Generac Holdings Inc. — 2024 Q1

Yes. So it's a great question, Tommy. I mean activations have been a little slower this year relative to -- if you look at the outage environment most recently in the last couple of quarters, that outage environment has been weaker than kind of the trend over the last, I would say, a couple of years. So Q1 was actually in line with the long-term average since we've been tracking outages. But again, you look kind of trend-wise, it was a quiet relatively quiet quarters. You get past January, things really slowed down in February and March. And then Q4, as we discussed previously, was a really light quarter relative to kind of historical trends. So...

And Q1 over the last year...

Yes, Q1 last year was -- '23 was really strong for Q1. So kind of a tough comp that way. So activations were a little bit down. But yes, shipments are up because, again, the field inventory headwind is largely gone now, right? So we exited the quarter and really kind of February, March run rates, activations and shipments were in line with each other. So we think that's a really good sign that we're kind of at a point of stasis with field inventories in terms of them returning to normal, which has been the primary headwind here. So as that abates, that helps us in terms of comping more strongly on shipments, but yet the activation has been a little bit softer as a result, I think, of the most recent outage periods.

The field inventory drag was a bigger drag last year than it was this year's...

Exactly.

Quarter, and that allowed for the year-over-year increase in shipments.

Exactly.

Yes. Thanks, George. So our product range is typically underneath the range of products that are being used for -- purely for backup for the data center market. And that's a market that, they use very large blocks of power, and that's dominated on a direct basis by the large diesel engine manufacturers that are out there. There's a handful of them in the world, and they sell all the major data centers on a direct basis.

Yes. Thanks, Mike. So our C&I business has continued to perform quite well in the face of -- as you noted and as we've been noting for quite some time now, in the slowdown, the cyclical slowdown that we're experiencing in the rental markets as well as the telecom markets, which, again, guidance for rental and telecom are largely unchanged for the year. Really, the change has come from our industrial distribution channel, which is, again, they're serving businesses. They're serving the infrastructure like wastewater treatment plants and school districts and other types of applications, a very wide range of applications, health care, manufacturing plants, even data centers, as I mentioned before, data and telco, outside of the strict telecom market that we talk about oftentimes on a direct basis.

Quoting is hanging in there...

Quoting is hanging in there. The quote-to-sale conversion process has continued to hang in there. And we continue to invest in it. And I think all of those things when you line them up are really what are helping us offset the broader weakness in those other markets.

Yes. Yes. Thanks, Jeff. So yes, from a destocking perspective, again, we exited the quarter, February and March, activations and shipments were pretty much in line. So we felt like -- and again, based on all the data we have and based on the extended period here of destocking that we've been experiencing really since the third quarter of 2022, we feel like we're finally through that. And so that's in line with our prior expectations. And that largely is behind, I think, the -- again, as we -- as I mentioned previously, the ability to kind of post those mid-teens increases year-over-year in home standby shipments. So we don't have that field inventory headwind now that that's primarily gone.

Ever.

So I mean we don't...

Preseason forecast.

Personally, we don't tend to put a lot of stock in those forecasts because they -- I have a hard time believing that if you can't tell me what the weather is going to be next Saturday, how can you tell me what it's going to be in September. But again, I think we're looking at longer-term trends around air temperatures, water temperatures, the relaxing of the El Nino events. I think those are things that are important to how forecasters think about the long-term, the bigger cycles around things like hurricanes. So that's coming as well.

But our guidance assumes baseline outage activity, doesn't assume any majors.

Yes.

And I think it's important also to mention like the category is seasonal. So second half is always stronger than the first half.

Definitely.

You would -- if you're assuming baseline level of outage activity, you would expect a nice sequential increase from first half to second half in that home standby business to support our guidance.

Yes. Thanks, Brian. So I mean, obviously, we gave those guidance points last fall. And we're not in a position today to update the next couple of years. But I -- we can talk specifically to Energy Tech and how we're thinking about that. Obviously, the market for solar plus storage, the market for EV charging, the market for some of the products that are within that complex. I would say are weaker today. The near-term market dynamics are clearly more negative coming off of, the pull ahead from NEM 3.0 in California and then just higher interest rates. I think the impact of that's having on those markets and the demand for those products. So that's the negative news.

Yes. Absolutely, yes. No, we were pleased with the gross margin performance that did beat expectation. It was well over 1% increase there versus expectation. And the reality is we guided that input costs would improve throughout the year in 2024. The reality is we just saw the realization of that improvement sooner than we expected here in Q1. So that's great. So the fact that, that came in ahead of sooner than expected. So we got to beat in Q1. And then I guess what that does is just derisks that assumption in the second half, that gross margin improvement that we expect in -- from first half to second half, we're seeing it now. So it derisks that assumption. So that's what's going on behind the gross margin beat.

Yes. I mean, definitely, that is the case, right? I mean the margin profile of the standby products for residential is greater than every product we offer here in the company, frankly. So it's a very strong margin product for us. And so the margin mix to that point would be favorable.

I mean gross margins were up 5% year-over-year in Q1. I'd say half of that was a better mix as home standby grew mid-teens.

Yes. So that's played out. In terms of the competitive landscape, yes, there have been -- there's a couple of kind of developments in the competitive landscape. As you mentioned, one of our competitors here was -- is in the process, I think, of being taken private. They haven't -- are being taken through private equity, and we're a private company already but being acquired by private equity as a carve-out of the bigger enterprise there. We don't believe that's closed yet or haven't been told it's been a closed transaction yet. But, I mean it's interesting to see how it plays out. I mean, take private like that with kind of the -- there's a debt load.

6.25%.

6.25% [ Kris ]. So I think there are -- for us, when you think of every 1% of penetration being kind of a $2.5 billion to $3 billion market opportunity, there's a ton of runway left here, and it's worth the -- it's worth being, I think, being a net investor here, if you will, in the category.

Yes. I mean that's a significant portion of our total domestic C&I sales. So again, it's -- I think when you kind of step back, it's close to 70% of the total for domestic C&I. So it's 70%, 75% of the total, with the balance being, again, the mobile products and telecom products, and again, those are down largely here. So as we documented, they go in cycles. We're a big player in those markets in rental and in telecom. But when those large customers are not spending CapEx there. They -- that disproportionately impacts us because we supply a lot of equipment into those areas.

Yes, Kash. So the -- from an activation standpoint, I mean, modestly, it's kind of at mid-single-digit range, which is, again, not too far off of our expectations in terms of year-over-year. We just -- we kind of expected it to be a little bit softer coming out of the -- we had IHCs in Q4 were lower as a result of the weaker power outage environment, frankly, Q3, we really didn't have much of a season last year in terms of the outage environment. So kind of the back half of last year maybe wasn't -- didn't play out as strongly as it might have historically. And as a result, it just -- you see that play out in fewer installs here year-over-year in the quarter.

Yes. And then your comment about like as residential paces from Q1 to Q2, we did -- in Q1, we still did undership the market. We are still bringing field inventory down and again, by the tail end of the quarter, as we get into Q2, we feel like we're back to normal for the most part. So we still did undership the market. If you recall, we undershipped 2023 by around $300 million. I guess, I would say, 1/4 of that probably a little less than 1/4 of that was what we undershipped the market in Q1 here. So we got back to normal.

Yes. Thanks. Yes. So storage attach rates are up dramatically. Solar plus storage install rates, as we understand them are -- certainly, new solar projects are down significantly. 50%, 60% year-over-year in California. And so you are seeing greater attachment rates because of the NEM 3.0 position. And that's where storage I think you're seeing just the absolute numbers are probably up because of that higher attach rate. California for us, that's a market largely dominated by Tesla. It's not a market that we've historically been strong in. So we're just -- we're really not participating dramatically in that.

Yes. No, I think it's a number of things in terms of -- well, steel is probably our largest input and we've really -- those steel costs, I guess, over the longer term have come down. And as we've been turning through our higher cost inventory, we're just seeing those lower steel costs come through, again, maybe a little bit faster than we originally anticipated. So steel is an important factor. Obviously, logistics, freight costs, while those came down throughout last year and again, we're starting to turn through that inventory and the realization of those lower freight costs, we're starting to see, that's part of the improvement, just better plant efficiencies. I think that's better plant absorption. We're seeing that as well in terms of strong execution there.

And there's lags. I mean...

If you add to the steel side, yes. So copper has gone up. But that, I would say, is in terms of lower impact relative to steel.

Yes. This is -- on the last part on the OpEx guidance, I did -- in our prepared comments, we did mention that the outperformance in Q1 on the gross margin would get roughly offset by a little bit higher OpEx, again, as we continue to invest in those strategic initiatives. It's early. So we basically held the EBITDA margin guide where we had it from last quarter with the offset -- the gross margin outperformance slightly offset by the OpEx side.

Yes. And then on the -- Vikram, on the R&D side, yes, we're spending very heavily largely a lot of those R&D dollars. I mean it's across the board on all of our products, but obviously, the energy tech products. We are knee-deep in our next-generation storage devices, in the residential side that we'll be bringing to market here later this year. And then, of course, our rooftop solar products, power generation products, inverter products that we continue to invest in. We have our next generation, those products coming to market in early '25.

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2024 earnings results with you in late July. Thank you again, and goodbye.