipments associated with the previously awarded Department of Energy Grand Puerto Rico.
This program is accelerating as we enter 2025 and provides favorable top line momentum. Particularly with the upcoming commercial launch of our next generation power cell energy storage system that we introduced at RE Plus in September.
Speaker Change: Power Cell 2, introduced includes important upgrades over our previous generation storage products, with Power Cell 2 positioned as the market leader in storage capacity per cabinet, while also delivering improved continuous and peak power output.
The AC couple power cell 2 also brings additional flexibility, including an improved retrofit installation experience and seamless generator integration with both home standby and portable generators, as well as a differentiated user interface through our EcoB platform.
Speaker Change: The introduction of the Power Cell 2 series marks the key milestone for the company as we believe we are building a unique energy management ecosystem for the market. Center to round the eco be smart home, energy hub and focus on both resiliency and energy savings.
Additionally, as we accelerate our efforts in expanding and engaging our channel partners for these products over the coming quarters, we expect to further leverage our expertise in building and developing distribution, lead generation via direct to consumer marketing and our brand strength.
In addition to growth in our clean energy storage solutions, our team at EcoBeacon team's deck secured very well, driving growth and significant growth margin expansion from the prior year, while also adding new products and partnerships.
We believe ECOB's market share continues to grow as a result of these initiatives, building on the current installed base of more than 4 million connected homes.
We see the intelligent HVAC control and that equal provides within our energy management ecosystem as a meaningful differentiator. And we are working towards similar capabilities for EV charging management through our partnership with Walbox.
Speaker Change: Switching gears now to our CNI product category, as previously mentioned global CNI product sales decline 15% from the prior year.
and shipments to our North American Industrial Distributor Channel, again grew at a robust rate in the third quarter, and quoting activity as remained resilient.
Although our operational execution has allowed us to reduce lead times and customer project timelines have extended more recently and we will be monitoring these trends closely as we head into 2025.
As expected, shipments, financial telecom and rental equipment customers declined in the quarter from the prior year period.
While we expect that ourselves to the telecom market of bottomed, we believe demand for from our rental equipment customers will likely remain softer in the coming quarters.
Despite the cyclical weakness we've experienced in 2024, we continued if you both to telecom and rental categories as long-term growth opportunities. Given the mission critical wireless networks and infrastructure-related projects that our products support.
Schimmets of our National Gas Generators for using beyond standby applications also declined during the quarter from a very strong prior year comparable period.
and Market Act, give you a remain subdued, but we are optimistic regarding the longer-term prospects for these applications, and adjacent projects due to the supporting megatrends of lower power quality and higher power prices.
We continue to develop a growing pipeline for our CNI battery energy storage systems or best, as well as our multi-asset microgrid offerings, which also often include traditional generator products as part of these solutions.
Speaker Change: In early August, we acquired a Gito, a leading provider of microgrid controllers.
This small but strategically important deal follows our recent acquisition of SunGrid CNI Best Product Offering and brings us important technical capabilities that enable end users to coordinate, optimize and monitor multiple energy assets from a single interface.
A GDAL also brings commercial synergies given its strong reputation in the CNI Microgrid space.
Speaker Change: By leveraging these capabilities, General Act was selected for negotiations by the Department of Energy to receive a grant of $50 million to deploy microgrid solutions across approximately 100 California water utility sites.
The total investment from the DOE Grant and Water Utilities, inclusive of all hardware components, installation costs, and community benefits associated with the project, is expected to be approximately $100 million.
These microgrids will also form virtual power plants capable of delivering critical grid support during times of stress.
Speaker Change: We believe this award provides important validation of our strategic vision for energy technology within the CNI product category, and has the potential to serve as a successful proof point for similar applications across the country.
Internationally Total Sales decreased year over year primarily due to lower inter-company shipments from our Mexican operations to the telecom market in the US as well as a decline in portable generator and CNI product sales in Europe.
Our international results continue to be impacted by varying market conditions around the globe, as softness in Europe and the third quarter was partially offset by growth and other key regions, most notably Latin America.
Speaker Change: Adjust the D.B. margins have been impacted by this decline in shipment volumes, but as we execute on our global growth initiatives, we expect to drive continued improved profitability over time in this important segment of our business.
In closing this morning, our third quarter of our performance in increased 2024 outlook, highlight our strong execution, alongside the mega trends that support our long-term growth expectations.
Speaker Change: and Robust Free Cash Flow Generation thus far in 2024, have helped to enable our disciplined and balanced capital allocation strategy.
I also want to take a moment to thank the team here at General Act that have been executing our rapid response to the significant increase in power out of activity over the last several months. Our operations, supply chain and customer support teams have been working tirelessly in response to Hurricane Sparrow, Hullie and Milton.
I'm incredibly proud of our team's efforts, particularly those of our field-service field-serviced, field-service storm response teams that travel directly into the areas impacted by these events to provide vital boots on the ground support to customers and distribution partners.
Speaker Change: As Power Outers have steadily turned it higher over the last 30 years, the need for continuous and reliable sources of power is growing due to the increasingly electrified and connected nature of our homes, businesses and our transportation.
Speaker Change: and the Electrification Trends, together with the adoption of artificial intelligence.
Nation of North America, driving expectations for power demand or load growth far beyond what has been seen in the last two decades.
At the same time, renewable intermittent generation sources are being prioritized.
Speaker Change: We expect that the secular trends will drive grid-related supply demand and balances, ultimately resulting in lower power quality and higher power prices for all rate pairs.
By building on our well-established resiliency value proposition, with solutions that optimize for efficiency, consumption, cost and comfort, we are confident that, Generac, is uniquely positioned to help home and business owners overcome the challenges of the evolving electrical grid.
Speaker Change: I'm now going to turn the call over to York for by further details on the third quarter results and our increased outlook for 2024. York.
York: Thanks, Aaron. Looking at third quarter 2020, four results in more detail.
and that sales were 1.17 billion during the third quarter of 2024. As compared to 1.07 billion in the prior third quarter.
The combination of contributions from recent acquisitions and the unfavorable impact from foreign currency had a slight net positive impact on revenue during the quarter.
Briefly looking at consolidate net sales for the third quarter by product class.
York: Resonential Products sales increased 28% to 723 million as compared to 565 million in the prior year.
This robust growth was driven by a significant power outage, the significant power outage activity during the quarter to the hurricane's barrel and halene. Resulting in a high 20% increase in shipments of home standby generators and various strong growth for portable generators domestically.
In addition, sales of residential energy technology solutions were higher during the quarter, as we experience growth in both our clean energy and eco-be product offerings.
Commercial Industrial Products sales for the third quarter of 2024, decreased 15% to 3208 million. That's compared to 385 million in the prior year quarter, including a slight positive impact from the combination of contributions from acquisitions and unfavorable foreign currency.
York: The Corsail's decline was due to the expected weakness in domestic shipments for telecom, National Equipment Rental and Beyond Standby Applications, as well as softer market conditions in Europe.
This was partially offset by a robust increase in CNI product shipments through our domestic industrial distributor channel and growth in certain other international markets.
Net sales for other products and services increased slightly to 123 million as compared to 121 million in the prior year, quarter. As strengthened in domestic service parts, accessories and deferred warranty revenue was partially offset by lower industrial project services revenue.
Gross Profit margin was 40.2% compared to 35.1% the prior year third quarter.
Primarily due to favorable sales mix given stronger home standby shipments.
Lawart Implet, and Logistics Costs, and Improve Production efficiencies within our home standby manufacturing facilities.
3rd quarter of the Rosemargins were the highest we've seen in any quarters since 2010 and also exceeded our prior expectations.
Operating expenses increase 33 million or 12% as compared to the third quarter of 2023.
The overall growth and operating expenses was primarily due to ongoing investment in resources to drive future growth. Additional marketing spend to create incremental awareness for our products.
and Higher Variable Expenses and Senate Compensation, given Higher Ship and Volumes and Profitability.
York: These increases were partially offset by a 22 million dollar provision for certain legal matters that was recorded in the prior year, which did not repeat in the current year period.
York: As a result of these factors, adjusted E-beta before deducting for non-controlling interests as defined in our earnings release.
York: was 232 million or 19.8% of net sales in the third quarter. As compared to 189 million or 17.6% of net sales in the prior year.
York: Adjust the Vittal margins came in ahead of our prior expectations during the quarter as a result of the gross margin of performance.
The significant increase in Adjusted Ebedda, showcases the earnings power of Generac as we return to strong overall net sales growth with a robust margin profile.
I will now briefly discuss financial results for our two reporting segments.
Domestic segment total sales, including intersegment sales, increase 14% to 1.02 billion in the quarter, as compared to 894 million in the prior year quarter, including a slight benefit for acquisitions.
Adjusted the width of the segment was 212 million, representing at 20.7% margin. As compared to 160 million in the prior year or 17.9% of total sales.
International segment total sales, which includes intersegment sales, decreased 20% to 167 million in the quarter, as compared to 28 million in the prior year quarter, including a slight unfavorable impact from foreign currency.
Adjusting the speed of the segment before deducting for an uncontrolling interest was 20 million or 12.2% of total sales.
As compared to 28 million or 13.6% of total sales in the prior year.
York: Now switching back to our financial performance for the third quarter of 24 on a consolidated basis.
As the squels in our earnings release, Gapnetting come for the company in the quarter, was 114 million. As compared to 60 million for the third quarter of 2023.
The current year third quarter gap ending comes includes a 5.2 million-hour gain on the change in fair value of our investment in wallbox equity securities and warrants.
which is partially offset by a $4.9 million loss on extinguishment of dead related to our previously announced term loan be refinancing.
York: Gapping Comtexers during the current year third quarter, we're 33 million, or an effective tax rate of 22.7%. As compared to 19 million, or an effective tax rate of 24.3% for the prior year.
York: The decrease in effective tax rate was primarily driven by certain unfavorable discrete tax items in the prior year period, which did not repeat in the current year.
The Illuted Net income per share for the company on a gap basis was $1.89 in the third quarter, 24 compared to $97 in the prior year.
York: A Justin Eddingcome for the company as defining our earnings release was 136 million in the current year quarter or $2.25 per share. This compares to a Justin Eddingcome of 102 million in the prior year or $1.64 per share.
Cash full from operations in the current year third quarter was 212 million, as compared to 140 million in the prior year third quarter.
and Freakcast, as defined in our anxieties, was 184 million, as compared to 117 million in the same quarter last year.
York: The Improven and Free Cash Flow is primarily driven by higher operating earnings and a greater reduction in primary working capital in the current year quarter. Partly offset by an increasing capital expenditure is relative to the prior year.
Additionally, during the third quarter, we repurchased nearly $691,000 shares of our common stock for approximately $122 million.
Over the last two calendar years, we've repurchased approximately 3.2 million shares that an average cost of $125 per share.
There's approximately 347 million remaining under the current, repurchased authorization as of September 30th.
York: As previously announced.
We also deployed capital during the third quarter with an additional $35 million investment in Wallbox.
and the small but strategic acquisition of a Gito. In addition, we made a $30 million pre-payment on our term loan-be credit facility in connection with the refinancing that closed on July 3rd.
York: Total dead outstanding at the end of the quarter was 1.5 billion. Resulting an gross debt leverage ratio at the end of the third quarter of 2.1 times on an as reported basis.
A continued reduction from 2.5 times at the end of 2023.
With that, I will now provide further comments on our updated outlook for 2024.
As this calls in our press release this morning, we're increasing our overall look for the full year 2024.
Given the higher than previously expected power out of activity in the Southeast region of the US, specifically the impact of hurricanes, halene and Milton.
We now expect overall 2024 net sales growth to be approximately 5 to 9%. As compared to the prior year, this is an increase from the previously expected range of 4 to 8%.
Breaking this down with product class.
Relative to our prior expectations, residential products are expected to increase by approximately $100 million, primarily due to incremental home standby and portable generator sales, resulting from the higher power-outage activity.
As a result, our overall residential product sales growth is now expected to be in the high teens range on a year-over-year basis, compared to our prior expectations of mid-teens increase.
However, software and unexpected market conditions with in certain domestic and European and markets for our CNI and other product categories are projected to partially offset the increased residential products sales outlook.
We now expect the combination of CNI and other products sales to be approximately $50 million dollars below our prior forecast. Resulting in CNI products sales now projected to be down, high-single digits compared to the prior year for the full year 2024.
York: The other sales category is anticipated to be nearly flat on a year over your basis for the bull year 2024.
Our gross margin expectations for the Fulier 24 have also increased relative to our previous guidance. Due to the third quarter out performance and higher sales mix of home standby generators now expected in the fourth quarter.
We now project Rosemargins to improve by approximately 450 bases points over the full year 2023.
Resulting and implied fourth quarter gross margin that are similar to third quarter gross margin in the 40% range.
As a result of the increased outlook for Gross margins, a just Steve Atta margins before deducting for non-controlling interests are now expected to be approximately 17.5 to 18.5%. For the full year 2024, as compared to the previous guidance range of 17 to 18%.
This implies fourth quarter of Jesse Bittam Argin's of approximately 20%.
York: As is our normal practice, we're also providing updated guidance detail to assist with modeling adjusted earnings per share and free cash flow for the full year 2024.
For the full year, our Gap Effective Tax Rate is lower than our prior outlook. Now expected to be approximately 24 to 25% compared to our previous guidance range of 25 to 26%.
This is expected result in a gap effective tax rate of approximately 24 to 24 an average in the fourth quarter.
Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share. Addback items should be reflected net of tax using the 24 to 25% expected effective tax rate.
As a result of lower interest rate expectations, our gross interest expense is now expected to be approximately 91-93 million. As compared to prior guidance of 92-94 million, this guidance assumes no additional term loan or revolver principle prepamence during the year.
Stock Compensation is now expected to be between 50 to 52 million for the year as compared to prior guidance of 52 to 54 million.
As a result of our Sherry purchases that were completed in the third court of 2024, our full year weighted average diluted share count is now expected to decrease to approximately 60.5 million shares as compared to prior guidance of 60.5 to 61 million shares.
Our Gains for Capital expenditures, those percent of sales remains consistent at approximately three percent of sales.
The appreciation expense and gap and tangible amirization expense also remain consistent with last quarter's guidance.
We continue to expect free cash flow conversion for the full year to be well above 100% as we anticipate a further reduction in working capital in the fourth quarter.
This would result in free cash flow approximately $500 million for the full year 2024, giving a significant optionality to drive further shareholder value in the future.
York: This concludes our prepared remarks at this time we'd like to open the call for questions.
York: Operator.
Speaker Change: Thank you as a reminder to ask a question you will need to press star 1-1 on your telephone. To remove yourself from the Q, you may press star 1-1 again. You will be limited to one question to allow everyone the opportunity to participate.
Please stand by while we compile the Q&A roster.
York: oh
Our first question comes from the line of Tommy Mall of Steve and Zink. Your question please Tommy.
Tommy Mall: Good morning and thank you for taking my questions.
York: Determining.
I want to start on Home Standby. So you guided the residential revenue of high-times year over year now, within that, is it safe to assume that Home Standby would be a little bit above and, and what are you assuming for activations?
York: and that for your garden. Thank you.
Speaker Change: Yeah Tommy, so yeah, home standby is going to be a little bit above that 15% range.
In terms of activations, we're anticipating, you know, we return to growth here in the third quarter. With activations, we believe that's going to accelerate as we said in the prepared remarks this morning.
throughout the fourth quarter as the market digests the increase in demand here from the recent events.
So again, I don't think we've given specific guidance on activations for the full year, but it is expected to be. And again, I would remind you we had a really strong fourth quarter last year, so it's a pretty strong comp that we're up against there on activations.
But we're pretty confident given all of the designs here. We are seeing activations here early in the fourth quarter, kind of pacing to where we thought they'd be.
Thanks, Aaron. As a follow up, we haven't talked too much today about the margin impact from the energy technology investments.
But I know that the intention there is for that to fade over time. And while you're not going to guide us for 2025 today, anything you can do to help frame how that margin drag could fade next year, based on what you're saying would be helpful. Thank you.
Yeah, I mean this year it's going to be in that 350 to 400 based point range. It's kind of an hanging in that level. It's obviously it's a high level of investment for us.
As we said on the prepared remarks, we are making progress, you know, at RE plus this year, which is the renewable energy show, out in an a high, and we introduced our power cell too.
York: We had really good receptivity there, I think the...
The idea of building out the ecosystem with the eco-be.
York: Energy Hub is we refer to it at the center of that.
was incredibly well received. We think it's a differentiator.
in terms of the ability to control one of the heaviest loads in the home in terms of HVAC and do that in concert with energy storage and build out that ecosystem.
and then as we said, you know, doing similar things with some of the other heavier loads that present.
York: Like Evie Charging.
York: We just believe that that's something that's going to be...
York: Really, really important going forward and we don't think that there's...
Really anybody else that's going to be doing it.
Similar to us. Now, as we laid out in our investor day last year in 2023, we still think that by the end of 2026.
and we're going to be closer to break even. That we believe is still within reach for that business. And so, you know, the drag on Eva Dogg, again, we're not going to be able to pin down it specifically next year's impact, but, you know, obviously it's going to obey from the 350 to 400 basis point.
Drag Run Rate, if you will, today to that kind of break-even point.
which by the way even if we hit break in what that business is still going to present a drag on even though margins in more than 26 until we get, you know, significantly to the other side of that. But we are seeing progress. We were excited about the receptivity of those products.
York: Now we've got to do the hard work of commercializing these new products that we're bringing to market. And that's the thing something that we haven't...
We haven't really had with the first generation product that we've been selling. It's been more difficult for us to make headway. I know the teams here, the commercial teams of particular and energy technology are really excited to have new products to sell as we get into 2025.
Thank you, our next question comes from the line of George Jinnock.
John Riekes of Canacourt Genuity, your question please George.
George Jinnock: I'd love if you can kind of dig in a little bit as to what's happening in your European business and when you expect those trends to potentially rebound. Thank you.
Yeah, thanks George. So Europe has been, you know, kind of, we were seeing trends earlier this year.
Speaker Change: Around Portable Generators, mainly, and that was our, you know, again we had.
Some pretty tough cops from the prior year.
on the back of the Ukraine Russia War.
Speaker Change: There were energy security issues, concerns around energy security.
that really drove portable generator sales higher in 2023. As we rounded 2024, those concerns after a kind of a mildish winter.
and we were kind of seeing struggles there. That has now expanded to include kind of the broader CNI complex of products in Europe as well.
It's not all bad news for our national segment. We are seeing pockets of, I would say, surprising strength Latin America in particular. We've got a new team managing that business down there. I think we've...
Dunn a nice job, Dave Dunn a nice job.
Speaker Change: really tackling the market and improving our position there.
But, you know, broader Europe, Germany in particular, I mean if we had to kind of pin it down to a particular...
Country, not to call anyone out here, but Germany is really going to struggle. And it's an important market for our operations there. So, I think it's something that...
Speaker Change: I think everybody has seen the recent headlines, you know, even the automotive sector in particular in Germany is really struggling Volkswagen and announcing their first plant closures in
and Germany ever, you know, in something like 84 years or something like that, I think was the headline. So...
I think it's gonna be a struggle in Europe, mainland Europe for a bit.
until we see the economic shift happen there. Hopefully that happens sometime in 2025. I would tell you right now, we're probably going to see, I would expect to see.
Speaker Change: Maybe a recovery in CNI domestically before we see a recovery in Europe, I just say I think that maybe is how the pacing will work. We're starting to see some green shoots.
Domestically for Telecom here in the US.
I think Rental is going to remain down. You know, we were a little bit below our guide even for the third quarter in Rental. The season hasn't been a strong one, wasn't a huge miss, but...
Speaker Change: I think the rental companies are taking a little bit more of a wait and see approach. I don't know how much of that is based on the current.
Election Environment, just getting the other side of that, whatever party ends up being in power here. But I think there is some trepidation around cap expanding there. And so, you know, I think Europe's going to be tough. Probably for all of next year would be my guess.
Tough for her anyway. Again, offset by some pockets of strength, you know, in Latin America, and maybe some other areas of the world.
Thank you. Our next question comes from the line of Mike Holleron, of Beard. Please go ahead, Mike.
Mike Holleron: Morning, guys.
He broke up there, wasn't sure if that was my name or not. You need to hear the validation from you guys. I'm very, very, very proud of you.
Mike Holleron: is probably a couple of years to this but could you place?
The activity you're seeing today in historical context, what kind of uplift are you seeing? How does it compare to history?
and I'm asking from kind of two perspectives. One, your penetration and awareness is much higher in these reasons today than it was then maybe the last of the penetration, certainly the awareness.
and so how is that manifesting when it comes to the activity levels that you're seeing?
and but then secondarily how is that awareness impacting non impacted regions? Does that make sense? So how are the regions tracking, how are the other regions tracking? Is there a spill over effect in places in historical kind of tanks as well, please?
Yeah, thanks Mike. Yeah, just I think it's a great question actually and you know when you put it in perspective
You know, there's a couple things. You know, I think so the states that were impacted here and then there's six or seven states that that that that bore the brunt of, you know, barrel, a haline and Milton.
Mike Holleron: Those states actually oddly enough are slightly below the national average of 6% Pen rate for home standby.
Mike Holleron: HSP for a second.
Speaker Change: [inaudible]
Speaker Change: While they're not materially below, like maybe like California is compared to the national average, there's still below. So in terms of the upside, I think there are interesting things, we have good dealer representation in those markets because they are markets we've sold into in the past. Obviously, Texas.
has had a number of high priority events, you know, so barrel hits.
That said, we've added a lot of dealers in Texas. We've said of the 400 dealers we've added.
Over the last year, our coming out of Texas, we would expect to see in the fourth quarter.
Speaker Change: Dealer Council improve at probably coming out of Florida and the Carolinas.
Those are gonna grow.
But, you know, I think just pretty.
Speaker Change: Going back to the core of your question, putting in perspective. So we've always said these events can provide between $50 to $100 million.
Impact in the current year, depending on the timing you're in the event, right? And so the later...
Speaker Change: timing of the event in the year, the last of that 50-100 you're going to be able to get. So if you add up all three events,
Now, we'll put your range somewhere between 150 to 300 million upside. We said that the upside we're going to experience this year is around 200.
from these events, right? So I think we're kind of right where we think we should be.
Speaker Change: with some of that probably spilling over into 2025. We've got a lot of time between now and then before we give proper formal guidance around that, we're going to watch a lot of things, but we're ramping our production. So what you're going to see in Q4 based on our guidance update is really based on what we can get out of the factories in Q4. It's a combination of our supply chain and our factories.
Speaker Change: I think that what we've seen out of these events kind of right down the middle of the fairway and what we would have expected. We are encouraged by the fact that we do have good dealer representation in the markets and I think our brand is well represented in these markets as well.
And you asked one other part of that question, Mike, which was the spillover effect of the areas outside of the markets impacted by this I think interestingly enough. If you just look at October here. When we look at home consultations, we're seeing a nice lift outside of those six or seven states that were impacted by these events. This year, So I would say.
Speaker Change: More broadly.
Impacting our demand, which is great I think in fact outside of Canada I think every other region in the U S.
Speaker Change: <unk>.
It's an easier comp of Canada was a tougher comp from last year.
But every other region so far.
Speaker Change: This quarter.
Speaker Change: We saw a nice growth and in fact, just one last point on this I mean October was not done yet we still got today to go but October is likely to be a record month for in home consultations for us.
And that is I think that's an important data point as we think about not only the impact of Q4 as we've laid out here. This morning, but also the impact on the continued awareness to the category and as we as we kind of build that new and higher baseline for the category as we go into 2025.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: Comes from the line.
Jeff Hammond of Keybanc capital markets. Your line is open.
Hey, good morning, guys morning, Jeff Good morning.
So maybe just back on clean energy.
Can you just talk about what you think is really differentiated and the new product and just the initial feedback you're getting any kind of early.
Speaker Change: Distribution partner wins, and just an update on the on the inverter ensure timing.
Yes, it's a great Jeff. Thanks, I appreciate that so the new product power cell too.
Speaker Change: Obviously as it's basically it's a ground up redesign of the platform.
The acquired platform from Pica days, when we acquired that back in 2019 I believe it was.
Speaker Change: We went through kind of ups and downs of that platform have been working very hard over the last year and a half.
Speaker Change: With our teams.
Invested tremendously as you can see obviously the 350 to 400 basis point drag that we talked about on EBITDA margins, it's a heavy lift here, but.
The differentiating factors of that platform. So our focus and this is really going back to.
The first generation product, we really positioned ourselves from a storage standpoint of being focused on resiliency.
The product of course can take care of.
Speaker Change: The.
The time shifting needs that you need when you've got solar attached to it and you're trying to store product too.
Speaker Change: From a savings standpoint, but what we really felt that people wanted when homeowners want is if they have a battery. They wanted to last some period of time, if they do have an outage and so the first generation product was the largest capacity battery and market. The second generation product here will remain the largest capacity battery and <unk>.
But we've also done some other cool things to focus on some other important upgrades there around just around improved continuous and peak power output, which allows you to cover more of your house at once when there is an outage so youre not limited to having to make choices about what you get whats backed up by the the storage did.
And what's not.
And that's kind of at the storage level right. So that's a product I'll call those the product enhancements I think more broadly though.
Speaker Change: Jeff is the is really the expansion of this concept of an ecosystem.
And you'll see some other companies going after this but I think this was core to our thesis in acquiring <unk> is the technology that <unk> brings in not only the HMA the human interface. The UI UX portion of the device right they've got a great.
Speaker Change: Kind of front end in terms of the user experience.
Speaker Change: The app experience the device experience its high end its premium.
Speaker Change: And it's a truly smart thermostat theres a lot of capability within that device, we're going to leverage the capability within that device to control the entire ecosystem and create an experience for the end customer that really takes.
Not only savings, but takes resiliency to the next level right. So.
The most Prime example, we can share with you. There is if you take the example of you have an outage of utility outage and if you have the Kobe thermostat Slash energy hub at the center of your ecosystem you have a power cell two device you have a generator, perhaps you maybe have an EV charger from wall box you have all of these devices.
That are now going to be integrated onto the platform.
The eco be smart hub is going to be making choices for you about how to preserve the maximum amount of duration for your batteries. So it might.
If it's a cold day, it might turn down your thermostat a few degrees or if it's a hot day it might turn up the thermostat a few days, giving you a couple of precious more hours of backup.
And you don't even have to kind of be aware of that it will obviously have work within parameters of comfort that you've that you've sat or that that it knows it's learned from Europe behaviors, but it also can make those choices if youre not home it can definitely adjust the thermostat to a greater degree so again to preserve that duration and can make sure.
The EV charging system is not charging your vehicle during an outage right you don't want to take the precious energy that stored in your in your power cell system, you don't want to use that to put that into your into your vehicle. During an outage you want to preserve that so these these different kind of scenarios that are going to play out and the complexities around those scenarios that will.
Les out and as the ecosystem grows with more content I think it's going to become even more clearly evident how important that is to have a central brain in effect. What we're creating here is a mini micro grid, it's a personal micro grid for your home right with.
<unk> of assets that you can tie into that micro grid, but that micro grid can be optimized for resiliency. It can be optimized for cost it can be optimized for conservation for comfort right. So all of those different settings can be prioritized and those prioritization can change. So I think we demonstrated that our <unk> plus.
In a very visceral way in our in our Booth and our show Booth and I think that that was for me. It was an eye opening experience I went to the show and engaging with customers and distribution partners. There. They really understood very quickly the value of that and I think that that is going to be for us I think that's going to set us apart you couple that with our brand and then you put together.
That are kind of our marketing capabilities here and our ability to build and develop distribution and I really like how we're positioned as we go forward timing on the product's real quick so parallel to where we're going to be shipping product here, we wanted to be in market at the very end of the fourth quarter, that's probably shifted about six weeks into February a little bit four to six.
Weeks I think we're just putting the finishing touches on our customer field trials there.
And I hope to be in market kind of in that early to mid Q1, and then the micro is still slated for early second half of next year. So that that product is pacing ahead as well.
Speaker Change: Thank you.
Our next question comes from the line.
Speaker Change: Brian drab of William Blair.
Speaker Change: <unk> please Brian.
Hi, Thanks for taking my question.
Looking at Hey.
Just looking at the timing of the Hurricanes.
Speaker Change: Celine and Milton.
There is still obviously.
Speaker Change: Significant outages.
In several states even in mid October.
Speaker Change: And.
There is there is the cycle time.
Getting these home standbys installed obviously in getting to the dealers and all of those conversations need to happen I'm, just trying to figure out why even half of demand.
Related to those recent hurricanes wood.
It would be fulfilled in 2024, it seems like it.
This is I mean, you've only had like a couple of weeks since these people even got the power back on.
I don't know if it feels like just the beginning.
Dave of demand rather than.
You're kind of making it sound I think like a lot of it will be satisfied in 2020, yes, I think that's a great question, Brian I think it's one that bears a little bit further explanation I mean, clearly so at least here in 2024, our ability to fulfill that demand is going to be gated as I said by what we can do from a supply chain and operation standpoint, and that's with a pretty significant.
Speaker Change: Second ramp we actually started ramping after barrel in early July that was early July that was early July so we got we.
We got the benefit of that we kind of got ahead of it a little bit in terms of prioritizing with our supply chain, both portables kind of getting our portable generator inventories in a better place ahead of the season and then obviously with the home standby ramp we were starting to we were able to begin execution on that maybe a little earlier because of that early season event I think that that put us on a <unk>.
Our debt and obviously all the predictions were for a pretty active season, and then nothing really happened after that until until we got Helene in late September. So I think it was a matter of.
Being able to get that ramp going and now we're going to continue in the back half of the year. The question of whether the demand I think the important thing to note here is <unk>.
Consistent with prior events, we've always seen a surge in demand followed by kind of a pullback to a new and higher baseline level right. I think the question is the surge in demand how long is that last and what is the pullback when does the pullback happen and where does that new and higher baseline level kind of emerge and those are kind of unanswered yet at this <unk>.
And I think we're not prepared at least on this call to do that because to your point to in effect. It is early right. I mean, it is we're not even done with October and we're still talking about.
Speaker Change: How.
Speaker Change: We've seen that.
This will be our strongest month ever with IHG.
Speaker Change: Power outages since we started tracking them. The most outage hours that we've seen from an impact standpoint, certainly going back since 2010. So I think I think it is something that when we think about the future demand we want to see how things play out here for the balance of the year.
Again, it's an election cycle here, we've got an interest rate environment that is higher today than maybe historically when we've been in the category I don't know that we've had a number of I don't know that we've had very good proxy periods to kind of compare to there. So in terms of the impact on on.
Kind of how people think about.
Speaker Change: Our project for their home, there's a lot of homeowners I think that might tell you that they feel a little bit stuck in their current home because of where their current mortgage rates are at so as that shifts and it hasnt shifted materially yet even with a 50 basis point decline.
From the fed Hasnt really read through completely to a decrease in 30 year mortgage rates. So at least not to that extent. So we're watching that and we'll see where that goes as well because I think that's another factor as we think about this but look. These are these are this is an area of the country the southeast that I think.
Speaker Change: Is understanding the importance of needing our resiliency plan and I think our products are the right answer for that it's just a question of timing again around kind of that demand peak, where it happens when it happens how far does it come off of that peak, and where does that new and higher level of baseline demand emerge.
Speaker Change: Yeah.
Thank you.
Speaker Change: Our next question comes from the line.
Jerry Revich of Goldman Sachs. Your question. Please Gerry.
Yes, hi, good morning, everyone, Hey, Jerry Hey, Gerry.
Jerry: Aaron I'm wondering if you could just talk about the level of in home consultations that youre seeing based on web traffic looks like you are setting records in terms of interest in your products is that translating into home consultations.
With the revised residential standby guidance it looks like youre not counting on a sequential pickup in Spain by business <unk> versus <unk>.
Speaker Change: <unk> I'm wondering is that right can you talk about that because normally seasonally you do see.
Higher shipment rates for Q3 Q.
Speaker Change: Yeah. Thanks, Jerry.
Yes, I mean again October here were not completed yet we've got one more day, but.
We're going to be at a record level and we think that that when you look at <unk> as we mentioned that was.
Credit high power portable Theyre going to go down Q3 to Q4 in home standby is going to go up as we ramp production without acute sort of masked by the portable decline, yes. So home standby is going to increase in Q4 and portables, obviously, unless we have sold a lot of Florida. We saw a lot of portable generators and frankly, even if we have another major event here anytime soon in Q4.
Our inventory levels are quite low so we're in the middle of replenishing those stock levels. So it's really a shift between higher home standby lower portables for Q4, when youre trying to compare the Q3 to Q4 run rate.
Thank you.
Speaker Change: Next question comes from the line.
Speaker Change: Kashi Harrison Piper Sandler Your line is open Kashi.
Good morning, guys and thank you for taking my question.
Kashi Harrison: I'll keep mine to be C&I side of the business.
Kashi Harrison: Can you can you help us think through.
Whether the the implied <unk> C&I <unk>.
<unk> have essentially stabilized or whether based on what youre seeing on cycle times in the U S and Europe.
Kashi Harrison: Rental and ever.
Everything else that there could be some more risk I'm, just trying to get a sense of the businesses in aggregate bottomed by your measures or if you think there could still be some some softness as we think about you know becoming quarters qualitatively. Thank you yes.
Speaker Change: Yeah Kashi thanks for that I appreciate the question so yes.
I think as we said on the last call actually and we kind of viewed Q2 Q3 is the bottom for telecom, we don't see that pulling back in fact, we're seeing some green shoots in Q4 would contemplate the guidance. We gave this morning, we contemplate that that actually improved slightly.
Speaker Change: Q3 into Q4.
I think on the rental market side is as I said.
In a previous question, we actually saw that be a little weaker than we would have hoped in Q3, so normally thats a little bit of more of a seasonal business for us we see lighting towers.
From that season is when we kind of get to this time of year that has not played out again, it's not materially off of our expectations, but it was disappointing to see kind of maybe further weakness than we expected there.
But I think in terms of bottoming out it feels like that is probably kind of maybe where we're at I guess the question. The fundamental question on rental.
Speaker Change: Is.
Is kind of where does that go kind of next year right and I think our views on rental right now without additional kind of <unk>.
Speaker Change: Direct guidance from the major rental companies that we serve we haven't been given any kind of guide yet on next year's Capex spend in our categories, but we would we would believe at this point that it's probably going to remain pretty muted throughout 2025, I think telecom as we said those green shoots we're hoping to see continued improvement I think when you think about our core.
Core industrial distributor channel we have.
Been working to catch our lead times, we've been executing quite well operationally, but we've been seeing book to bill rates that are under one and that so as we catch that backlog and we've reduced our lead times.
That could be.
Speaker Change: An area, where we see we see that pull back a little bit in our coatings remained resilient so.
Speaker Change: The challenge, we're seeing is that the quote to order timeline is pushing out so we're seeing projects get delayed and this is something that can happen in this part of the cycle, especially if you have high rates persisting. So perhaps if maybe the uncertainty around the election is taken away and we see rates continue to come down as they are projected.
To come down into next year.
Might be a very temporary thing that we see there it might just be related more to us catching our our backlog in and bringing lead times down I think for US one of the other fundamental questions is Europe although.
Speaker Change: I think when we think about that we have.
In mainland Europe.
I think that that doesn't feel very good to see other markets outside of that that we've been seeing pretty decent actually nice growth in Latin America as I said some in the middle East we've seen a little bit there.
Speaker Change: And we have some new products coming to market next year, we've got some new partnerships there.
In that business, so I would like to believe at least kind of the early read here is I think we've maybe hopefully found the bottom in terms of our European operation of our international operations, even if Europe may soften further I think that will be.
At this point at least fully offset or more than offset perhaps by some of the other regions of the world, where we're we have operations and we have opportunities.
Speaker Change: Thank you.
Our next question comes from the line of Stephen Kim Zara.
Before your question please Stephen.
Speaker Change: Thanks, Good morning, everybody.
Speaker Change: Hey, Steven.
Stephen Kim: So a quick one from me when when we think about the margin progression that you've seen.
Speaker Change: And.
Stephen Kim: Relative maybe to the prior guidance, but even just relative throughout the year can you talk about or give us some sense for how much is mix and how much is sort of cost out and efficiency gains that you've been able to achieve.
Yes, Stephen This is York, so gross margins improved roughly 5%.
Stephen Kim: Year over year, we've been seeing that for quite some time now over a number of quarters. This particular quarter I would say about.
Stephen Kim: Say, 40% to 50% of that 5% was mix related.
So obviously as home standby generators.
Increase in mix, we're going to get a.
Speaker Change: A nice bump in margins so that means around 50% to 60% was price cost. So we're still on a year over year basis.
Speaker Change: Still seeing the benefits of lower input costs coming through the P&L as we turn through that higher cost inventory or as we as we sell through that in the past and now we're not not now thats not running through the P&L.
And then logistics costs, we continue to do a good job in terms of bringing material to the plants and getting in getting out to our customers. So we continue to run our factories more efficiently.
And particularly the home standby volume picks up.
Speaker Change: Price cost has been favorable for a number of quarters continues to be in Q3, like I said around 50% to 60% of that year over year increases price cost.
Speaker Change: What's interesting is if you look from say like now look ahead from Q3 to Q4 now sequentially now not talking year over year, but sequentially I'd, probably say a lot of that price cost is now running through our P&L here in Q3, we recorded what 40% gross margins in Q.
Speaker Change: Three.
Speaker Change: That's the best we've seen since 2010, so so we're feeling good in terms of where we're at from a gross margin profile in that we believe will continue into Q4 and.
Speaker Change: And so I'd say sequentially the price cost scenario is played out but year over year, we'll still see benefits.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: Comes from the line of Keith Awesome of most research your question. Please Keith.
Great. Thanks, I appreciate it hey, good morning, guys in terms of like the power outages in the driving of the demand.
Keith: Our focus has been on hsp, but touch on is there any opportunity for growth is in.
C&I are there beyond standby batteries.
Keith: In terms of.
Keith: But anything for when you have these massive storms come through yes.
Thanks, Keith and I appreciate you, bringing that up because I, probably should have mentioned that when we were talking about C&I.
And one of the last questions.
Keith: Absolutely.
We get outage events, I mean longer term trends the outages drive awareness, whether you're a small business owner or whether you are a a wireless telephone network operator that has thousands and thousands of sites hundreds of thousands of sites you realize very quickly if you haven't.
Vested in a backup plan you realize the the impact that can have on your operations and on your revenue streams on your continuity of operations, maybe spoilage or inventory that can happen and so we just we also know that historically for us and when we look at our business that usually is more of a delayed reaction in the point the reason for that.
Keith: Really is that in.
In the business World those are business decisions. They are usually capex budgets. There are approval process as it takes time to get to get those projects going So we would expect as historically would follow on as.
Keith: Sometime late kind of in that four quarter cycle basis, you would start to see some demand.
Start to pull through from those events directly related to those events in the affected areas and perhaps indirectly affected indirectly impacted areas outside of that when you are talking about a national telecom operator, who is now going to allocate more dollars in the budget process for hardening of.
<unk> networks right. So they put more dollars aside for purchases of generators of storage devices.
Things definitely or are things that we see historically and that also I think could be an offset to any potential longer term weakness in the <unk>.
And kind of the core industrial C&I markets that are.
We're currently seeing we think those those are fleeting we've seen these cycles before and I think you bring up a really good point as soon as you get kind of an active period of events like this that definitely gets people on notice and brings it more to the forefront from a business planning standpoint from a disaster planning standpoint.
Continuity of operation retaining planned regulatory standpoint, all of those things come to the front of the line.
Speaker Change: Thank you.
Our next question comes from the line of Jordan Levy of true Securities. Your question. Please Jordan.
Good morning, and thanks for all the detail.
We've talked before about the percentage of the HSBC category, but that's fine.
I think the program with synchrony.
Jordan: You said, it's around 20% with dealer network sales are so I'm just curious how you think about the potential to kind of expand that financing optionality on interest because more customers.
Jordan: Thank you power quality in all of the activity sort of issues.
No instead as York Jordan definitely I think financing is.
I mean price in general as always.
Jordan: A barrier to to.
Jordan: To driving close rates higher.
Financing as a way to sort of.
Speaker Change: Breakthrough that that.
That that challenge that that you might have in terms of closing a deal.
Speaker Change: I know for a fact in 2025, we're going to be doing some some were going to be amping up that the financing initiatives.
Throughout the dealer channel and it is going to be a big focus throughout 2025, just like it has been in 2024 here. So yes.
Speaker Change: No.
Speaker Change: I agree we agree with you that that will be an important aspect to trying to drive close rates higher.
Speaker Change: Okay.
Speaker Change: Thank you I would now like to turn the conference back to Chris Roseman for closing remarks, Sir.
Chris Roseman: We want to thank everyone for joining us. This morning, we look forward to discussing our fourth quarter and full year 2024 earnings results with you in mid February. Thank you again and goodbye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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