Generac Holdlings Inc. (GNRC)

GNRC 
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Generac Holdings, Inc. (GNRC)

Q4 2012 Earnings Call

February 14, 2013 9:00 AM ET

Executives

York Ragen – CFO

Aaron Jagdfeld – CEO

Analysts

Andrew – BMO Capital Markets

Jerry Revich – Goldman Sachs

John Quealy – Canaccord Genuity

Jeff Hammond – KeyBanc Capital Markets

Chris Glynn – Oppenheimer

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full-Year 2012 Generac Holdings Incorporated Earnings Call. My name is Dominic, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to York Ragen, the Chief Financial Officer. Please proceed.

York Ragen

Good morning, and welcome to our fourth quarter 2012 earnings call. I’d like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, our President and Chief Executive 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 our 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’ll now turn the call over to Aaron.

Aaron Jagdfeld

Thanks, York. Good morning, everyone, and Happy Valentine’s Day, for joining us today. We’re pleased to report our fourth quarter and full-year 2012 results this morning, which we believe clearly provide further validation of the powerful macro growth drivers for our business and demonstrate the strong execution of our strategy. Our Powering Ahead strategic plan has served as the framework for the significant investments we have made over the past two years to drive penetration of home standby generators and develop new products that strengthen our leadership positions in the residential and C&I markets that we serve.

Additionally, we have made two strategic acquisitions in last 16 months, that have given us access to new products, new markets and new geographies, so the purchase of the Magnum – the Magnum Products business in October 2011 and the Ottomotores business late in the fourth quarter of 2012. The investments we have been making have helped to accelerate our growth and are important part of our transformation of Generac into a more diverse and globally focused company.

In the fourth quarter, our net sales increased 28% over the prior year to a record level of $342 million, with strong and broad-based organic revenue growth across the business. This impressive revenue growth follows a strong prior-year fourth quarter in which we grew 66% over the fourth quarter of 2010. We converted these record shipments during the fourth quarter of 2012 into record levels of adjusted EBITDA and free cash flow.

Our results for the quarter exceeded our previously raised expectations and also exceeded those of the analysts who cover our company as a result of strong operational execution, as demand increased dramatically for home standby and portable generators due to awareness created by Superstorm Sandy and other major outage events in recent years.

In addition to a tremendous quarter for our residential products, our commercial and industrial product net sales were also strong on an organic basis as compared to the prior-year quarter, driven primarily by increased shipments to our national account customers.

On a full-year basis for 2012, we achieved a number of important accomplishments and milestones highlighted by a record level of revenue of $1.176 billion, representing a 49% increase over a very strong 2011 in which we had revenue growth of 34% over 2010.

Similar to our fourth quarter results, we experienced significant growth across all product categories and regions in the United States. The major power outages occurring in 2011 and 2012 continue to demonstrate just how fragile the nation’s electrical grid has become, as a result of significant under investment.

While the outages of the past two years are noteworthy for their scale and impact, the fact remains that over the last two decades severe outages have been increasing at a nearly 20% compounded annual rate, based on data reported by the National American Electric Reliability Council. It’s now estimated that on average between 250,000 and 500,000 people every day across the U.S. lose their power for some period of time. We don’t even have to look further than this year’s Super Bowl, where the component failure resulted in a 34-minute blackout during the game.

These higher profile outages as well as the everyday outages we all experience have created significant awareness for the need for backup power for homes and businesses. This increased level of awareness combined with our greater marketing and distribution efforts have driven higher interest and demand for our home standby and portable generators, as well as our commercial and industrial emergency backup systems. We have worked very hard over the last decade to build the Generac brand in one of the leading names in the backup power space in the U.S. In particular, we have been tremendously successful in making the Generac name synonymous with the home standby generator category, where we hold a dominant 70% share position in this rapidly growing market.

Our ability to satisfy this growth has required us to make major investments in the infrastructure of the company to accommodate what we believe to be a new and higher baseline of sustainable demand for our products. With our improved scale, we’re adding manufacturing capacity to investments and automation, improved utilization and the expansion of our manufacturing footprint.

In addition to more manufacturing capacity, we’ve used the positive momentum in our business to aggressively add engineering and sales resources to drive our strategic growth initiatives forward at an accelerated pace. We believe these investments are a critical and necessary element of our ability to continue to grow successfully into the future.

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