Generac Holdings Inc. (GNRC) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the First Quarter 2021 Generac Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Michael Harris. Please go ahead.

Thanks, Alicia. Good morning, and welcome to our first quarter 2021 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron 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 by 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 U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our first quarter results were incredibly strong as net sales, adjusted EBITDA and adjusted EPS were all-time records for Generac, despite Q1 historically being the low point for the year seasonally for our business. First quarter revenue margins and profitability were all significantly ahead of our previous expectations. The revenue outperformance was very broad-based and was highlighted by increased shipments of residential products, primarily due to home standby and portable generators. Home standby build rates were ahead of plan for the quarter, and demand further accelerated due to continuing traction with the Home as a Sanctuary megatrend, as well as being driven by significantly higher power outage activity in recent quarters, including the major event in Texas, which also led to a sharp increase in demand for portable generators. Revenue from C&I products also outperformed expectations during the quarter domestically with our industrial distributors, national telecom customers and rental customers, as well as internationally, mostly in the European region. Also, in terms of profitability, adjusted EBITDA margin came in considerably higher than our previous forecast, driven mostly by greater operating leverage from the significantly higher revenue achieved during the quarter. Year-over-year, overall net sales increased 70% to $807 million and also increased sequentially from the fourth quarter of 2020, which was our previous all-time record. Growth in the quarter was broad-based, led by a dramatic increase for residential products that more than doubled compared to prior year as shipments for home standby generators were much higher due to record production levels. Shipments of portable generators also increased driven by the major outage event in Texas and higher outage activity overall in recent quarters. Deliveries of chore products and clean energy products, such as our PWRcell energy storage system, also grew at a significant rate as compared to the prior year, and shipments of C&I products returned to strong growth in the quarter. Gross margin expanded 370 basis points compared to prior year, and adjusted EBITDA margin increased 840 basis points over the prior first quarter to 26.5%, which was the highest EBITDA margin reported since the fourth quarter of 2013. Before discussing our first quarter results in more detail, I'd like to spend a few minutes on the major outage event that occurred in Texas in mid-February. This was a very unique winter event with unusually cold weather in a state that represents our second largest addressable market opportunity for home standby generators and highlighted yet another example of the vulnerabilities of the current electrical utility model. This was a high-profile power outage. In fact, the fifth largest event recorded since we began tracking outages more than a decade ago, with rolling blackouts across the state that lasted for several days and impacted over 4.5 million utility customers at its peak. With the backdrop of the ongoing Home as a Sanctuary trend, we believe the outage in Texas was a dramatic reminder of the pain of losing power in today's day and age and further amplify the importance of having power security for your home or your business. Driven by this event, we experienced yet another dramatic acceleration in demand for home standby generators from the already elevated levels, increasing our lead times to approximately 28 weeks for our most popular models as of today. As a result, we have further increased our capacity expansion plans for home standby as we target even higher production levels in the second half of the year through a faster ramp of our New South Carolina facility and further expansion of capacity at our Wisconsin facilities. When combined with the broad-based strengthening of demand across the rest of our business, including a significant recovery in C&I products, which are also benefiting from the major Texas event, we are significantly increasing our full year revenue and earnings outlook for 2021. We'll provide additional details regarding our updated guidance and the outlook portion of our prepared remarks this morning. Now discussing our first quarter results in more detail. Several key metrics that we monitor closely for home standby demand continues to be exceptionally strong and rose even further during the first quarter benefiting from the major event in Texas. The combination of in-home and virtual consultations once again increased dramatically compared to the prior year, with year-over-year appointments more than 5 times higher during the first quarter as compared to the first quarter of 2020. The strength was broad-based across the U.S. with the vast majority of states showing triple-digit growth once again which we believe provides further validation of the need for backup power given the Home as a Sanctuary megatrend. Activations, which are a proxy for installations, grew again at a strong rate compared to the prior year and were also broad-based in strength across all U.S. regions. The power outage severity environment continues to be very active during the quarter and trended well above the long-term baseline average, driven by the Texas event, but also ice storms in several states, severe storms in the Pacific Northwest, outage events in California and smaller scale rolling blackouts in other states due to severe cold temperatures. In addition, we continue to expand our distribution footprint as we ended the first quarter with approximately 7,700 residential dealers, a sequential increase of about 400 new dealers as compared to the fourth quarter of 2020 and approximately 1,200 dealers higher over the last 12 months, which includes the addition of a number of new dealers in California and Texas. Early here in the second quarter, these key demand metrics for home standby have continued to trend much higher relative to last year as home consultations are running more than double the prior year's level through April. We continue to believe that the ongoing strength in the product category can be attributed to several factors, which are leading to home standby generators becoming more mainstream as homeowners have an increasing awareness of the need for power security as they continue to work more from home, learn from home, entertain from home and shop from home. Now I want to provide an update on our rapidly growing clean energy product offering. The secular growth opportunity within the U.S. market for renewables, energy storage, energy monitoring and energy management remains very compelling and has gained further momentum so far here in 2021. As previously mentioned, shipments of our PWRcell energy storage systems grew at a significant rate as compared to the prior year, and demand paced ahead of our expectations during the first quarter. In addition to the strong demand, key performance indicators for our clean energy-related initiatives continue to show favorable trends. In-home and virtual consultations grew rapidly as compared to the prior year and were very encouraging sequentially as compared to the fourth quarter. System activations, which were a proxy for installations and commissioning, also grew at a tremendous rate during the first quarter as compared to the prior year, and orders for clean energy products were very strong on a sequential basis during the first quarter, and this strength has continued here in April. We also have had encouraging success further building out our installer network as we've trained and certified approximately 2,000 dealers as of the end of the quarter, with approximately 800 dealers registered on our PowerPlay CE selling system. As we discussed during the last earnings call, we have an exciting pipeline of innovative clean energy products, which are expected to come to market throughout the current year. New product launches include deep integration of our PWRcell storage systems with our legacy generator products, the ability to more easily and cost effectively add a PWRcell system to an existing solar installation and the launch of a new purpose-built generator that can be combined with solar and storage to allow an end user to operate independently of the power grid. Additionally, later this year, we expect to launch a new load management system that will be paired with our existing PWRview energy monitoring platform to allow a homeowner to more fully control their power generation and consumption. We believe these product launches will further enhance our competitive position and differentiation in the energy storage, monitoring and management markets as we focus on whole home storage solutions with load management capabilities that provide both the energy independence and flexibility that we believe consumers really want in these types of systems. The solar plus storage market continues to expand rapidly within the U.S., and we are making good progress in building considerable momentum for our energy storage products. Accordingly, we are increasing our full year revenue outlook as a result of higher demand and our expanded distribution in this growing market. We now expect shipments of clean energy products to increase between 75% to 100% as compared to the prior year levels of approximately $115 million, which is an increase from the previous forecast of 50% to 75% growth. In addition, we achieved the second consecutive quarter of profitability for clean energy products during the first quarter, and we expect this trend to continue sequentially for the remainder of the year as we further scale PWRcell system volumes. Recall that in October of last year, we acquired Enbala Power Networks, a leading grid services technology provider, and I'd like to provide a quick update on the progress we're making in developing a road map for integrating Enbala's Concerto software platform into our existing generator and energy storage products. As the market for grid services continues to develop, we believe integrating Enbala's technology will enable us to improve our value proposition to end users with our legacy products as well as allowing us to develop various new revenue streams in the years ahead. These will include the existing software as a service platform that Enbala offers as well as a variety of operational services that enable a more turnkey solution, and ultimately performance services that could deliver megawatts of power to various potential customers. During the first quarter, we began marketing our initial solutions, which involve our legacy products delivered with built-in capabilities to connect to the Enbala platform. These Enbala ready generic assets, known as distributed energy resources, or DERs can be available to bundle together to form a virtual power plant, or VPP solution. We're excited to currently offer this initial capability with our C&I natural gas generators, and as the year progresses, we will begin to introduce this feature with our home standby generators and our PWRcell energy storage systems. Also, over the last several quarters, the Enbala and Generac commercial sales teams have been working closely together on potential projects with utilities, energy cooperatives and energy aggregators, which has led to a considerable increase in quoting and proposal activities during the first quarter. In addition to the great performance of residential products to start the year, C&I products were also very strong as revenue returned to growth during the first quarter and increased at a strong rate compared to the prior year broadly across a number of markets and geographies as demand continues to recover at a faster pace than we had previously expected. Net sales of C&I stationary generators through our North American distributor channel returned to solid growth in the quarter, with project quoting activity continuing to recover from the beginning of the pandemic last year and once again growing at a solid rate as compared to 2019 levels. This is leading to an improved overall order outlook for the sales channel and as a result, we're expecting attractive growth during the year. We also are expecting solid growth from the Energy Systems business. This is our industrial distributor in Northern California that we acquired last July, as our investments in integration activities are producing results in this large and rapidly growing power generation market. Shipments to telecom national account customers increased significantly during the quarter as compared to the prior year, and we're well ahead of our expectations. Several of our larger telecom customers have materially raised their capital spending outlooks for the year, leading us to now expect a substantial increase in telecom shipments during the current year relative to our prior forecast. The catalyst for the additional spending on backup power in this important vertical can be attributed to a number of factors, including the elevated power outage environment over the last several years, the power security mandate in California requiring a minimum of 72 hours of backup power at all tower locations and the build-out of wireless carriers' next-generation networks. The long-term demand outlook for telecom backup power remains very compelling, driven by the increasingly critical nature of wireless communications networks as this infrastructure shifts to the next-generation 5G architecture. Additionally, we gained further traction in the quarter with our lead gas initiatives through an increased quote activity and improved project close rates for our natural gas generators that are used in applications beyond traditional emergency standby power generation, including their use as distributed generation assets. This is an emerging part of our C&I business that already had good momentum entering the year. And the major outages in Texas have created additional demand for these products. Shipments of mobile products to national account rental customers were lower during the first quarter, but exceeded our previous expectations as the rate of decline slowed relative to recent quarters, and we expect a return to growth for these products during the second quarter. As we mentioned during our last call, we expected shipments of mobile products for full year 2021 to improve from prior year levels as national rental account customers increased their spending on fleet equipment due to improving utilization and rental rates. Several of our large national rental customers have recently increased their capital spending plans even further. And as a result, we're increasing our outlook for these products as it appears a fleet replacement cycle has begun. We remain optimistic about the long-term opportunity for mobile products with the compelling megatrend around the critical need for infrastructure improvements, which could finally benefit from economic stimulus plans recently announced by the current administration. Outside of North America, we returned to growth during the first quarter with revenue increasing at a solid core rate of 10% compared to the prior year, primarily due to growth in the European region that is recovering from the impacts of the pandemic. While COVID-19 impacts and restrictions are still being felt in several international regions, larger project quoting and overall order activity is recovering at a faster pace than previously expected, leading to a significant increase in our international backlog at the end of the first quarter. As a result, our revenue outlook for the international segment has further improved as we now expect strong growth for the full year, with adjusted EBITDA margin expected to expand considerably year-over-year, benefiting from improved operating leverage on higher sales volumes. Lastly, our international teams continue to make encouraging progress on several important global initiatives around increasing the penetration of natural gas generators for residential and C&I applications and expanding our share in the market for telecom backup power in key regions around the world. In closing this morning, 2021 is developing into a year where our megatrends and macro secular themes appear to have significant momentum and are moving in the same direction as we anticipated as we are anticipating tremendous growth for our residential product and a significant rebound in demand for C&I products as compared to the prior year. A key focus for our teams is expanding capacity across the business, both within our own facilities as well as ramping our supply chain to enable our ability to continue to scale. Our operations and supply chain teams have been working aggressively to address ongoing sourcing and logistics delays, component availability constraints and the increasing cost pressures we have been experiencing. We have largely mitigated the impact of these issues up to this point, but the situation remains fluid. That being said, we believe we have appropriately risk-adjusted our latest guidance to reflect potential disruptions and additional inflationary pressures that will likely continue to materialize as the year progresses. Lastly, I have to give a shout-out to our more than 7,000 employees at Generac that have helped us successfully navigate the pandemic while still providing an incredible level of service to our customers and our partners around the world. The hyperscale growth that we are experiencing is a reflection of their commitment to the execution of our strategy and their dedication to our success. When you combine the strength of our team, with our financial strength, we believe Generac is incredibly well positioned to aggressively invest in a number of strategic initiatives to further accelerate our strategy and build out our capabilities as we continue our evolution into an energy technology solutions company. I'd now like to turn the call over to York to provide further details on our first quarter results and our updated outlook for 2021. York?

Thanks, Aaron. Looking at first quarter 2021 results in more detail. Net sales increased 70% to $807.4 million during the first quarter of 2021, an all-time record, as compared to $475.9 million in the prior year first quarter. The combination of contributions from the Energy Systems, Mean Green and Enbala acquisitions and the favorable impact from foreign currency had an approximate 3% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class. Residential product sales more than doubled to $542.1 million as compared to $257.6 million in the prior year, representing a 110% increase. Also, residential products improved 9% on a sequential basis as compared to the fourth quarter of 2020, benefiting from the significant backlog for home standby generators entering 2021, which is in contrast to the normal seasonally lower volumes experienced during the first quarter that have averaged a 26% sequential decline over the past five years. As Aaron already discussed in detail, home standby generator sales continue to experience robust year-over-year growth, which more than doubled during the first quarter as we made further progress increasing production levels for these products. Portable generators also experienced dramatic growth versus the prior year due to the much higher power outage activity, highlighted by the impact from the major event in Texas. In addition to this strength, shipments of PWRcell energy storage systems also grew at a significant rate as compared to the prior year, as the solar plus storage market in the U.S. continues to expand and as we build out our capabilities selling into the clean energy space. Lastly, shipments of Chore products were also much higher during the quarter, in part due to the Home as a Sanctuary trend continuing to positively impact demand for outdoor power equipment. Commercial and industrial product net sales for the first quarter of 2021 increased 18% to $202.4 million as compared to $172.1 million in the prior year quarter. This represents a return to growth for C&I products for the first time since the third quarter of 2019, with the previous four quarters being negatively impacted by the COVID-19 pandemic. The strength in shipments was due to broad-based growth across a number of markets and geographies as demand is recovering at a faster pace than previously expected, both domestically and internationally in the following areas. Domestically, the growth was driven by a substantial increase in shipments to telecom national account customers due to capital spending, further improving for these customers as they continue to harden their wireless networks. Also contributing to the increase was solid growth with our industrial distributors, as well as an increase in other project opportunities as we gain traction with our lead gas initiatives. Internationally, the increase in C&I products, as previously mentioned, was primarily due to an increase in market activity, mostly in the European region, that is recovering from the impacts of the pandemic, which began during the first quarter of last year. Net sales for the other products and services category, primarily made up of aftermarket service parts, product accessories, extended warranty revenue, remote monitoring, subscription revenue and other service offerings, increased 36% to $62.9 million as compared to $46.2 million in the first quarter of 2020. There was an approximate 7% benefit to net sales during the quarter from the impacts of the Energy Systems and Enbala acquisitions and favorable foreign currency. In addition, we experienced very strong growth in aftermarket service parts as a result of the higher level of power outage activity in recent quarters. A larger and growing installed base of our products also contributed to the increase versus prior year. Gross profit margin improved 370 basis points to 39.9% compared to 36.2% in the prior year first quarter. Operating expenses increased $23.2 million, or 21.2% as compared to the first quarter of 2020, but declined 610 basis points as a percentage of revenue, excluding intangible amortization due to the substantially higher sales volumes in the current year quarter. As a result, adjusted EBITDA before deducting for noncontrolling interests, as defined in our earnings release, was an all-time record of $214.2 million or a very strong 26.5% of net sales as compared to $86 million or 18.1% of net sales in the prior year. This substantial 840 basis point improvement in EBITDA margin was driven by the significant gross margin expansion during the quarter due to favorable sales mix, improved pricing and favorable overhead absorption, coupled with improved leverage of fixed operating expenses on the much higher sales volumes and tight cost control. Note, the favorable impact to margins during the first quarter were partially offset by the onset of higher input costs, primarily relating to higher commodities, currencies, labor, freight and logistics costs, and these are expected to have more of an impact on properly starting in the second quarter. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased a robust 84% to $693 million as compared to $376 million in the prior year quarter, with the impact of acquisitions contributing approximately 2% of the revenue growth for the quarter. Adjusted EBITDA for the segment was $207.1 million, representing a very healthy 30% margin as compared to $82.8 million in the prior year or 22% of net sales. International segment sales increased 15% to $115 million as compared to $100 million in the prior year quarter. Core sales, which excludes the favorable impact of currency, increased approximately 10% compared to the prior year. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $7.1 million, or 6.2% of net sales as compared to $3.3 million or 3.3% of net sales in the prior year. Now switching back to our financial performance for the first quarter of 2021 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $149 million as compared to $44.5 million for the first quarter of 2020. GAAP income taxes during the current year first quarter were $35.4 million or an effective tax rate of 19.1% as compared to $9.4 million or an effective tax rate of 17.9% for the prior year. The increase in effective tax rate was primarily due to the significant increase in the mix of domestic pretax income in the current year, which is taxed at an approximate 25% statutory rate. Diluted net income per share for the company on a GAAP basis was $2.33 for the first quarter of 2021 compared to $0.68 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $152.7 million in the current year quarter or $2.38 per share, which is also an all-time record. This compares to adjusted net income of $55.1 million in the prior year or $0.87 per share. Cash income taxes for the first quarter of 2021 were $37.9 million as compared to $7.3 million in the prior year quarter. The current year reflects an expected cash income tax rate of approximately 20.5% for the full year 2021, which is at the lower end of the previously expected range of 20.5% to 21.5% for 2021. This compares to the prior year rate of 14% that was anticipated in the first quarter of the prior year. The increase in the current year cash tax rate versus prior year is primarily due to the significant increase in domestic pretax income, which is taxed at a higher statutory rate. Cash flow from operations was robust at $152.5 million as compared to $11.3 million in the prior year first quarter, and free cash flow, as defined in our earnings release, was $125.8 million as compared to a negative $1 million in the same quarter last year. Both operating and free cash flow represented seasonal records for the first quarter of a year. The substantial increase in cash flow was primarily due to higher net income and a lower level of working capital investment in the current year quarter, partially offset by higher capital expenditures, which included the new facility in Trenton, South Carolina. Before discussing our updated outlook for 2021, I wanted to comment briefly on our healthy liquidity position at the end of the first quarter of '21, which allows us to confidently operate our business and accelerate our strategy. As of March 31, 2021, we had over $1 billion of liquidity comprised of $745 million of cash on hand and $300 million of availability on our ABL revolving credit facility, which matures in June of 2023. Also, total debt outstanding at the end of the first quarter was $872 million, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the first quarter was only 1.2 times on an as reported basis. In addition, our term loan doesn't mature until December 2026. We do not have any required principal payments on this facility until the maturity date, and it has a low cost of debt of LIBOR plus 175 basis points. We also have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026. Further enhancing this attractive capital structure is our strong cash flow profile with free cash flow over the last 12 months of $554 million. I'd now like to provide some additional details on our increased outlook for the full year 2021. As Aaron highlighted earlier, we are significantly increasing our full year revenue and earnings outlook for 2021. The major outages in Texas have led to an acceleration in demand and backlog for home standby generators. And as a result, our operations team has further increased their capacity expansion plans, and this is leading to a significant increase in the shipment outlook for these products for the full year 2021. The Texas outages also had a notable impact on portable generator shipments and, with an active sell-through at retail, we are increasing our outlook for these products as well. Also contributing to the improved outlook is higher demand for our PWRcell energy storage systems as we continue to make further progress in building our distribution partners in the clean energy market. The outlook for C&I products has also improved considerably with a significant pick up demand for telecom national account customers, stronger outlook for domestic industrial distributors, traction with certain projects and beyond standby applications, a further recovery in demand for mobile products and an improved outlook for C&I products within the international markets. As a result of these incrementally positive end market trends, we are increasing our full year 2020 net sales guidance to now be approximately 40% to 45% growth compared to the prior year, which includes only approximately 2% of favorable impact from acquisitions and foreign currency. This is an increase from the previous as reported guidance of 25% to 30%. At the midpoint of the range, this updated sales growth guidance would result in a year-over-year increase in net sales of over $1 billion. This revenue outlook now assumes shipments of residential products increased at a very robust rate of over 50% as compared to the prior year. Revenue for C&I products is now expected to rebound at an even stronger rate as compared to the softer prior year comparison, a rate approximately in the mid-20% range. Importantly, this guidance assumes a level of power outages in line with the longer-term baseline average for the remainder of the year. Consistent with our historical approach, this outlook does not assume the benefit of another major power outage event in the second half of the year. Given the additional capacity expansion for home standby generators that is targeted to increase as the year progresses, we are now expecting the seasonality for revenue in 2021 to be a bit more weighted towards the second half of the year, with sales in the first half being approximately 47% weighted and sales in the second half being approximately 53% weighted. Updating our margin outlook for the full year 2021. As we've discussed, there continues to be significant cost pressures, ongoing logistics delays and various capacity constraints in several areas across the supply chain, which are resulting in higher input costs relative to our previous guidance, including rising commodities, foreign currency headwinds, increased logistics costs, additional tariffs and higher wages. Furthermore, we still expect these inflationary cost pressures, together with new facility start-up costs, to be offset by favorable sales mix, pricing and cost reduction initiatives across the organization through our profit enhancement program. As a result, we expect gross margins for the full year 2021 to expand approximately 50 basis points as compared to the prior year. In addition, we continue to make operating expense investments to scale the business, support innovation and drive future revenue growth into new and existing markets. However, due to the much higher anticipated sales volumes, we should experience improved leverage on our operating expenses relative to previous guidance. As a result of these factors, adjusted EBITDA margins before deducting for noncontrolling interests are now expected to be approximately 24.5% to 25.5%, which is an increase from the 24% to 25% previously expected and an expansion from the 23.5% margin in the prior year. From a seasonality perspective, we now expect adjusted EBITDA margins during the second and third quarters to be moderately lower relative to the first quarter, primarily due to the impact of rising input costs. However, we believe this impact will be temporary, with adjusted EBITDA margins forecasted to improve in the fourth quarter back to first quarter levels, as the rising cost pressures are anticipated to be offset by more favorable mix, additional pricing and cost reduction initiatives that are expected to be realized towards the end of the year. Operating and free cash flow generation for the full year '21 is expected to remain strong with the conversion of adjusted net income to free cash flow still anticipated to be approximately 90%. Our GAAP effective tax rate is now expected to be between 22.5% to 23.5%, which is slightly lower as compared to the 23.5% to 24.5% previously expected. Our capital expenditures for 2021 as a percentage of forecasted net sales are still projected to be in the previous guidance range of between 2.5% to 3%, although with a much higher revenue outlook, this represents an increase in absolute dollar investment compared to our prior expectations, primarily due to additional capacity expansion. The remaining guidance items provided in our previous earnings call are not expected to change. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

[Operator Instructions] Your first question comes from the line of Tommy Moll of Stephens.

Aaron, I wanted to start on Enbala and some of the grid services opportunities you referenced. You gave a little bit of detail to start, but anything else you can give us just in terms of how active that pipeline is? What strategies you're pursuing there? How optimistic now versus maybe a quarter ago? And then you also referenced some potential for product integration, specifically you referenced a purpose-built generator. I think that's on the home standby side. But what details can you give us there as well?

Sure. No, good questions, Tommy. On Enbala, I think our confidence grows daily with that acquisition. It just continues to reinforce our strategic direction around participating more fully in the shift to Grid 2.0, right? I mean that's really what that acquisition was about. It really was about helping us take our legacy assets, our generators, if you will, as well as our clean energy assets like PWRcell and our load management devices and really expose those distributed energy resources for the benefit of grid operators, utilities, energy aggregators and ultimately the end customers, the owner operators of those pieces of equipment. What I can say over the last quarter is we continue to dive pretty deep into the pipeline that Enbala had previous to our acquisition. It is substantially larger today than it was, that pipeline -- substantially larger today than it was when we acquired it. We believe there are a couple of reasons for this. One, during the acquisition, of course, that was -- COVID was -- we were in the middle of that, and there was some retrenchment by utilities and others on a lot of things. But certainly, programs like grid services were kind of put down -- they were set down and as they were working on other things. But the volumes have picked up dramatically here based on the fact that COVID has abated. But probably more importantly, many of these customers are telling us that they feel like now they get that Enbala has a partner in Generac that is, one, financially stable and, two, has access to all these wonderful assets, right? So, what Enbala was selling before was software, and it's agnostic software to the OEM and agnostic to even the type of DER, be it storage or be it a generating asset, and we want to maintain that because we think that's important. But I think having the opportunity to provide a full turnkey solution to a utility is really important. It really reduces the friction around which platform should the utility choose, if our assets deeply integrate with it, and we have a lot of confidence in our ability to execute in our financial wherewithal to be able to do that. What we believe that's led to is just a lot more opportunities that we're seeing. So really good things to see there. On the product pipeline, you mentioned the -- we keep calling it as this purpose-built generator. This is really our off-grid generator, if you will. It's a machine that will produce direct current power. So, it will be able to charge a battery. It won't provide power to your home during a blackout, but it will be able to provide power to your battery as you deplete the battery, which could be during a blackout or some other time. We think that's a really important kind of critical missing link for those homeowners that really want to defect from the grid. And so think of it as a grid defection enabler. That product will be available later this year. And we're pretty excited about it. We've got a lot of interest in it. We'll see how many people really want to truly defect from the grid. They'll be able to do that after this product hits the market, but it's going to be an exciting launch. We're going to launch it at SPI here in September. So it should be a lot of fun.

Your next question comes from the line of Ross Gilardi of Bank of America.

I'm just curious, like, as you guys are scaling up the new capacity in the interim, where do you keep finding the extra capacity to get you through these quarters? And are you just driving continuous efficiencies out of your existing footprint? Are you able to sub out some additional assembly? We keep thinking you're out of capacity and can't possibly produce another unit out of your existing footprint, and you keep doing it, which is -- I mean that is a compliment, obviously, but just like how are you doing that?

Yes. It's a great question, Ross. And this is where I'll give a huge shout-out to our operations teams are. It's a fight every day, every hour. I mean they literally have hour by hour kind of metrics that they're pacing against, not only obviously for output, but the ability to hit the kinds of output levels that we're achieving and do it safely and to continue to produce a quality product. These are top of mind for everything we do. It's just -- it's amazing. In full disclosure, I think if you had asked me as the CEO of this company even 6 months ago, if we'd be able to achieve the levels we are at today in the existing footprint, I would have probably taken the under on that bet. I just -- I'm maybe more of a realist at heart and maybe just would have -- you never want to bet against your own team. But these folks on our team just continue to outperform. They're working very closely with our supply chain. That's obviously a major component of this to make sure we get continuous supply. We've been expanding our supply chain to dual and triple source, which has been incredibly helpful. That was an initiative we actually started back a couple of years ago now, but it's paying off very handsomely. We invested very heavily in automation over the last several years, which is also paying off quite nicely. And really, the way the teams -- to answer your question at the root of it, is the teams are continually looking at ways to improve the operations of the business. So how do we -- squeezing out 0.5 point of efficiency or 0.25 point of productivity out of our equipment, out of our teams, out of our supply chain makes a big difference at the kinds of rates that we're running right now. Again, we don't know what the future holds. Supply chain is just a really challenging area right now, everything from logistics to component availability. Everybody's talking about this. And we're no different. We have taken a pretty, I would say, I think we've properly reflected that in the guidance. We'll just say that. I think we kind of handicapped it in a way that we believe these numbers that we're going to put out are achievable based on everything we know today. If we have some improvement in the supply chain situation, maybe they go higher. We'll see. But I'm just -- I'm incredibly proud of the team. They're just -- they're doing a great job. And really, I can't say more about it.

Your next question comes from the line of Philip Shen of ROTH Capital Partner.

Congrats on the strong results. And just kind of piggybacking off that last question. Let's say, we get a huge hurricane wildfire season this year. What kind of capacity do you have to be able to serve that increased demand? Can you help us bridge where you're at now relative to what that potential scenario could be? Any specifics? Can you talk about this capacity expansion plans, Aaron? I know you've talked about adding more in Wisconsin, more in South Carolina, and you can do it earlier. But to what degree can you quantify that? And the wait time is continuing to just go longer. Aaron, I think you talked about 28 weeks, but our recent dealer check suggests the dealers are waiting 35 weeks for the 22-kilowatt engine. So what is the plan to reduce that wait time, serve the busy season, if you will, when that comes in Q3 and 4?

Yes. Thanks, Phil. There's -- capacity discussion here is a daily discussion. We had a plan that we had in place that we were going to bring Trenton online here midyear, which is effectively -- if you think of it this way, it's -- we're calling it a double-double, right? So we're effectively -- we are going to double our capacity. Where we're at today is somewhat kind of double where we were running maybe a little more than a year ago, maybe 12 to 18 months ago. And we had a pretty good line of sight to exit this year at that level. We felt pretty good that we -- we started tuning into the backlog pretty well. Notwithstanding, again, to your point about an active hurricane season, that was going to be a wildcard. But what happened here in between kind of our last plan and today was Texas. And so, as the Texas event was unfolding, we basically went back to the drawing board. And we said, look, we had a plan, it's not enough. How do we get more? We can't have lead times going out. 28 weeks is terrible, and that's the average across all channels, all customers, all products. But those lead times are -- that's too long to wait. And we're working hard to bring those in. But that recalibration of the capacity plan, simply put, just without getting too detailed, is to take our level that we're at today which we anticipated would go up somewhat by the end of this year as we brought Trenton online. But effectively, we've now made investments and plans to completely double where we're at today a year from now. So that will ramp throughout the year. And the way we're going to do that is we're going to bring Trenton up quicker. So we're going to need more people, we're going to need more equipment, and we're going to -- we've made those investments, we've made those decisions, and we're executing against that. But we're also making more investments here in Wisconsin. So the initial decision was to shift to a secondary location down in Trenton, that's not going to be enough. So we had stood up a temporary line in one of our facilities just outside of Whitewater, Wisconsin, where we build the lion's share of these products. And that temporary line, we're going to actually add another line in that facility, and we're going to augment that production through some subcontracting of component supply. So our constraints are a couple of the major components that go into the units. We're going to subcontract supply. We've got a line of sight on that. That will come online here really kind of end of Q3, beginning of Q4. So that, call it, second line in Wisconsin in that temporary facility. So, the second line that we're adding in Wisconsin, the quicker ramp of Trenton and then bringing on more equipment early next year is what gets us to doubling kind of where we're at today to where we can be tomorrow. So, if we do get an active hurricane season, we feel like that we'd be ready for that. We may still have longer lead times exiting the year than we want. But the kinds of capacity numbers we're talking about here, by the time we get out 12 months from now, are really quite big. So the ability to scale even further, I think, is going to be is going to be possible once we get through that investment process.

I mean we will sell our portable should we get to a major event. That's part of it.

That's part of it, too. Yes.

Your next question comes from the line of Brian Drab of William Blair.

I am just wondering for my one question about margins, 26.5% first quarter, you're going to exit the year around that level you expect. Given all the puts and takes, you won't have -- I would guess that severe headwind -- you have severe headwinds from cost going into 2022, but you'll have a lot of additional capacity. So, can you just help us at all think about, does that 26%, 27% EBITDA margin run rate at the end of the year carry into 2022? Or is it reasonable to expect that to kind of come off of that really high level given you're running so hot?

Yes. I mean, I think we've said we most likely would not be catching the backlog here in 2021. So, we'll be coming into '22 with that backlog. So conceivably while we're running full steam in terms of production, those types of EBITDA margins would be sustainable. I haven't necessarily rolled out my 2022 guidance yet. But thinking out loud, that's how I'm thinking about it. Ultimately, once we catch the backlog, that's -- I guess that's yet to be determined. We don't know what type of hurricane season we're going to get this year. So I guess more to come and how that will play out in 2022. But yes, I guess I haven't necessarily laid out 2022 margin profile yet.

Well, I think the key there is where do input costs go, how much higher they go?

I think the message is we believe that we -- the things we're doing from a price cost efficiency, cost reduction standpoint and then elements around mix will help offset those inflationary pressures that we're seeing today. The impact of that, we believe, is going to be transitory here in the middle part of the year of 2021. That should alleviate more with the back end, to your point, Brian.

Your next question comes from the line of Mark Strouse of JPMorgan.

Most of them have been answered. I just wanted to go back to the supply chain issues. Can you just remind us what kind of the specific raw materials are? Or I guess what the major headwinds are? Is it specifically raw materials? Is it any kind of semiconductors like we're hearing with other companies? Maybe just give us an indication what that could be.

Yes. No, Mark, it's an important question, and there's two types of headwinds here. There's cost headwinds and then there's availability headwinds. And so from a cost headwind standpoint, we use a lot of copper, aluminum and steel in our products. So obviously, as those have run here over the last 6 to 12 months, we've seen a sizable increase, and that's kind of the cost pressures that York was alluding to on the last question. And we're offsetting that with pricing and other cost out actions. Interestingly enough, the second headwind, which is availability, we're also seeing some availability issues within some of those basic materials, which is not something we've typically experienced. So finding electrical-grade steel as an example for the alternators we manufacture, which is the business entity of a generator. That's been challenging. Having to go out to the mills and buy coil stock. We're kind of jumping the supply chain in a lot of cases to get upstream to find rock coil stock to provide to our electrical grade steel lamination manufacturers. So that would be one instance of it. I would say more broadly, the electrical components are in terms of availability. We use a lot of semiconductors, a lot of microprocessors in all of our products. I would say, much more heavier use on our clean energy products, much lighter use on products like Chore products. But nonetheless, there are still a lot of microprocessors across the board. I think that one thing for us, maybe just a little bit of how we've been insulated from some of the current shortfalls you're reading about in automotive and some other areas, as much as I'd love to say, we're an incredibly lean supply chain in terms of inventory levels and whatnot. The fact of the matter is, because of the nature of our business in terms of needing to react to exogenous elements of demand, we have to keep a fair amount of safety stock, and our suppliers have to keep a fair amount of safety stock on hand to feed us when we need to double or triple our output. So, there was a fair amount of inventory in the channel, if you will, our supply chain channel, that is, as well as our own inventories. And so that's been helpful in kind of absorbing some of those shortfalls. And that being said, we definitely are looking at some problem areas ahead. Now again, we've reflected this, we think, appropriately in our guidance. So, there are some areas of our business that I'll just point out clean energy. I mean the demand for clean energy is much higher than what we can produce, simply because of some of the constraints we have on availability at the electronics level, also battery cell production levels. There's constraints there as well. And we're monitoring that, and we're looking at ways we can mitigate that. But we've more heavily reflected that in the guidance for that business. And still, we're saying we're up 75% to 100% in clean energy year-over-year. But it's been a challenge. We're going to continue to manage it to the best of our ability. But there's quite a few headwinds out there, but I think our teams have a pretty good handle on it, and we're going to continue to keep fighting here.

Your next question comes from the line of Christopher Glynn of Oppenheimer.

Nice work. A lot of high-level questions have been asked. I'm curious what you're seeing in terms for HSB? What you're seeing for emergence of replacement and upgrade market as well as new construction penetration?

Yes. That's a great question. And we watch this very, very closely. As we've said in the past, the replacement rate is roughly about 10% today. We get quarterly updates. That's up nicely. We get quarterly updates on what the replacement rates are. We survey people who buy products. Are they buying it for replacement? Are they buying it as a new home? Are they buying it as an existing home? So, in new construction, it's 15% to 20% of the products going into new construction. So, both of those trends are favorable and have been favorable over the long haul. The replacement trend, I think, is maybe the most favorable because when you really just peel back the math on it, and I think we showed this a couple of years ago at an Investor Day, and we may have to update this coming up here in our Investor Day in September. But the replacement rate itself was worth quite a bit of money there, just over the long haul. And so -- and that, I think, as technology continues to improving the products and in particular, as those products become grid services enabled, right, in Enbala-ready, the idea of the newer products being in Enbala-ready and the old ones not, that becomes an asset that could be producing for somebody in a different way than just protecting their home. It could be something that is able to be monetized. So pretty interesting stuff there. The remote monitoring capabilities that we've added to products over the years also don't exist in generational products 10, 15 years ago. So really interesting trends longer term, and I think they're bullish for us and bullish for the category.

Your next question comes from the line of Jed Dorsheimer of Canaccord Genuity.

I'll echo the sentiments. Congratulations on great execution. So I guess for my question, on the home standby, sort of an easy trend to call with respect to the work-from-home phenomenon, and you guys have executed flawlessly on that. Just maybe my question on turning to sort of the commercial and industrial. And if we look at the trend, if I'm a REIT and I own either industrial property or even an office or hospital post archive and knowing that this work-from-home phenomenon is that there's going to need to be a law to get tenants to come back into the properties. I'm curious where you think from the conversations, where we're at in terms of, to use baseball analogy, sort of the innings of using guaranteed power is one of the benefits in terms of that and whether or not the fact that the structure of that REIT in having to spend the money from a tax perspective, if you're starting to see that benefit yet, and that's what we saw in these results.

Yes. I think, Jed, it might be a little early to be saying it's reading through today, maybe a little bit, but really we've always looked at the sales cycle and just that -- those products because they're budgetary items generally for a business or even a hospital, in some cases. Those are little more quote-driven. But really, we bifurcate the C&I world into two markets. There's the quote-driven and then there's the optional standby markets within just purely standby, right? So, quote-driven markets are clear, where you've got to provide backup power because of a wastewater treatment plan, a hospital, some other installation where quotes require that. That's a simple bid process and would be something that is about half of the market. The other half of the market then is made up of what we refer to as this optional standby market. And that's really a decision for a business or a business owner, who says, look, I have interruption of my -- maybe it's my revenue streams or I have spoilage of inventory or I have some other thing that happens when the power goes out, it's a negative for my business, and I want to protect that and protect against that, so I invest in backup power. I think the idea there and what we've typically seen is we'll see a follow-on period here for a couple of years, especially after an event like Texas, the magnitude of that event. We'll see increased quotations activity which we're seeing today, increased activity around what types of solutions make sense. You can talk to the specifying engineering firms that are involved in projects like this, down in that region of the country. And they will tell you that there's a lot of inbound interest around businesses and other types of properties looking at adding a backup generator. I think what gets really interesting for me is when you can take that backup generator, and C&I is really -- it makes a lot of sense here. You can turn it into a distributed energy resource. Now you're talking about a big chunky block of power that you can take 400, 500, 1 megawatt -- 400 kw 500 kw, 1 megawatt, 2 megawatts of power in a single installation with a single owner that you can put back into the grid. And that's incredibly valuable for ERCOT or for any of the other -- PJM -- any of the other grid operators out there or utility companies even themselves who can use that asset to help them balance supply and demand. And so that's kind of the new frontier, right? And that's why we invested in Enbala. You're going to see us continue to push even further in this. And I mentioned it just briefly in the prepared remarks about, we call it our lead gas initiatives here, which is really about using a natural gas generator for those purposes because in those instances, you're just talking about a cleaner burning machine. The economics are much better around gas. We use a rich burn configuration machine. So it can do quick startup to protect against blackouts as well as provide power back to the grid. So we're the leader in that industry and have been for many, many years. And we're incredibly excited. And that's where we've been getting the most interest actually with the Enbala acquisition. As I was mentioning, those sales teams, Enbala and our teams working together many of the projects that we're talking about are natural gas generator projects and larger blocks of power for distribution centers, for manufacturing plants, for other types of installations, critical or noncritical. And I think that's going to be really important because that's really more of energy as a service. If you think about it down the line, that's what it turns into. And I think that's going to be a really exciting part of the growth story for C&I as we go forward.

Your next question comes from the line of Jerry Revich of Goldman Sachs.

Let me add my congratulations to the strong performance as well. I'm wondering if you could talk about how much your PWRcell production was up in the quarter, and you mentioned you increased your expectations for the year. Maybe just quantify that for us? And if you could just touch on whether you have enough battery capacity with your existing supplier relationship or any additional plans to augment the supply base?

Yes. Thanks, Jerry. PWRcell has been incredibly well received. We're doing well to take some good market share there in a growing market, which is awesome. And we continue to roll out new products, as we talked about in the prepared remarks. But as it relates to supply chain and capacity, I mentioned briefly the battery cell capacity constraints, which anybody, who's electrifying anything today, is dealing with the same situations, and we're no different. We brought on a second source here in the first quarter to augment our primary source of battery cells, battery packs. We'll be bringing on in the second half of the year a third and potentially even fourth source to continue to kind of broaden the supply base for those products. That being said, again, we -- as I said before, we've kind of reflected in our guidance. Even though we're talking about a 75% to 100% growth rate year-over-year for clean energy products, we're really -- it could be higher. The demand is much higher. I mean the inbound demand that we're seeing in those product categories is phenomenal, and it's very exciting. And I think this is really ahead of any kind of -- all the major policy changes that are being proposed out there, right? We really didn't even touch on that today much, but the current administration has a whole host of kind of plans and proposals out there related to increasing and extending the investment tax credit, actually giving an ITC credit, making that available for storage only, which is something that would be very interesting, I think, for people, who are looking to add storage to an existing solar array or use storage perhaps as an arbitrage opportunity. So, we need to continue to work on capacity as, I think, the takeaway here. Our teams are looking at that very hard. And longer term, I think that we're going to need to do some other things there that I think we're probably prepared to talk a little bit more deeply about once we get to our Investor Day in September. But as it relates to what we did in Q1, I guess, York

I think we said in the prepared remarks. So shipments obviously did grow dramatically. I think what was encouraging where orders, or demand actually was up sequentially from Q4 to Q1, actually better than expectations. So that was the driver of taking our outlook up. There's a lot of momentum on the distribution side for these products, took our outlook up to growing 75% to 100%. At the midpoint of that range, that would be about a $100 million increase in shipments of those products year-over-year. So, a lot of encouraging signs. And again, that's better than we had originally expected. And I think the key there is we'll be ramping volumes throughout the year. Margin profile will ramp throughout the year. And we're going to have attractive margin profile as well on top of that.

Your final question comes from the line of Ross Gilardi of Bank of America.

I just had a quick follow-up. Where is the backlog by the end of the year, if you get your capacity where you want and you get normal order activity for the balance of the year based on a number of product activity?

Yes. It's a great question. And obviously, the big wildcard and that kind of equation or formula is what kind of a season do we see this fall. And so, I think it's really difficult for me to just kind of spout out a number here because I don't know what the season holds for us. We really want to bring the backlog down in terms of the lead times. We'd love to see that get a lot shorter as we go forward. And that's something that we're working hard to as we ramp capacity. As I said, the South Carolina facility, the team there, we've got a plan that basically doubles where we thought we were going to be at the end of the year. In terms of exiting the year down in Trenton, we want to be twice as high as we thought we'd be. And then again, augmenting that with more production in Wisconsin here. So, we're going to grow into a really big capacity number by the time we hit kind of Q2 of next year. But the season could -- if the season plays out to be an active one and there are quite a number of forecasts out there saying that, and that's just the hurricane season. I guess I haven't touched on the fire season out west, it's been incredibly dry out west and very dangerous situation there. Already seeing fire activity out in the northwest in Washington. Californians, I think, are really on edge with where that could go. So

Lots of interest in Texas.

Tons of interest in Texas coming off of the outages there. So again, we're trying to reflect what we think is an appropriate level of…

Either way, we're not going to be catching our back.

We're not going to catch it. We're going to come out of the year with a fair amount of backlog. It's just a question of what the magnitude of that number is. And just not in a position yet to size that.

There are no further questions at this time.

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

This concludes today's conference call. Thank you for participating. You may now disconnect.