Generac Holdlings Inc. (GNRC)

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Generac Holdings Incorporated (GNRC)

Q2 2013 Earnings Conference Call

July 31, 2013, 09:00 AM, ET


York Ragen - Chief Financial Officer

Aaron Jagdfeld - Chief Executive Officer


Christopher Glynn - Oppenheimer

John Quealy - Canaccord Genuity

Jeffrey Hammond - KeyBanc Capital

Ross Gilardi – Bank of America/Merrill Lynch

Stanley Elliott – Stifel Nicolaus



Good day, ladies and gentlemen and welcome to the Second Quarter 2013 Generac Holdings Incorporated Earnings Conference Call. My name is Katrina and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a Q&A session towards the end of the presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. York Ragen, Chief Financial Officer. Please proceed.

York Ragen

Good morning and welcome to our second quarter 2013 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'll 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 thank you for joining us today. We are pleased to report our second quarter 2013 results this morning, which we believe continue to demonstrate the powerful macro growth drivers for our business as well as the ongoing progress we are making in executing our Powering Ahead strategic plan.

Our second quarter net sales increased 45% over the prior year to $347 million with very strong double-digit organic growth which remain broadly based across our product categories at all major regions in United States. We are particularly impressed with the organic growth that we have experienced when considering as follows the prior year second quarter in which net sales increased nearly 50% over the second quarter of 2011. We converted this robust revenue growth into even higher growth rates for adjusted EBITDA and adjusted earnings per share of 65% and 64% respectively, as we saw a 320 basis point improvement in EBITDA margin during the quarter versus prior year.

Growth in shipments of home standby generators were again very strong during the quarter as the market for these products continues to develop with more home owners becoming aware of the importance of having a backup power system. As home owners experience more frequent and longer duration power outages, they are increasingly seeking technology solutions which ensure their basic comfort, safety and expected standard of living. As a result, home standby generators are becoming more mainstream, given this increased need and awareness.

The accelerated adoption rates for these products has led to further expansion of our residential and light commercial distribution network, ending the second quarter with over 5100 dealers which is nearly a 1000 more since the end of 2011.

As we support the increased awareness with expanded distribution, we believe we are driving a new and higher baseline level of demand for home standby generators. As the clear leader in the home standby generator category over the last decade with approximately 70% market share, we believe it is incumbent upon us to continue to drive growth and increase the penetration rate of this emerging backup power solution in household across the United States.

We are supplementing the main growth drivers of an extended afterglow period and expanded distribution with some new and exciting sales and marketing initiatives to further increase the awareness of home standby generators. These initiatives include our AMP targeted marketing process, our power play in-home selling solution and our recently launched national advertising campaign.

The number of dealers using power play continue to grow during the second quarter as we are well on our way to achieving an approximate 20% adoption rate by our dealer base by the end of the year. We are very pleased with this rollout so far as we are still seeing a notable improvement in sales closure rates for dealers using this new and innovative sales tool.

In addition, our power you control direct response television advertising campaign was recently launched at the end of May, and we are selectively targeting certain national networks as well as specific local regions of the country. Although still early in the campaign, we are encouraged with the response rate relative to other forms of direct marketing.

The sales leads we are generating come directly into our lead management team here at Generac where they are qualified and directed to our dealers who are using power play thereby leveraging our investment and increasing the likely closure rate.

With penetration rates at only approximately 3% of single family unattached houses in the U.S. we believe there remains a substantial opportunity for us to continue to grow the market for home standby generators.

We also experienced a strong double-digit year-over-year increase in portable generator shipments during the second quarter of 2013 to the combination of inventory replenishment and overall expanded placement for these products at our retail customers. Shipments of portable generators during the first half of 2013 have significantly exceeded our expectations. Unlike previous major power outages where demand for portable generators increases rapidly and then settles back down to baseline relatively quickly, we are seeing a longer tail of demand following super storm Sandy. We believe this extended period of elevated demand as well as further market share gains have driven our outperformance of portable generator shipments so far in 2013.

Our ongoing success in portable generators after reentering this product category in 2008 has further solidified our leading position in providing a full range of backup power products to the residential market. In doing so, we have positioned the Generac brand as being the household name in backup power.

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