Generac Holdings Inc. (GNRC) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Welcome to this morning's fireside chat with Generac. I'm Jerry Revich. And joining us from Generac today, we have the executive team here, Aaron Jagdfeld, President and CEO; York Ragen, CFO; Mike Harris, Vice President, Corporate Development and Investor Relations. Gentlemen, thank you so much for joining us.

Yes, very good. Now you've got York Ragen, CFO, and Mike. Aaron had to step out just as a heads up.

Okay. Perfect. So in terms of as a starting point for us, York, there are a lot of interesting parts to the Generac story. Let's just start in battery storage, where sales are ramping up from virtually 0 to nearly $150 million, if you hit the high end of the range for the targets this year. Your approach to distribution is really unique in the industry. Can you talk to us about the difference in your path to market compared to the incumbents here?

Yes. I think for those of you on the line, Generac got into clean energy really last year, in 2019, after the acquisitions of Neurio Technologies and Pika Energy with Neurio Technologies being the energy monitoring, hardware, software, data analytics company and then Pika Energy being the battery storage, power inversion company. And we really put those 2 companies together, combine them with the expertise of Generac in supply chain, power electronics and distribution. So to Jerry's point, distribution, we've always had a philosophy, an omnichannel philosophy in serving the markets that we serve in an omnichannel approach, in particular, on the residential side of our legacy business, the legacy residential power generation business. When in a very underpenetrated market, you need to have a very broad channels of distribution and a large pipe to be able to sell your products through. And we did that on the legacy residential power generation side. We sell through 6,500 residential dealers. We sell through retail. We sell through wholesale. We sell through online, et cetera, et cetera. So we extended -- we are extending that philosophy into clean energy and building out a broad distribution network as we speak. We started in the back half of 2019, and we continue to do that today. We've been talking to all the national solar installers and developing some partnerships with those, the likes of Sunnova. We have a partnership to offer their PPA arrangements as we sell our products. We've been talking to all the solar wholesalers to distribute our products through the wholesale -- solar wholesale channel. We've been talking to the independent solar installers to train them on how to sell, install and service our storage products. And we've also been offering our storage products through our legacy power generation channels as well. So really building out a network. And it's really gone better than expected. When -- we rolled out some numbers last September in our -- during our Investor Day, and we far exceeded our expectations back then. And Jerry pointed out, on the high end of our range, we did offer some guidance for selling these products in 2020. We said we look to deploy 125 to 150 megawatt hours of storage products in 2020, which on the midpoint is around $130 million, high end $150 million. So basically, going from the startup businesses of Neurio and Pika, which sales were low, effectively going from 0 to $150 million, it's working out very well. And in the first quarter here of the first full quarter of scale launch, it went as expected as well. So good news there from the clean energy side.

And York, can we talk about the number of distribution partners that you folks have today? Is there a similar metric that we can think about compared to the distributor count that we talk about for residential standby?

So we -- I think if you think about the progression of rolling out our distribution partners on the clean energy side, we have been talking to -- we've trained over 1,000 independent solar installers to sell, install and service our products. We rolled out -- in January, we rolled out PowerPlay. So those on the line that are familiar with PowerPlay, that's our in-home selling system on the residential home standby generator side. We rolled out a PowerPlay Clean Energy, similar system in January. There's roughly, call it, 400 solar installers using that today and only the first quarter launch. So I think that's...

It's ramping nicely.

It's ramping nicely. And like I said, we've trained over 1,000 of these installers. So that will continue to ramp. And like I said, we continue to talk to our solar -- the solar wholesale partners who many of these independent solar installers will still buy their equipment through wholesale distribution. They want to buy their panels. They want to buy the Generac storage system. They want it all delivered to the job site, and they want to have some credit extended to them from the wholesaler. So there's still -- the wholesale distributor plays an important role still in this marketplace, and we continue to talk to all those partners. And then there's the national -- big national guys like we talked about. So all that's playing out as expected. And there's some -- if you think about our 6,500 residential dealers on the generator side. There's -- some of those partners are selling storage as well. It's just -- it's a small percentage, though.

And York, my line cut out. How many did you say are using the PowerPlay equivalent for battery storage?

It's a little over 400 today, and that's only after the first quarter of ramping. So that's -- we're happy with that. And we -- like I said, we've trained over 1,000 dealers. So we're going to continue to ramp that up.

Yes. We didn't launch the PowerPlay Clean Energy system until January of this year. So this is really pretty recent.

Yes.

Well, so we're adding 400 a quarter, just out of the gate. Okay. And then I know it's early, but can you talk about where you're seeing in terms of close rates and cost per lead in the battery storage business for you compared to the generator business? How do the 2 stack up so far?

Yes. No, I mean, it's a little early to -- we don't -- one, we don't give those close rates out in general. It's a little -- just because we've just launched that PowerPlay and home selling system in January. So you need to have those leads mature and ultimately come to closure and get good -- you need to have good solid data, good volume of sample to be able to sort of like zero in on where the ultimate close rates are coming in at. So it's a little early to tell, Jerry, from that perspective. And then in the middle of this, COVID-19 hit and solar installations took a little bit of a pause here with COVID-19, with some permitting, like in Northern California, permitting was getting locked up in Northern California for solar. So that had some probably abnormal effect on any result there. But we're seeing good trends. And like I said, the first quarter out of the gate was as expected.

And gentlemen, how concentrated is that business in California? What proportion of your expected deliveries this year are in California versus other states?

It's an important market, but actually what we're seeing is sales outside of California are strong. I was surprised to see lots of interest in the Southeast, the Northeast, the Sun States. I was thinking originally, this was like a California story when we rolled this out, but we are seeing lots of interest. And there's some particular wholesaler -- I'm sorry, there's some particular solar installers we're dealing with outside of California that are doing good business. So again, it's -- we're seeing good results there outside of California.

And Jerry, as you would imagine, with the launching of our PowerPlay CE capabilities, we have pretty good visibility into where the interest is coming from for these energy storage systems because the incoming inquiries come to our -- to us here at the factory when our customer service reps qualify these leads and pass them on to our dealers. And so we're getting pretty broad-based interest across the country. Obviously, California is a pretty important market. Hawaii, Florida, Texas, New York, those are some bigger markets. But as York said, it's pretty broad-based, and we're seeing interest across the country.

And in terms of the interest that you're seeing, what proportion of it is for new solar installations versus people who have existing solar systems that want to add battery storage?

Yes. Yes. Most of it actually -- the majority of it actually is for new installations. I think on the retrofit applications, the challenge there is you got to rip out the existing power electronics infrastructure and inverter infrastructure and replace it with our system. So it's a little bit more of a leap in terms of cost that you're throwing away some equipment there. So -- but we're working on some things there to try to augment the retrofit environment. But -- so the majority to answer your question are new installations.

And you folks on the home standby systems have been really excellent at prepackaging solutions to reduce installation costs. Any similar application here? It sounds like you have an opportunity on the retrofit side. How close are you to delivering more cost-effective solution than what's available in the market now?

I think in general, we're continuing to optimize our supply chain. Like so we just really launched this, again, in scale for the -- our first full quarter was the first quarter. And we've been migrating supply chain. Our strategic sourcing team has been migrating supply chain away from the legacy Pika supply chain over to our Neurio supply chain. And as we do that and as we also spin up dual sources on batteries, as we progress into the second half of 2020, we're going to be -- just in terms of the bill of material, we're going to be able to reduce the cost structure of our product and improve our gross margins on the bill of material side of things. Now you asked a question about like install and how you make it easier to install. Now storage -- it's a little bit easier of an installation outside of the panel. So the panels, which we're not selling, it's the whole system from the panels on down. It's easier to install than a generator. So the amount of labor required to install a storage system is just not as much as a generator. In a generator, you're piping natural gas and whatnot. And so it just takes a little bit longer. And so I guess we'll continue over time to try to optimize. I guess I will say that from an installation standpoint of our storage system, we have modular -- we have a modular battery approach where we have -- you can put up to 6 battery modules into our battery package, if you will, the enclosure. And those batteries, those modules, are only -- they only weigh about 75 pounds. So unlike our -- some of our competition, where it's like over 200 pounds, that you're trying to install a 200-pound block onto a wall, it's a little bit harder to do. For us, it's -- because of our modular approach, you can do this, install our product with 1 person. So we tout that as the most easiest to install product on the marketplace with the most power in the marketplace.

That's really interesting. And if we could transition the conversation to the residential standby part of the business, really core to the company historically, 40% of sales or so today. It was really interesting to hear that home consultations doubled year-over-year in April. It sounds like people are thinking Pellicon, Netflix Generac. So in terms of -- can you talk to us about your experience with virtual home consultations? How has that evolved? And how have the conversions been compared to live in home consultations have -- through that experience? Any difference in close rates?

Yes, yes. So our legacy home standby -- the residential home standby business, we've always said it's been a bit -- it tends to be more defensive in nature. It's more tied to power outages, not necessarily the broader economic environment. We saw this in the last -- the financial crisis back in 2008 and 2009, where we were able -- we grew that business despite other businesses cratering around us, we grew that business. So we're seeing something similar here even in this -- during the pandemic here where Jerry alluded to it, that the interest -- so we schedule home consultations through our PowerPlay selling system. And we can track the data around those home consultations. And to Jerry's point and on our earnings call on April 30, we alluded to how April home consultations were up double versus prior year. So what we're finding is that power outages are still happening. And now when people are sheltering at home and working from home and their kids are learning from home, power is that much more critical to have in your house. So when your power goes out, you need to have backup power. And I think given our brand recognition in the marketplace as the player in backup power for residential purposes, interest in our products are increasing significantly in April. So Jerry alluded then also to these virtual home consultations. Historically, we would schedule an in-home consultation. These leads, if you will, would get placed on our dealers and the dealer would schedule an appointment at the homeowner's house. And we used to call it the kitchen table pitch. But in this environment, most homeowners don't want a stranger in their house. So we've -- our dealers have been able to quickly pivot into what we're calling virtual home consultations via Zoom. And using our PowerPlay selling system, it's basically using the same system, but just doing it over Zoom instead of at the kitchen table. And that has been very effective. And if anything, actually, the dealers are finding they can be more efficient. They can do more proposals in any one given day over Zoom than having to drive from house to house to house with an in-home consultation. So the early read was that some of these initial home consultations, the close rates were very similar to -- I'm sorry, the initial virtual home consultations were similar to in-home consultations. That's good news. The one thing we don't know is with this doubling of interest, doubling of home consultations in April, given the COVID-19 environment and its impact -- potential impact on consumer spending, we just don't know what the close rate of this current interest is going to be. So we took a more conservative view in our guidance that we guided on April 30. And we didn't have home standby generators doubling. In line with the home consultations, we had a much more conservative view on that in our recent guidance, and we're going to continue to watch it, obviously, throughout the quarter here.

And your -- in the high-frequency data that our consumer team and others track, there has been no let up in demand growth for -- in home consumer goods and services. Has the generator retained its logo or halo, I should say? Have you seen a continuation of that high interest trend that Google search would suggest that's continued?

Well, I guess that's the April -- how we indicated April home consultations are up double. There was a big outage in the south about 3 weeks ago that helped -- there's about 1.5 million people without power from Texas to Georgia. And again if you're at home sheltering in place and you're trying to work from home and your kids are trying to learn from home, you need to have power. And I think that -- what does current environment has done is just provided another catalyst for awareness of this product category. And as a result, the interest has been high and it's, I guess, provided that halo that you're speaking of, Jerry.

Yes. And then, Jerry, one of the things we talked about as with April with the doubling of the home consultation, so that's through our PowerPlay system, right, and through our residential dealers, which is our largest channel for home standby. But we also sell home standby generators through other channels as well. And in April and in Q1, those channels were pretty strong as well. So we're seeing some broad-based strength for demand for these products across various channels.

And then what we typically see in a strong demand environment, look, we're talking about in April, and hopefully continuing new dealer sign-ups tend to accelerate. Can you talk to us about what level of interest you're seeing from new distributors?

Yes. In the first quarter, I mean, we had -- I'm trying to -- we're over 6,500 residential generator dealers today, and that added a couple hundred, I want to say.

Yes. So on a year-over-year basis compared to Q1 of '19, that was approximately 500 dealers that we added year-over-year.

Yes. So buried in there is California. So California is -- and we'll probably talk about that on the call here. California with PG&E threatening to turn the power off last year and then actually doing it in October of last year, these public safety power shutoffs to really prevent fires. That threat and that actually doing it, turning the power off, has really caused a lot of concern with homeowners in California and business owners for that matter. And many of them are trying to figure out a strategy for backup power in California now, which historically has been a small market. So included in that 500 increase over the last year of dealers from 6,000 to 6,500, there's about -- about half of that is just dealer growth in California from roughly 100, 150 up to 400 at the end of last year. Actually, we're over 400 now in California as we speak going from 150 to over 400.

And in terms of the California part of the conversation, let's pivot there as it's a natural transition. Can you talk about what level of interest you're seeing out of folks in California, and how has the home consultation growth been in that part of the market, presumably given the factors that you mentioned, York, we should have some pretty good momentum in California, I would guess?

Yes. First quarter, it was -- interest was strong in the first quarter. And then we also indicated in April. Again, this is off a low base because keep in mind, California has historically been a small market for us, but it's -- we're quickly finding it's going to be a growth opportunity for us over the next -- over the long-term here the next few years as we build out distribution there. But we indicated in April interest these home consultations in California are up 10x actually, off a low base, keep in mind. But there's a lot of interest in California for generators. And there's a lot of interest in storage as well. So it's sort of this double whammy that we get. We -- California, let's -- in 2018 was a very small market for us, and we've sort of indicated that it should be over a $200 million market for us in the next couple of years here. So it's -- there's a big growth opportunity in California, not only on the residential side, but on the C&I side as well. Buried in that $200 million would include some C&I business as well. It does not -- however, the $200 million does not include clean energy. That's an important distinction. That will be a separate growth driver in California as well.

Yes. And Jerry, I was going to add -- sorry, I was just going to add regarding California. You know how we talk about like nationwide, the penetration rate of home standby generators is like 4.7%. It's just a little under 5%. So at the end of 2019, California was only 1%. And our analysis shows there's over 6 million households in California that meet our filters for our addressable market. So at only 1% and you have over 6 million homes, I mean, you could do the math on the potential long-term opportunity within that state alone.

And part of satisfying that opportunity is new dealer sign-ups. Are you constrained at all by lack of physical training? Can you continue to grow that dealer count in California to address that market?

Yes. We have been growing it, and we will continue to grow it. It's -- like we said, we had about 150 dealers there entering 2019. We've got over 400 now. We're going to continue to rapidly and aggressively sign up distribution in California. I think, internally, we've talked about, we should have over 1,000 dealers in California. So it's -- just given the 6 million homes that Mike just talked about, we need a lot more dealers to serve that market. And because historically that threat of PG&E turning the power off and because the weather was actually -- when it's 72 and sunny all the time, it just -- it wasn't a big -- California wasn't a big market for us. It's only 1% penetrated, as Mike said. So -- but now with this PG&E threatening to turn the power off, there's a lot of interest in the category. And as a result, we need to continue to build out distribution, to your point, Jerry, and we'll continue to do that over the next couple of years.

And what are your lead times like for consultations in California? Are they higher than they are nationwide?

I don't have specific lead times in California in my head, but it's not bad. There isn't a massive backlog of home consultations that have built up. We've been able to get to them relatively quickly. And especially with these virtual home consultations, you can do -- you could do almost 10 a day, if you work 10 hours and you spend an hour with a homeowner going through the proposal and understanding what circuits they want to back up and how much power they need. And you can do a lot of home consultations in a day now.

And on that note, can we talk about what that improved productivity could mean for your business? I mean, we're talking 30%, 40% higher productivity for salespeople at your distributors. Do you expect them to drop installation price as a result? Or is there an opportunity to bring down lead times? What are the...

I don't know about that. I mean, being able -- I mean, is -- it still will take whatever it takes to install the product. I mean the time it takes to do a proposal is one thing, but to install it is -- that actually isn't dramatically changing because you still have to do -- once you get on site so you got to install it. And I think what's interesting, we got a lot of questions. And again, what's the impact of COVID-19 on installations. We've been talking a lot about these home consultations, but the actual installation, a lot of questions on what's the impact. And we're actually -- we haven't seen installations of generators be impacted by the pandemic. We see installations because you're required to get an activation code from the factory. So we track that data daily. And so we see this activation data daily and activation trends have been encouraging as well. And if COVID-19 was impacting these installations or activations, we would have seen a big drop off, and we haven't. So we're -- again, we're encouraged not only by the home consultation trends but also by the installation trends as well. And yes. So I don't know if I'm answering your question, Jerry, but that we're seeing good encouraging trends there.

Yes. Well, yes, I mean, I would say from the standpoint of if we have your essential 6,500 strong distributor sales force, it's going to be 30% more productive. I'm wondering how those benefits accrue to Generac.

Yes. I think, like I said, I think they can be more efficient on the proposal side of things. So you don't get a big backlog of proposals built up or home consultations build up. But the installation itself still has to happen, and that hasn't changed.

Because you do have to travel to the homeowner site for the actual obviously installation, so...

Installation, yes.

I'm sure you guys will set up a drone for that soon. And in terms of the activation still going strong, it's nice to hear. I'm wondering if you could talk about what you're hearing from your dealers on any delays in filing permits. Or are they for most areas being filed online now? Can you talk about the lead indicators on whether we might see a constraint on installs from a permitting standpoint?

Yes. I mean, there might be some pockets from municipality to municipality that things have slowed down a bit. But overall, my comment holds where installations -- this activation data that we get, which is synonymous within installation, we've seen good trends there. So we're not concerned that the permitting process has locked up the ability to be able to install these products. There was some concern there on the storage side, again, in Northern California, where that slowed a little bit there in April, but since I believe permitting has freed up there a bit in Northern California for storage and solar, I should say, solar plus storage.

And we have a question here via the webcast. Somebody is asking, can you talk about how financing is handled? It sounds like for the standby genset and probably for battery storage system is the direction of the question? Do you folks have any financing partners in place? And how penetrated is that part of the offering?

Yes. Good question. So we'll talk generators first. So we offer -- or I should say, our dealers offer financing to the homeowner through our partnership with Synchrony. So we've integrated Synchrony financing into the PowerPlay selling solution. So if a homeowner wants to finance the purchase of the generator plus the installation, labor, they can do that through our partners, with Synchrony. And again, that's the dealer offering that to the homeowner. But we've -- again, we've set up those programs with Synchrony. And what's interesting, we have seen historically, the financing of this product with a homeowner through Synchrony was low. In 2019, we did offer some new programs or Synchrony was able to offer some new programs to allow a lower cost to the dealer to offer those programs. And since then, the increase in financing by the homeowners has increased nicely. And we have seen some indications where more people are using that financing in this environment just initially here in the month of April. So that's the generator side. On the storage, solar plus storage side, we have integrated a number of financing partners into our clean energy PowerPlay selling system, the likes of Mosaic and Loanpal. And in the future, in the third quarter, we're actually going to be integrating the Sunnova PPA financing process into our selling system as well. So if you want to set up a PPA arrangement through Sunnova, with the installation of your solar plus storage, you can do that, and that will start in Q3. So we haven't necessarily seen any of that financing lock up in this environment and -- which I think in many cases investors are wondering about that.

Okay. Good. And then as we think back to the Analyst Day, the residential standby business is performing much better than targeted. The battery storage business ramping up ahead of expectations as we covered earlier. Obviously, C&I is impacted by COVID compared to other businesses. Are there any parts of the strategy where you're pivoting today compared to the Analyst Day as a result of all of these developments?

No. I don't think any parts of the strategy were, I wouldn't say, pivoting. We are seeing on the C&I side of the business a pretty significant impact of COVID-19. That's a global business. Our C&I business is a global business. And when you think about our operations in Europe and Latin America, with European GDPs getting slashed, we're seeing that impact in Europe and in the APAC region and Middle East and whatnot. And our mobile products business -- we sell mobile products to rental companies. And with the collapse in oil prices, we've seen our rental customers slash CapEx. That's been well documented, and that's impacting us. Some of our telecom customers have slowed down their CapEx spending in this environment, and we're seeing that. But I think what's interesting, though, we believe, and we've seen this in the past, where those markets, like the mobile markets, those will come back. Those will cycle back. There's a replacement cycle. Those rental customers will need to replace and refleet, replace their fleet, and business will pick back up. And in the case of telecom, with the rollout of 5G, they're going to need to harden their networks even more so. They're going to need to put more generators on their cell towers and penetrate the cell tower network and make it more reliable. So we expect mobile telecom -- those will come back at some point. And then once global GDP picks up, our international business will pick up as well.

And in terms of looking at the success that you folks have had in a short period of time with battery storage. Are there other products that you're evaluating to see whether you can apply your consumer distribution know-how the same way that you're rolling out in battery storage? And I appreciate that part of it is, look, you're leveraging the core competency on the electronics and some of the systems, but if we were to think of the opportunity set as wider beyond these products, anything top of the mind that could be an opportunity?

I mean, we're always thinking about how do you have some tangential products that you could plug into our existing business model, which has been very successful. And I think clean energy is still in its infancy stage. We still believe we can do a lot there. We do believe there's a whole energy revolution on the horizon. We believe, on-site, power is going to be the way of the future through renewables and storage and natural gas power generation. So how do we continue to invest in that? I think there's some things around energy management. I think there's things around C&I energy storage. We think that internationally, the energy -- clean energy market is -- and storage market is a very large market internationally. So I think there's still things that we can explore on the clean energy side that to build that business out, that are exciting in our M&A funnel. But I guess that I don't necessarily have any comments on like other tangential products that we're looking at.

That is a helpful framework. And then in terms of the M&A pipeline, obviously, it's going to be a tough environment to pull the trigger on any deals currently. But as you think about the market stabilizing, how active is the pipeline? How much time are you spending looking at M&A at this point?

Yes. No, I think the beauty is -- and we haven't really stressed it on this call -- is we do have a very strong balance sheet. If you think about our liquidity, we've got over $500 million, almost $600 million of liquidity on our balance sheet between cash and availability on our ABL. And we expect to -- based on our guidance, we still expect to generate a significant amount of free cash flow in 2020. So we expect to put that to work here. We do have an M&A funnel, to Jerry's point. And we've done 14 deals in the last, I guess, 9 years, 8 to 9 years. And we expect to continue to do that. As -- and I think I already alluded on the things that are in our funnel that we're looking at. But continued product extensions and geographic extensions would be the things that we would be looking at. And I think we've been -- once -- as things become actionable, we've demonstrated we can execute on those.

Perfect. Well, that's all the time that we have. York, Mike, thank you very much for joining us. And thank you, everyone, for dialing in. Stay safe, and have a great day, everyone.

Thanks, everyone. Appreciate the interest.

Take care. Bye-bye.