Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year 2020 Earnings Call. At this time all participants lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference to you Mike Harris, Vice President and Corporate Development of Investor Relations. Thank you. Please go ahead, sir.

Good morning and welcome to our Fourth Quarter and Full Year 2020 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. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time to Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release 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 US GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning everyone and thank you for joining us today. The fourth quarter was a tremendous finish to 2020 for Generac with all-time record performance for both the quarter and full year net sales, adjusted EBITDA, adjusted EPS and free cash flow. Fourth quarter shipments, margins and profitability were all well ahead of our previous expectations. The revenue outperformance was primarily due to higher shipments of home standby generators from better than expected production output. We're also pleased that shipments of PWRcell energy storage systems met our aggressive expectations during the quarter. The ongoing elevated level of power outages, combined with the emerging Home as a Sanctuary trend, continued to drive unprecedented levels of demand for home standby generators across the entire US. We continue to aggressively ramp production levels for home standby throughout the fourth quarter to all-time record daily build rates. Despite this expanding production, the ongoing robust demand created substantial backlog for these products at the end of the year, far exceeding anything previously experienced in the history of the product category. Year-over-year, overall net sales increased approximately 28% on a core growth basis as compared to the prior year quarter. This growth was primarily driven by the dramatic increase in sales of home standby generators, followed by the continued ramp of PWRcell energy storage systems. In addition, the higher power outage activity also drove elevated shipments of portable generators and aftermarket service parts, and chore products also improved at a strong rate as compared to the prior year. Partially offsetting this significant strength was the decline in shipments of C&I products, given the ongoing impacts of the COVID-19 pandemic. Gross margin expanded 180 basis points compared to the prior year, and adjusted EBITDA margin increased 380 basis points over the prior year to an…

Thanks, Aaron. Looking at fourth quarter and full year 2020 results in more detail. Net sales increased 28.8% to $761.1 million during the fourth quarter of 2020, an all-time record as compared to $590.9 million in the prior year fourth quarter. The combination of contributions from the Energy Systems, Mean Green and Enbala acquisitions and the favorable impact from foreign currency had an approximate 1% impact on revenue growth during the quarter. Net sales for the full year 2020 increased 12.7% to approximately $2.5 billion, also an all-time record for the company. Briefly looking at consolidated net sales for the fourth quarter by product class, residential product sales during the fourth quarter increased 54.6% to $498.7 million as compared to $322.5 million in the prior year. As Aaron already discussed in detail, home standby generator sales continue to experience robust year-over-year growth, which accelerated to over 40% during the fourth quarter as we made further progress increasing production levels for these products. In addition to this strength, shipments of PWRcell energy storage systems continued to significantly ramp during the quarter as the solar plus storage market expands at a rapid pace in the US and we continue to build out our capability selling into the clean energy space. Also contributing to the growth were a large increase in shipments of portable generators during the quarter, which benefited from the much higher power outage activity as compared to the prior year. Lastly, shipments of chore products were also much higher during the quarter as the Home as a Sanctuary trend positively impacted demand for outdoor power equipment. Commercial industrial product net sales for the fourth quarter of 2020 declined 8.5% to $198.6 million as compared to $217.1 million in the prior year quarter. The weakness in shipments of C&I products was…

[Operator Instructions] First question, Philip Shen from ROTH Capital.

Hey guys, congrats on the strong results.

Hey, Phil.

Okay. It just seems like you guys are just running flat out, running at call it 24 hours, 7 days a week, 3 shifts. And with your strong guidance, I think you alluded to this. If there is an outage or some kind of event, there might be a limited upside, and it might be limited to portables just because it seems like you're maxed out. When do you guys think you can catch up and kind of get ahead of the curve here? The facility announcement is definitely a great start, and it seems like you might be able to get 2X -- you talked about 75% more capacity. But we looked at the facility, it looks like maybe you can get the 2X of that number. And at one point, Aaron, I think you were talking about being able to get the ability to expand to 5X, that 75%. So, I was wondering if this location gives you that potential. Thanks.

Yes, it's -- I mean obviously capacity right now, Phil, is we're, as you say, we're flat out, and we're starting to see actually capacity pressures even in our C&I business which, thankfully, we have a brand new plant down in Mexico that we brought online last year. We haven't talked a ton about it, but it's a beautiful facility. It's primarily there to serve the Latin American market consolidation of our previous operations down in Mexico City, but we can use that facility as well for other things. And we'll probably end up doing some products for the US and Canada down there simply just because we're going to be up against some capacity things here too, especially in the smaller C&I ranges for telecom. The telecom business is looking like it's -- the line-up there is pretty strong relative to demand. But on the -- back on the home standby side. Yes, the new facility in Trenton is going to be a big boost. You're right, the 75% improvement that we say or increase that we've been indicating in capacity was off of the previous capacity limitations as we entered 2020. So we did raise those numbers over the course of 2020. So in effect with that new facility coming online, we can get more -- more capacity. And then that site is actually expandable about 2, 2.5 times its existing size today if we choose to go that route. So to answer your question, when do we see catching this? We're going to be working hard all year long to do that. Remember, recall that we do have some temporary production that we stood up in one of our other facilities here in Wisconsin. The initial plan was to take that down as we ramped up the Trenton facility over the summer. We could choose to leave if demand remains strong, and every indication right now is that will be the case, we could leave that temporary capacity add online, which gives us kind of an incremental bump above where kind of we would be if it was just Whitewater and Trenton. So -- but the way we've sized the equipment and everything in the Trenton facility, we think we'll be ramping throughout the full year. And we'll will kind of hit the ground running here mid-year and hopefully be at kind of max rates by the end of the year. That would be the goal.

Okay. Thanks, Aaron. And then embedded in your guidance.

Next question, Tommy Moll from Stephens.

Good morning, and thanks for taking my questions.

No problem, Tommy, apologies to Phil.

We'll follow up.

It happened to me last quarter, so I guess it's where we are these days. Lots of interest in the call. I'll get I'll get to the questions here. So I wanted to talk about some of the demand dynamics you've seen around the Home as a Sanctuary theme. Have you discerned anything different in terms of the demographics or anything you pick up on the types of customers whose leads you're qualifying or maybe through channel conversations? You've commented that it's a much broader swell of demand geographically, so many more states for example, so that -- it's clear that that's changed. I just wonder for years and years you've had a pretty, pretty good insight into the types of folks who are interested in your products demographic wise. And I just wonder if you're seeing any shifts there as a part of this trend.

Yes, it's a great question, Tommy, We do a ton of work around the demographics of the customer bases that buy those products over the years. It's just as the leader in that category and as building it out, we had to develop the market, so understanding who the buyer was and where the opportunities were. And frankly, one of the things we learned in that is understanding who the buyer wasn't, right. So who wasn't buying the products and why? Who went through the sale process and didn't buy and why didn't they buy? Those are all important considerations. And to answer your question though, demographically typically the product category historically has skewed older, right. So something on the order of 70% of the customers have been over age 50 historically, and that's really because home ownership kind of follows those trends. We have seen indications early in the pandemic, what we saw, and it's a little bit dicey when we talk about this because you have to talk about that expansion in the geography. As an example, Florida was such a hot market last year for us. And it just, it typically demographically is an older market. So we actually saw our demo shift older, but when you strip out Florida, actually the demo for other states was shifting younger, which is really fascinating. I think what it speaks to, Florida was an interesting dynamic because you had a lot of people who went down over the winter last year. The pandemic started to take hold February and March. They chose to kind of shelter in place and stay in Florida. If they didn't own a generator, they came to the conclusion very quickly they needed one because they were going to be basically stuck in Florida. And…

That's very helpful context and much appreciated. I want to ask a follow-up on a different theme here around the potential to go build out some virtual power plants now that you've got Enbala under the portfolio -- in the portfolio. And specifically you made some comments around the potential to enroll natural gas generators, whether they'd be on the resi or the C&I side, into that kind of platform. And what is the -- what is the potential ramp there look like here in North America. Maybe because you have such great market share on the resi side, not many others have talked about that concept, but it sounds like you have some product innovation in the pipeline that may enable it. And so, I'm curious what the opportunity set looks like.

Yes, it's something that as part of the thesis behind the acquisition of Enbala was that obviously we make, we make a lot of products that could be used as distributed energy resources, right. So we have $2 million home standby generators on the ground. We have literally hundreds of megawatts of C&I products that we put into the market every year. It's actually, if you step back and you think of the potential, and I called it out in the prepared remarks, and we think we're in this incredibly unique position given the scale that we can bring to this with the assets that we already, not only that we already have on the ground, but certainly that we put into the market on a year-in and year-out basis. And those assets combined now with the technology, which is Enbala, the Concerto platform is the enablement of those assets to be used in a much more fulsome way right, to the benefit of the end users, grid operators, utility companies, ourselves, right, Generac. I mean there is an opportunity for us to participate in that. We haven't given really clear kind of longer range guidance on this yet, because we're trying to get our arms around just what are the different business models that are out there and available to us, and there are a lot of them. I talked about few of them in the script here today, but there is a lot of different ways we could play this. I think the opportunity doesn't begin though until we get the products to be connected to the Enbala network, and that's what our effort is here in the early innings. So we just closed on this acquisition in really the beginning of Q4 in October. So we've been…

Next question, Philip Shen from ROTH Capital.

Okay. Thanks for taking me back. Yes, so I'll just ask one more and pass it on. But as it relates to the guidance, and I think you guys in terms of clean energy last year, you did $115 million in revenue for clean energy. And I think you said that you expect that to be 50% to 75% higher in '21. So just wanted to make sure that roughly $185 million to $190 million of revenue at a midpoint for clean energy in '21. And then, as a kind of another topic there, maybe finish that up, and I'll come back and follow-up on clean energy. Sorry.

Yes, I know that, I mean basically you confirmed what we said in our prepared remarks. We saw a large ramp in Q4, up 75% from Q3, and that momentum is going to continue into this year. And with the positive things we're seeing, we're showing -- we're talking 50% or 75% increase in '21 versus 2020.

Great. And we've heard some logistical issues on the storage side as you guys are ramping up and growing this business. Some of it has to do with ports and congestion and maybe certain installers when they getting their goods. I mean maybe they get the battery, but they don't get the Optimizer, they don't get the SnapRS or something. So can you talk about when you expect to resolve that friction if you will, and is that maybe limiting some of the growth. And in fact once you solve that, do you think the growth could perhaps even accelerate?

Yes, Phil. We think that those are largely behind us. We had some constraints as you mentioned, logistics mainly. For a while there, we were flying pieces and parts over the top of boats on the West Coast ports. We've got a full inventory position now and everything we need. And we think that that's going to be -- going to give us a good start here to 2021. And it's certainly an important part of getting to that 50% to 75% growth rate that we're quoting for our expectations next year. So -- but supply chain is a constraint. It's a concern, a challenge. I would imagine for most companies right now like ours it's -- every day is a new battle with something right. I mean it's just it's hand to hand combat right now down in the trenches on trying to get pieces and parts from the supply chain, all the way through into our warehouses and in the hands of our customers. So -- but the particular things you're mentioning there we've got behind us.

Next question, Ross Gilardi from Bank of America.

Good morning, guys. We're running out of superlatives for Generac on your performance. Congratulations.

Thanks.

Can you speak at all to the size of the backlog for us or if you don't want to say the absolute number, just some sense of like how it compares to when you were exiting 2012 on the back of Sandy? And I'm just trying to get a better sense of the production versus the retail trends in home standby as they unfold in 2020. It's hard to believe that as strong as the category has been with you guys running above capacity that you've actually under produced demand so materially, but just trying to understand those dynamics a little better.

Yes, I'm right alongside you on that one, Ross. We have been making some major investments in our Whitewater facility where -- which has been the primary center of gravity for manufacturing of those products. And those are investments, multi-year, multi-tens of millions of dollars that we've been putting in that facility to ramp production there. And honestly, we came into this year. We've put a bunch of automation in that facility early in the year well before the pandemic hit. So we thought we were in pretty good shape. And then the demand curve has just been, I -- you talk about the loss of words and superlatives. Mike's running out of things in the thesaurus here -- every time we write these prepared remarks, we're trying to figure out how else to describe what we're seeing, because it's -- it is -- it's really something. And I guess, while we're not quoting a distinct number, I'll just get to the heart of it. At the end of the year, I think we said -- in the Q3 call, we said our lead times on home standby generators were between 16 to 20 week. So pick the midpoint on that. It's about 18 weeks as kind of where we exited the year at if you ordered one. It was 18 weeks out. Today, we stand at about 20 weeks. So it's actually gone the wrong way on us. And that's -- again we're at all-time daily records we're hitting every day at our facility there. That Trenton facility can't come online fast enough. It's -- I wish we had a better answer for people. Our customers are really patient. I think the one thing that -- the one saving grace if there is one here is, this is a…

All right. Good enough. And then can you talk a little bit more about the profitability in your clean energy business and with PWRcell? You mentioned that you were profitable. I think that was an EBITDA comment, but I wanted to clarify that. And can you talk at all about the gross margins for your clean energy business, where roughly will they be by the end of 2021 in comparison to your overall gross margin? And just how should we think of it more on a two to three-year basis as you continue to ramp?

Yes, Ross. It's York. So yes, making very good progress on gross margin optimization. A lot of focus on the bill of material, a lot of focus on supply chain. And you're right, leaving the year here in 2020, in Q4, we were profitable. That was a nice landmark or a milestone for the start-up business being profitable in Q4. But throughout 2021, we do expect to ramp up our gross margins to somewhere in the mid-30% range. So that's relative -- what did we do almost 40%, well, I guess, high 30s here gross margin for 2020, so close to the Company average by the end of '21 is the plan. And then obviously we're going to be ramping up on our operating expenses to really go fast after this market. So expecting EBITDA margins to grow throughout the year as well, along with gross margins maybe hitting double digits there by the end of the year for EBITDA margins.

Next question, Mike Halloran from Baird.

Hey, good morning everyone. Let's stay on the clean energy side, maybe just an update on how distributor penetration. I know, Aaron, you made some in the prepared -- comments on the prepared remarks, but more importantly just some thoughts on the competitive dynamics, how you think the receptivity of your product in the marketplace is comparing to others? Obviously very strong demand holistically. So more curious on the relative side for you and how you think that's tracking versus what your hopes were?

Yes, Mike. So making really good progress on the distribution front, that's your question. I think in the prepared remarks we said like, we've trained over 4,200 energy -- we call them contractors. We sell kind of in a multiple of ways there into the channels. We two step through electrical wholesalers -- clean energy electrical wholesalers. And we also sell in some cases direct to a large national partners like Sunnova, who is one of our partners, a great partner of ours. And then, we serve a number of other kind of larger independent kind of long tail energy, clean energy companies directly. So really made good progress though. And it's been -- one thing we learned with the home standby business is you really got to have a lot of points of light, especially in something that's growing that's not as penetrated right. And certainly storage is a lot like the parallels there between home standby, in terms of the early days of home standby 20 years ago and what storage looks like today are eerily similar, super low penetration rates, super low awareness, pretty expensive, kind of lacked kind of availability in terms of where you could access the product, market access. So we know, we knew the roadmap, we had to take to change that. So we've been really focused heavily on that here. And I think our sales and marketing efforts, the efforts to put together sales processes for these channel partners and path leads to them, right. I mean one of their barriers to growth has always been customer acquisition costs, and here we are giving our channel partner leads for free. We're paying when -- they're not free of course, we're spending millions and millions on advertising to drive the leads into our hands, but we're giving them to our channel partners, so that they can see -- so they can have success. Because if they have success, we have success, it's a symbiotic relationship. So again, I don't know if I'm getting to the heart of your question, but really focused on building out that distribution network.

So, more I think along the lines of when you think about what you're doing in the market. Everyone is growing. Do you think you're getting your fair share, more than your fair share? And how do you think the competitive offering stacks up?

Yes, so I think one thing that we've done is we're basically going to market from a differentiated standpoint. The way we differentiate is we focus on whole home back up, whole home power capability, right. So we have a largest inverter in the industry, which allows for more to be connected to the system at any one point in time, right. So people we compete with have smaller inverters and therefore the capacity constraints that are -- that manifest as a result of that mean that you can't take everything in your home and try and run it at the same time. There's just serious limitations to that if you have a smaller inverter. It's one of the reasons we really like the Pika energy system is it had a very high capacity inverter, and also the battery cabinets and the battery capacity, we believe we have one of the largest capacity availabilities in the industry. So you get longer duration then. If the outage lasts more than four hours, eight hours, you start to run into trouble, but we definitely can do quite a bit with the current size of the system. So that's how we differentiate. Are we getting our fair share? I think so. I mean we're growing very quickly. You can look at growth rates from others who are in this industry and how they describe their own growth in Q4 in clean energy and in particular around storage, right, if we just want to focus on that. And I would say our 75% growth rate is best in class, at least for those companies that have talked about it openly. So we feel like we're making good headway. We feel like we're building the brand and the space there, adding the distribution. And as I said on the prepared remarks, we've got a huge pipeline of really cool new stuff coming that I think it's going to only continue to separate us from the pack here as the market grows.

Next question, Christopher Glynn from Oppenheimer.

Hey, good morning guys. Most of questions have been asked. Just wanted to kind of go into the splits first half, second half, 48, 52. How should we think about the residential and the C&I relative to that 48, 52? Do they both kind of track that? And part of the impetus for the question is you've talked about Trenton hitting kind of max capacity later in the year in the second half. It sounded like you were talking about actual utilization, not just its ability to be online.

Yes. And I think that the first part of your question is, I would say that both Resi, C&I would probably follow similar trends in that 48-52. And I don't know if your second question was around that the 75% increase in capacity. That's a capacity number, it doesn't necessarily mean that's where we'll be at in the building by the end of the year. But we haven't given that number out, like…

Well, we hope to have the capability to be at full utilization by the end of the year should we need it.

Yes, that's a good point.

I think that's the answers to the question.

It's a good point.

Next question, Jed Dorsheimer from Canaccord Genuity.

Hey, thanks, guys. Yes, great job, all the way around. So, Aaron, just if I think about resiliency and efficiency. I think most people and investors tend to think, well both are positives, but many don't realize that you're diametrically opposed between resiliency and efficiency. So as you think about the business and kind of climbing that efficiency, but also where there is freely available resilience sort of that parabolic curve, if you will. If we think about Home as a Sanctuary, it seems like we're sort of in that first order which is I've got a rolling blackout and so -- or I've got a storm or fire that hit. And so I don't want that to happen again. So I want to make my home more resilient. But when you think broader, sort of away from the coast, and you look at the policy that's being pushed out right now in terms of the -- for decarbonization. It seems like there is a much bigger play here in terms of that, that discussion along resiliency and efficiency where even these great results are kind of first inning type stuff. I'm just curious how you're thinking about that?

Absolutely, Jed. I mean, when you look at, I would take our -- let's start with our legacy business, right, which we've been focused on for over 60 years, and it's about emergency backup. And an emergency backup system is, frankly, it's about cost. It's about first piece cost and what that system is capable of in terms of output, right. And so efficiency, rarely if ever, comes into the consideration for a homeowner or even a business owner for that matter. What's the cost of the system? What is my potential loss during an outage and how long could I run if I needed to, right? And so the efficiency was never really a consideration. Of course, we are concerned about things like that. In fact, I might point out one of the reasons we've been able to successively go larger with like our air cooled solution as an example -- we introduced the 24 KW air-cooled unit, is because we did focus on efficiency, right. We looked at the internal workings of the machine itself, both at the engine and at the alternator and made some design changes that allowed us to get a more efficient connected output to convert the mechanical energy to electrical. So that was an example where it's allowed us to position with the industry's leading product line. Now thinking forward, you're right. As you think about a distributed energy network or you think of the Grid 2.0 or 3.0, depending on your viewpoints on what you want to call it. I think that the new grid, this changing energy landscape, it's about a focus on decarbonizing, digitizing, right and decentralizing, right, the three Ds of that transition and that transformation that's underway. And so efficiency does play an important role there. But that…

Last question, Jerry Revich from Goldman Sachs.

Yes, hi, good morning everyone. Aaron, I'm wondering if you could talk about the backwards compatible nature of the Wi-Fi connected assets that you have in the field now. So going forward into this future vision of the grid that you folks laid out, will you be able to take the gen sets that are being installed today, that are Wi-Fi connected and connect them to the Enbala network? Could you talk about that? And separately, I'm wondering if you can talk about the pipeline that you have in sign-ups of new points of light, if you will, for your PWRcell distribution? Can you just quantify what that pipeline looks like for you? How many points of light do you think you're adding per month at this point?

Yes. So we talk about Power partners, and again because we're selling in some cases two step right. So we're selling to the contractors. They're selling to clean energy, part of your question, Jerry. That really is, it's about -- I think, we're at 700. And we've got a bunch of them in the pipeline as well.

They're using our CE lead-gen system.

Correct, correct. And then the first part of your question on the connectability. So we've got 2 million home standbys in the field. I'll just focus on residential, because I think it's a little bit easier to get our arms around the answer to the question. And frankly, the numbers are just big. Two million machines that we've put out in the field over the last, call it 20 years to 25 years. Starting with the products in 2008, those versions of products, those are connectable through our Wi-Fi solutions. Starting in, I think it was 2018, they began coming out of the box as standard with Wi-Fi connectability. But the 10 years of product -- the generation of product previous to that you can buy a device from us, an accessory device to make those connectable. That represents about 1.5 million of the 2 million going from 2008 forward. So think about in terms of ease of connectability, you can still connect the previous generation products, the 500,000 that are out there. It's just a little bit harder. The software and the hardware is a little more complicated. Those machines are older and not as quite -- obviously, they've been out in the market for some time, anything pre-2008. These machines have a lifecycle of 15 to 20 years. So, now just taking this one step further. What we have on our Wi-Fi and cellular platforms today is about a quarter million machines that are actively talking to us every day. So I think that's pretty exciting, when you just think of the scale of that, a quarter million since really 2018, the number of machines that are out there. That is pretty meaningful. We haven't really talked about that. So it's kind of an important data point that…

There are no further questions. Mike Harris, do you have any closing comments?

We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2021 earnings results with you in late April. Thank you again, and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a good day.