Generac Holdlings Inc. (GNRC)

GNRC 
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Generac Holdings, Inc. (GNRC)

Q3 2012 Earnings Conference Call

October 31, 2012 09:00 a.m. ET

Executives

Aaron Jagdfeld – President & CEO

York Ragen – CFO

Analysts

John Quealy – Canaccord Genuity

Charles Brady – BMO Capital Markets

Christopher Glynn – Oppenheimer Securities

Jeff Hammond – KeyBanc Capital Markets

Jerry Revich – Goldman Sachs & Co

Jeff Hammond – KeyBanc Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Generac Holdings Inc. Earnings Conference Call. My name is Tahisha, and I’ll be operator for today. At this time, all participants are in 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 your host for today, Mr. York Ragen, Chief Financial Officer. Please proceed.

York Ragen

Good morning and welcome to our third 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 thank you for joining us today. Before we begin this morning, I want to say that our thoughts and prayers go out to those that are currently being affected by the major storm at the East Coast. This storm was built significant with regards to shrink for the large region that has impacted. Our teams at Generac are working around the clock producing and shipping products to the affected regions, assisting customers with their questions and providing technical support to our distribution partners.

As the company focused very heavily on backup power generation, our business model has built around providing a very high level of service and support during times like these. In addition to our teams here at Generac, we have the industry’s largest and most well trained generator-dealer network of more than 4,500 partners that are focused on taking care of our customers during major outage events.

We believe that this event as well as other recent outages will have a positive impact on our results going forward. And accordingly, we have significantly raised our guidance for the remainder of 2012.

Now I’d like to turn our attention to Generac’s third quarter results, which we believe continue to demonstrate the accelerated option of standby generators into the residential and life commercial markets. Our third quarter net sales increased 26% over the prior year to $300.6 million. This follows the third quarter of 2011 that grew 49% over the third quarter of 2010. The significant growth that we have delivered over the last several years clearly illustrates the progress that we’re making in executing our Powering Ahead strategic plan

Growth in shipments of home standby generators were again strong during the current year third quarter as the market for this product category continues to develop with more homeowners becoming aware of the importance of having a backup power system for their home. As a result of our execution and meeting the increased demand for these products during the current quarter, we believe we have expanded upon our leading market share position for home standby generators, as consumers further realize the advantages of the Generac branded, including the breadth of our product offerings, our industry-leading price points, and the support we provide for both our customers and our distribution partners.

Major power outage events continue to be an important catalyst for demand and highlight the powerful macro drivers for our business as the prolonged underinvestment in the aging electrical grid is leading to more frequent and longer power disruptions for homeowners and businesses. Although the category has been growing at a compounded annual rate of nearly 17% over the last decade, home standby generators are only installed in roughly 2.5% of all single family and attached homes.

The market opportunity for these products remains very attractive with every 1% of additional penetration representing $2 billion of market value. As the leader in this relatively nascent market with over 70% share, we believe Generac is very well positioned for additional future growth in our residential markets. The latest series of major power outages have helped to create additional momentum and the awareness for automatic backup power solutions for homes, and this is awareness coupled with our greater marketing and distribution efforts have continued to drive significant baseline growth for home standby generators in North America.

With regards to our Commercial & Industrial products, an important driver for our business going forward, is the increased market interest in cleaner-burning, more cross effective natural gas fuel backup power solutions. While still a much smaller portion of the overall C&I market, demand for these products is increasing at a faster rate than traditional diesel fuel generators given their lower capital and operating costs.

As a leader in the North American market for natural gas fuel generators for over 30 years, we believe we are well positioned to capitalize on the secular shift towards these products. During the current year third quarter, we continued to see a year-over-year increase in natural gas generator shipments providing attractive organic growth for our C&I products.

In addition to natural gas fuel generators Magnum branded light towers and mobile generators have also performed well as demand for mobile equipment continues to benefit from a secular shift towards renting versus buying, and as the equipment rental companies replace their aging fleets. We’ll remain excited about the strategic fit of these products through the additional diversification and cross-selling opportunities they bring to our business.

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