Generac Holdlings Inc. (GNRC)

GNRC 
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Generac Holdings, Inc. (GNRC)

Investor Day

November 08, 2012, 10:30 a.m. ET

Executives

Mike Harris - Director, Finance and IR

Aaron Jagdfeld - President and CEO

Russ Minick - EVP, Residential Products

Terry Dolan - EVP, Industrial Products

York Ragen - CFO

Analysts

Jeff Hammond - Keybanc Capital Markets

Steven Hill - First Investors

Mike Halloran - Robert W. Baird

Brian Drab - William Blair

John Quealy - Canaccord Genuity

Presentation

Mike Harris

Good morning everyone my name is Mike Harris, Director of Finance and Investor Relations here at Generac. I’d like to welcome everyone to our Investor Day. We like to take this opportunity to thank everyone for taking time out of their very business schedule, be with us here today as well as both people who are login on to our webcast via the internet. We certainly have a lot to cover here today in our presentation, so I will quickly give an overview of the agenda for today.

Aaron Jagdfeld, our President and CEO will start off by giving a high level overview of Generac, discuss recent accomplishments as well as give an overview of the company’s growth strategy powering ahead. Russ Minick, Executive Vice President of Residential Products will discuss our plans to grow the residential market. Terry Dolan, Executive Vice President, Industrial Products will then give an overview of our initiatives to gain share in the industrial market. Aaron will then discuss the last two components of our growth strategy which (inaudible) the company’s end markets and expand our business internationally. York Ragen, our Chief Financial Officer will wrap up the presentation by discussing financial growth targets over the next three years. We will then open up the presentation for the Q&A session.

I want to make everyone aware that we have posted to the Investor Relations section of our website the actual slides for today’s presentation and that is located under the investor presentations link. We will begin our presentation and webcast today by commenting on certain 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 these forward-looking statements. Please review the forward-looking statements slide within the presentation or Generac’s 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 presentation; additional information regarding these measures is available in our SEC filings.

So, with that I will now turn the podium over to Aaron Jagdfeld, our President and Chief Executive Officer. Aaron?

Aaron Jagdfeld

We got little bit of light attendance here at the plant today, obviously we have any going on, you can travel with a bit of a nightmare. We can target some people. They are going to end up going us here midstream, so apologize for that. But for those of you who are able to join us this morning this is a brand new building we just opened it on Monday. So, welcome to what we think is a big part of this is kind of the physical manifestation of the growth of Generac over the last four, five years, but we think that what you are going to see today is for those of you who are familiar with the company, you are going to see kind of a layer deeper on the initiatives that are going to drive our growth going forward.

And so as Mike said, the goal here today is for me I’m going to go through and give a little bit of just background for those of you who maybe not or not as familiar with the company and certainly we have quite a few people that this is being webcast so have quite a few people on the phone that may also not be as familiar with the company. So, I apologize if you have been through. So many IR presentations we have done in the past and these slides on the front here are going to look a little bit the same. But though we are going to do is very quickly send the bulk of the day really digging into on the residential side of our business as well as the industrial side of our business. Kind of the underlying initiatives that we feel for the next several years that are going to continue our growth going forward.

So, let’s start with this Slide 5, the investment highlights. Again for those of you who know the company, best in class organic revenue growth. We have been growing at about 15% compound annual growth rate over the last decade and we will go through some of that growth and how we think that that is going to continue going forward.

We are the market leader in many of our end markets and we have built significant barriers to entry in many of those markets, we will also cover that. We have a fantastic or as we refer to here superior financial profile. Generac is a highly profitable company with great free cash flow characteristic and we will talk through that as well.

Very strong product market and geographic expansion opportunities, and that’s really what we are going to focus the bulk of the day on today, is what are those opportunities and how are we going to go after them.

So, little bit about Generac, if you don't know we started in 1959 by an engineer (inaudible) really about 2 miles west of the plant here in a barn in Waukesha, Wisconsin. That’s where this business was started, the classic American tale, the founder of the business started it, actually started the precursor to that the Generac business. A few years earlier that failed but in classic entrepreneurial fashion he continue to persevere and started Generac, founded in 1959. We’re an engine and power generation company and you can see on the LTM basis there with the pie chart about $1.1 billion in sales on an LTM basis through our third quarter. Now that’s significant because if you wind the clock back at the end of 2007 that was about 550 million. So, we doubled the company since 2007 which I think is a pretty amazing feet. So less than five year's we have been able to do that.

60% of our business from a revenue standpoint comes from residential, the balance of the business comes from commercial and industrial and in the other category would be service parts and we have got the (inaudible) engine that we sell to other OEMs out there. We distribute our products with a very broad multilayer distribution network and I will cover that as well. We have about 2200 employees and we now have about 1.4 million square feet of manufacturing and distribution and some of that yes you are going to get a chance to visit here a little bit later today as we tour the Whitewater factory. All of that distribution and that manufacturing capacity is located year-end. The same Wisconsin now in five plants.

This chart here on Slide 7, our organic growth record, most of it's being organic and I will explain here in a second. But from 2000 and 2011 as I mentioned 15% CAGR, all of that through last year was organic. Last year in October, about 2011 we closed on the first acquisition the company had ever actually embarked on which is the Magnum product business which we will cover here in a second and that obviously has been a very good business for us and is a part why we are able to achieve some of the growth that we have seen currently in the current year.

Our history of innovation, our culture of innovation we believe is a huge part of why this growth looks the way that it looks. But again a lot of this was organic; it's not all of it up until last year. And I think it's very unique to see a company that has this kind of growth trajectory strictly from organic growth.

Products that we manufacture and distribute you can see on the left hand side of this graphic on Slide 8, the residential product. Starting with our power market and portable generators all the way down through air-cooled and liquid-cooled home standby or serving the residential market and then on the right hand graphic here, our industrial products.

The first three products pictured on the right will be products required in the Magnum products deal a year ago. Rest it's going to be light towers, mobile generators and mobile phones. And the bottom two pictures there would be what a classic commercial or industrial stationary generator looks like (inaudible) so those are the products you are going to see.

Today over here on the left hand side, you are going to see these products on the residential side with the factory visit in Whitewater. That’s the product, that’s the factory that manufactures the bulk of those products. And you can see those being today later on.

Now I think it's important when we talk about Generac, that we step back when we talk about the macro growth drivers for power generation. And the power generation industry which of course right now are very topical and very top of mind given the kind of issues that we have seen around the country. Certainly more prevalent (inaudible). And that all starts with the aging infrastructure. The grid has been holistically under [resident] and it continues to grow older every year. That has led to a situation where the grid is incredibly susceptible to major events.

It doesn’t matter what your position is on global warming or what’s your position is on, are we going to have a more storms, are they more severe storms. The fact of the matter is that the infrastructure continues to be susceptible and become even more susceptible every year. And so the susceptible of the infrastructure that I what causes an outage. It's that infrastructure that continues to fail with the country. And that under investment has gone on for two or three decades now. It's starting to rear what we had.

We are really manifesting itself is in this bar chart here. You see that the number major outage and these are outages tat impact more than 50,000 people on an annual basis. This is the North American Electrical Reliability Council or NAERC as it's known, these are federal statistics. You can see the inflect point here in the number of outages, major outages that occur year-after-year. This is highly co-related to the investment gap in terms of the transmission and distribution of power generation asset in the country. So as power outages continue to grow and under investment that gap continues to grow. We see that we are in the right space at the right time being a backup power generation company primarily.

Now, compounding that, when we look at our residential side of our business in particular is the fact that we have an aging population. So, not only is the grid infrastructure aging will aging. As the population of the society we can feel the age. What we want to do when we age. We want to stay in our own homes, the concept is known as aging in place. Today everybody wants to stay in their home as long as they possibly can. The fact of the matter is, staying in that home after you retire until you can’t stay there any longer, you can prolong the amount of time you can stay in your home if you do some things in the house, maybe it's reducing the size of the tower top or lowering accounts (inaudible) switching on the wall, you got that certain security systems maybe you add to the home.

Putting a backup generator on a home for somebody who plans to be there for the next 15 or 20 years during retirement is absolutely becoming a necessity. Not only just from basic climate control, air conditioning, your furnace that type of thing, general lighting, those how all the things that make a lot of sense. But think of the other things that are going on as you are aging your home, you need refrigeration ,you maybe have medicine, insulin or other medicines that need to be refrigerated, without power you don't have refrigeration, you have a lot of home medical devices that are making their way into the home. Oxygenation is a big one, a lot of that oxygenation equipment runs off your power grid, so you have things like; you have basic services like phone. It used to be a number of years ago; we all had no [mobile phones] that 5 volt of electricity that came through that top of wire, so when you pick up that phone even if your power is out your house you still had a dial tone. You could still dial 911 if you had a problem.

Today rolling the triple play, we rolled out cable phone and internet being provided to a Comcast or Time Warner or whoever your provider is. When you don't have power today you don't have a phone. So if you are elderly, or if you are young and you don't have a phone, if you maybe have a mobile phone, business that phone going in the last one the battery last, you are going to recharge it. So, really you start getting into a serious issue of light safety and so light safety is driving in particular the demographics for the buyer of our product. Over 80% of the buyers of our home standby generator is over age 50. So, it definitely skews quite a bit older because of some of those light safety concerns and also because of property protection concerns.

If generator protect your [sunk pump] in your basement, right. When does your [sunk pump] not run when the power is out, right? When your basement flood when it's raining, when is the power generally out when it's raining. So, you have a bad conflict events there, so a backup generator can help protect your investment what is mostly the largest investment which is their home.

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