Earnings Call Transcript
GENERAC HOLDINGS INC. (GNRC)
Earnings Call Transcript - GNRC Q3 2020
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Third Quarter 2020 Generac Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mike Harris, Vice President of Corporate Development and Investor Relations. Please go ahead.
Mike Harris, Vice President of Corporate Development and Investor Relations
Good morning and welcome to our third quarter 2020 earnings call. I’d like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer, and York Ragen, Chief Financial 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 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 US GAAP measures, is available in our earnings release or SEC filings. I will now turn the call over to Aaron.
Aaron Jagdfeld, President and CEO
Thanks, Mike. Good morning, everyone, and thank you for joining us today. We're very pleased to discuss our financial results reported earlier this morning, in which net sales, adjusted EBITDA, and adjusted EPS were all by far, all-time records for Generac. Third quarter revenue easily exceeded our prior forecast, and adjusted EBITDA margins were also well ahead of the previous guidance. Power outage activity was dramatically higher during the quarter as a result of a record Atlantic hurricane season, a severe wind event in the Midwest, and high heat and growing wildfire risks in the western U.S., which led to higher shipments of both portable and standby generators, as well as aftermarket service parts. The extreme level of power outages, combined with the continuation of the home as a sanctuary trend led to unprecedented demand for home standby generators during the quarter that was broadly based across the entire U.S. We are aggressively ramping production levels for home standby generators, and there is a substantial backlog for these products that continues to grow during the fourth quarter. Year-over-year, overall net sales increased approximately 16% on a core growth basis as compared to the strong prior year quarter. Dramatic growth in sales of home standby and portable generators, coupled with shipments for the recently launched PowerCell Energy Storage system, drove the net sales increase in the quarter. Very strong growth in aftermarket service parts and chore products also contributed to the revenue increase compared to the prior year. Partially offsetting this significant strength was a decline in shipments of C&I products. Gross margin expanded 320 basis points compared to the prior year, and adjusted EBITDA margin increased 450 basis points over the prior year to 25.5%, both of which were the highest margins reported since the fourth quarter of 2013. Before discussing third quarter results in more detail, I'd like to stress that as the COVID-19 pandemic continues to evolve, a high degree of uncertainty still remains regarding potential additional waves of the virus, the magnitude and timing of an economic recovery, and the potential additional impacts on our end markets and overall business. However, as we have previously commented, our historical performance has repeatedly shown that demand for residential products can decouple from broader macroeconomic trends. And this has certainly proven to be the case during 2020. The combination of the dramatically higher power outage environment, along with the increasing trend of home as a sanctuary, is leading to a further increase in our full year revenue and earnings outlook for 2020, including higher expectations for the fourth quarter compared to our prior guidance. We'll provide further details regarding this updated guidance in the outlook portion of our prepared remarks this morning. Now discussing our third quarter results in more detail. Several key metrics that we monitor closely for home standby demand continued to be exceptionally strong during the quarter. Activations once again grew at a very substantial rate compared to the prior year, with broad-based strength across all U.S. regions and Canada. This strength was led by robust growth in the Western U.S., driven by California, and very strong double-digit increases in the South Central, Southeast, and Northeast regions. The combination of in-home and virtual consultations rose during the third quarter in every single state in the contiguous U.S., with the majority of the states showing triple-digit growth, which we believe provides further support for the emerging home as a sanctuary trend. The power outage severity environment also continues to be favorable and trend well above the long-term baseline average in recent years. The significant outage activity was broad-based across the major regions of the U.S. and included a major event in Hurricane ESA which drove significant demand in the key Northeast region. We also ended the third quarter with over 7,000 residential dealers, an increase of approximately 800 or 13% over the last 12 months. This includes a significant increase in California ramping up to approximately 550 dealers at the end of the quarter, which is roughly 300 dealers higher compared to the end of the prior year third quarter. More recently, early in the fourth quarter, these key demand metrics for home standby have continued to be much higher relative to prior year levels. Recall that we previously discussed trends with home consultations that were up approximately double compared to the prior year, and this tremendous strength has continued through October. We believe this increase can be attributed to several factors: the emerging trend of Americans viewing their homes as a sanctuary, the extreme level of outage activity during the third quarter, overall elevated baseline outages over the past several quarters, the active wildfire season in rolling blackouts in California, and the increasing awareness of the need for backup power. With demand for home standby generators at an all-time high, we've been working aggressively to ramp our supply chain and production levels, and we achieved record daily build rates by the end of the third quarter. We continue to further ramp production levels for these products during the fourth quarter to significantly increase build rates well above previous peak levels and we are evaluating plans to put additional permanent capacity in place early in the second half of 2021. Despite our operations teams working around the clock to ramp up standby production as quickly as possible, the unprecedented strength and demand seen over the past several months has led to extended lead times for these products. We had a substantial backlog for home standby generators at the end of the third quarter, which continues to grow during the fourth quarter, and we expect to enter 2021 with a very high level of open orders for these products, far exceeding anything previously experienced. Recall that Generac created the home standby category over two decades ago, and the market continues to significantly expand, with every 1% of penetration representing approximately $2.5 billion of additional market opportunity at retail prices. Despite the unprecedented home standby activity being experienced during 2020 in the form of home consultations, orders, build rates, activations, and net new dealers, the reality is that the overall penetration rate for the product category is only expected to be slightly over 5% at the end of the year. With demand for home standby generators being uniquely aligned with some key megatrends and secular growth drivers, we believe there remains considerable room for this dynamic market to continue to grow over the next several years. Also benefiting from the continuation of the home-as-a-sanctuary trend, we experienced strong growth for our core products during the quarter. Recall that core products consist of a wide range of specialty outdoor power equipment, including field and brush mowers, chipper shredders, log splitters, stump grinders, and pressure washers used in a variety of property maintenance applications. The strength experienced during the quarter included the sale of these products directly to consumers as homeowners increased outdoor project activity while spending more time at home. And so far, in the fourth quarter, demand continues to outpace normal seasonality. In September, we further expanded our broad lineup of core products by entering the battery-powered commercial mower market through acquiring the assets of Mean Green products. Based in Ross, Ohio, Mean Green is a leading manufacturer of an innovative line of commercial zero-turn and walk-behind battery-powered turf care products. Importantly, this equipment provides quiet operation, zero emissions, and minimal maintenance requirements compared to traditional commercial mowers. The acquisition will support our goals to integrate and develop new battery-powered solutions by accelerating the electrification of our lineup of higher powered Core Products. Rounding out our discussion on residential products is an update on clean energy. The secular growth opportunity within the U.S. market for energy storage and monitoring systems remains very compelling, particularly around the increasing resiliency desired from these products, which is driving residential solar attachment rates that are currently approaching 30%. Shipments of our PWRcell Energy Storage Systems recovered as expected during the quarter and were a key contributor to the company's year-over-year growth, and we are expecting a further significant sequential increase in shipments during the fourth quarter. We are making important strides in growing the still nascent market for energy storage through targeted advertising, lead generation, sales capabilities, along with expanding our distribution capabilities, including our strategic partnership with Senova. Our new clean energy infomercial began airing earlier this year and continues to drive good volume into our lead management and selling system that we call PowerPlay CE. We are very encouraged by the trends with home consultations for PWRcell Systems as they accelerated during the third quarter and have continued to be strong so far in the fourth quarter. System activations, which are a proxy for installations and commissioning, have also improved notably in recent months as compared to the second quarter, providing further proof of the V-shaped recovery for the clean energy market. We have made tremendous progress in ramping our clean energy products from essentially a startup in 2019 to year one revenues for 2020, which are expected to be in line with our previous guidance and which are far ahead of the expectations we laid out at our Investor Day last September. We achieved profitability for these products during the month of September and were roughly breakeven during the quarter, and we were expecting to achieve our first full quarter of profitability in Q4. We have accomplished this by significantly advancing our capabilities with our supply chain through increased volume and reduced system costs. We have also had several important new product introductions in 2020, and we continue to develop an innovative pipeline of additional clean energy products that will be coming to market over the next several quarters. We believe this will further enhance our competitive position and differentiation in the energy storage, monitoring, and management markets as we focus on whole house storage solutions with load management capabilities that provide the energy independence consumers really want in these systems. We remain extremely excited about the long-term growth opportunity for our clean energy products, including the potential to leverage and combine our new clean energy capabilities with our core competencies and strategies around our legacy natural gas generators. We believe this will better enable us to enter new and adjacent markets that align with the evolving megatrend around Grid 2.0, which is the evolution of the traditional electrical utility model, including decentralization of the grid and a migration towards distributed energy resources. To help accelerate our involvement with this trend, earlier this month, we closed on the acquisition of Enbala Power Networks, a leading distributed energy resources technology company based in Denver, Colorado. Enbala's best-in-class technology will enable us to participate in the market for grid services, which we see as a growing opportunity. The company's cloud-based platform is being used by utilities and energy retailers to leverage the power of distributed energy resources to respond to the real-time energy balancing needs of power systems and energy markets. Distributed Energy Resources, known as DERs, are systems that can generate, store or manage power, such as our residential or C&I natural gas generators, our PWRcell Energy storage systems, and our devices that enable load management. In areas where grid stability is needed, these DER assets can be connected to Enbala's software platform and can be aggregated into a decentralized and virtual power network to provide flexible capacity to address peaks in electricity supply and demand. Importantly, Enbala has an open software platform that is both brand and equipment agnostic, providing the capability to connect to a wide range of assets or systems. The platform is currently being used in areas worldwide, where the increasing use of renewable energy creates more variability in supply, and where resiliency is needed due to power outages. A recent ruling by the Federal Energy Regulatory Commission, known as FERC 2222, is a timely development for Enbala as it mandates utilities create programs that allow DERs to participate in the wholesale electric market. We believe this ruling will accelerate the overall move towards a decentralized grid by providing a path to connect and monetize both legacy and new DERs. This could result in opportunities to leverage the existing installed base of natural gas generators and energy storage systems by connecting them to software platforms such as Enbala's, thereby turning them into much more productive assets. Enbala is an important acquisition for us as we continue our evolution from an equipment manufacturer to an energy technology solutions company. Now with regards to our C&I products, as expected, the COVID-19 pandemic has continued to have a significant adverse impact on the overall market for global power generation and related equipment, given major declines in GDP growth rates around the globe. Domestic shipments have seen a decline during the third quarter as compared to the prior year, but came in ahead of our expectations. While there remains some uncertainty relative to the pandemic, and although we still expect shipments for domestic C&I products to decline on a year-over-year basis during the fourth quarter, the magnitude of the declines are slowing. As expected, shipments of mobile products and national rental account customers declined significantly during the quarter, primarily due to the continued impact of the pandemic and lower oil prices. Demand for mobile equipment had already begun to soften as we entered 2020, with many of our national rental customers reducing their capital spending budgets for the year. But the sudden decline in economic activity and corresponding drop in fleet utilization that occurred in March forced them to further and dramatically reduce equipment purchases. As we are expecting continued demand headwinds for domestic mobile products in the near term, we have focused our efforts on cost reductions and other restructuring actions, which we began implementing in the second quarter. We remain optimistic about the long-term opportunity for mobile products as an expected fleet replacement cycle nears and the compelling mega trend around infrastructure improvement, which could be aided over the next couple of years by economic stimulus. Shipments to national telecom customers also declined on a year-over-year basis, but we're also ahead of our prior expectations. More recently, we are seeing indications from several of our large telecom customers of an improving outlook, and we are now expecting overall shipments to grow in the fourth quarter compared to the relatively soft prior year comparison. Recall the demand trends for these customers can vary from quarter to quarter based on the timing of their capital spending and their project planning cycles. Historically, however, demand for telecom backup power tends to increase after periods of elevated power outage activity, similar to what we experienced during the third quarter. In addition, the California Public Utility Commission in July passed the mandate requiring a minimum of 72 hours of backup power at all cell tower locations in the state, which is expected to be implemented over the next three years, beginning in 2021. We've been in contact with the wireless operators in California to better understand the market opportunity and to gain better insights into their network spending plans related to this new mandate. While we're still in the early stages of understanding the impact, we currently estimate the backup power opportunity for the state could range between $100 million to $200 million over the next three years beginning next year. The incremental demand for Generac will depend on whether or not existing capital spending by the carriers is reallocated to California from other regions in order to meet the requirements of this new mandate. Lastly, shipments of C&I stationary generators through our North American distributor channel were also lower in the quarter, but the decline was less than expected. While this channel initially experienced a large decline in quotations for new projects in March and April during the onset of the pandemic, project quoting activity has largely recovered since then, which has improved the overall order outlook for this channel. We also continue to experience encouraging growth trends for natural gas generators, particularly in the higher kilowatt ranges as we begin selling into applications beyond emergency standby power. Additionally, results for our C&I products now include the acquisition of Energy Systems, our industrial distributor located in Northern California, on which we closed the acquisition on July 1st. This acquisition expands our presence in the rapidly growing California market and enhances our ability to serve one of the largest power generation markets in the U.S. for both C&I and residential products. The ongoing global pandemic continued to have a significant impact on C&I product demand outside the U.S. and Canada during the third quarter as well. As GDP growth rates have been sharply reduced around the world, revenues for our international segment in the third quarter declined approximately 12% on a core basis when compared to the prior year. This decline was broad-based across numerous markets and further magnified the slower economic growth and geopolitical headwinds that were already being felt prior to the pandemic. Despite this weakness and uncertainty in the global market, overall international revenue during the third quarter was modestly ahead of our expectations. And our current full-year outlook is now more favorable for this segment as certain regions are trending better than previously feared. Importantly, despite the decline in revenue during the quarter, adjusted EBITDA margins for our international segments still expanded 310 basis points to 7.9%, primarily due to lower operating expenses as a result of the restructuring activities that we initiated during the second quarter. Similar to our domestic C&I products, we believe international shipments will continue to decline on a year-over-year basis during Q4, but with the magnitude of the decline slowing relative to recent quarters. Our international teams remain focused on several critical global initiatives around increasing the penetration of natural gas generators for residential and C&I applications, expanding our share globally in the important wireless telecom backup power segment, and entering the emerging energy storage market for both residential and C&I applications. In closing, this morning, I'm extremely proud of our team as we are on pace for another year of record financial results, including more than 10% core revenue growth. This is only made possible by the tireless execution of our 6,500 employees globally across the company, which has been even more difficult this year in the face of the COVID-19 pandemic. Generac continues to benefit from a number of megatrends and macro secular themes. In fact, we believe these trends and themes are more compelling today than they've ever been, when considering the emergence of the new home as a sanctuary trend, the effects of extreme weather driving continued power outage activity, and the company's increasing capabilities with clean energy products and grid services, which is allowing us to participate in the evolution of the traditional electrical utility model. In addition, we're confident that once we get through this pandemic, our future growth prospects for our C&I products remain very compelling, driven by the increasing penetration of natural gas generators in a wide variety of applications, wireless telecommunications shifting to the 5G architecture, and the major investment cycle needed for legacy infrastructure. Supplementing these powerful trends and drivers is our considerable financial strength, liquidity, and free cash flow generation that puts us in the enviable position to aggressively invest further in a number of strategic initiatives to accelerate our powering our future strategy. As a result, we remain very excited about our long-term growth prospects and believe the future for Generac is brighter than it's ever been. I now want to turn the call over to York to provide further details on third quarter results and our updated outlook for 2020.
York Ragen, Chief Financial Officer
Thanks, Aaron. Looking at third quarter 2020 results in more detail. Net sales increased 16.7% to $701.4 million during the third quarter of 2020, an all-time record as compared to $601.1 million in the prior year third quarter, which was our previous record. The combination of contributions from the Energy Systems and Mean Green acquisitions and the favorable impact from foreign currency had an approximate 1% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the third quarter by product class, residential product sales during the third quarter increased 37% to $458.9 million compared to $335 million in the prior year. As Aaron already discussed in detail, home standby generator sales continue to experience very strong year-over-year growth, which was once again, nearly 30%. In addition to this home standby strength, there was a significant increase in shipments of portable generators during the quarter despite the very strong prior year comparison caused by Hurricane Dorian. Portable generator shipments were at record levels during the current year quarter, primarily as a result of the higher power outage activity, which included demand from Hurricane ECS. Also significantly contributing to year-over-year growth in residential products were shipments of our PowerCell Energy storage systems following the expected recovery in the solar market during the third quarter. Shipments of chore products were also higher during the quarter as the home as a sanctuary trend positively impacted demand for outdoor power equipment. Commercial and industrial product net sales for the third quarter of 2020 declined 18% to $176.2 million compared to $214.9 million in the prior year quarter with a core sales decline of approximately 19% when excluding the impacts from the Energy Systems acquisition and favorable foreign currency. The weakness in shipments of C&I products was broad-based, both domestically and internationally. Domestically, the negative impact of the COVID-19 pandemic drove lower utilization of rental fleets, and as a result, our national rental account customers continued to defer capital spending for our C&I mobile products. In addition, shipments to our telecom national accounts continued to decline as key customers also took a pause in capital spending. Internationally, C&I products declined due to the continued broad-based sharp drop in global demand caused by the pandemic. Net sales for the other products and services category, primarily made up of aftermarket service parts, product accessories, extended warranty revenue amortization, and other service offerings increased 29.4% to $66.3 million compared to $51.2 million in the third quarter of 2019. As Aaron mentioned, very strong growth was experienced in aftermarket service parts as a result of power outage activity being dramatically higher in the current year quarter, a larger and growing installed base of our products, and higher levels of extended warranty revenue. The addition of Energy Systems also contributed to the increase versus the prior year. Gross profit margin improved 320 basis points to 39.4% compared to 36.2% in the prior year third quarter. Operating expenses increased $8.6 million or 7.6% as compared to the third quarter of 2019, but declined 130 basis points as a percentage of revenue, excluding intangible amortization. As a result, adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $178.8 million or a very strong 25.5% of net sales, compared to $126 million or 21% of net sales in the prior year. This 450 basis point improvement in EBITDA margin was driven by impressive gross margin expansion during the quarter, primarily due to favorable sales mix, improved leverage of fixed operating expenses on the much higher sales volumes, and tight cost control. I will now briefly discuss financial results for our two other segments. Domestic segment sales increased 22.6% to $606.9 million compared to $494.8 million in the prior year quarter. Adjusted EBITDA for the segment during the quarter was $171.4 million or 28.2% of net sales compared to $120.8 million in the prior year or 24.4% of net sales. International segment sales, which consists primarily of C&I products, declined 11.1% to $94.5 million compared to $106.3 million in the prior year quarter. Foreign currency had a net favorable impact of only 500 basis points on revenue growth during the quarter. Adjusted EBITDA for the segment during the quarter before deducting for noncontrolling interests was $7.4 million or 7.9% of net sales compared to $5.1 million or 4.8% of net sales in the prior year. Now switching back to our financial performance for the third quarter of 2020 on a consolidated basis. As disclosed in our earnings release, GAAP net income attributable to the company in the quarter was $115 million, compared to $75.6 million in the third quarter of 2019. GAAP income taxes during the current year third quarter were $32.1 million or an effective tax rate of 21.8%, compared to $20.1 million or an effective tax rate of 21.1%. The increase in the effective tax rate was primarily due to the prior year having more favorable discrete tax items compared to the current year quarter, which was partially offset by an overall more favorable mix of pretax income in the current year quarter. Diluted net income per share for the company on a GAAP basis was at $1.82 in the third quarter of 2020 compared to $1.18 in the prior year. The specific calculations for these earnings per share amounts are included in the reconciliation schedules of our earnings release. Adjusted net income for the company, as defined in our earnings release, was $132.9 million in the current year quarter or $2.08 per share, which was also an all-time record. This compares to adjusted net income of $90 million in the prior year or $1.43 per share. Cash income taxes for the third quarter of 2020 were $23.6 million compared to $15.1 million in the prior year quarter. The current year now reflects an expected cash income tax rate of approximately 16% for the full year 2020, which is a reduction from the approximately 17% rate previously expected for 2020, and compares to the prior year expectation of approximately 17% at that time. The reduction in the current year cash tax rate from previous expectations was primarily due to favorable return to provision adjustments reflected in our recently filed corporate tax returns. Cash flow from operations was very strong at $155.2 million compared to $111.2 million in the prior year third quarter. Free cash flow, as defined in our earnings release, was $148.3 million compared to $100.8 million in the same quarter last year. The increase was primarily due to higher sales volumes and resulting net income. Before discussing our updated outlook for 2020, it's important to reiterate our healthy balance sheet and liquidity position at the end of the third quarter of 2020, which allows us to confidently operate our business and execute our strategy even during these uncertain times. As of September 30, 2020, we had $808 million of liquidity, comprised of $514 million of cash on hand and $294 million of availability on our ABL revolving credit facility, which matures in June of 2023. Also, total debt outstanding at the end of the third quarter was $890 million, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the third quarter was only 1.7 times on an as-reported basis. In addition, our term loan matures in December 2026, and we do not have any required principal payments on this facility until the maturity date. Also recall, there are no financial covenants on the term loan, which has a low cost of debt of LIBOR plus 175 basis points. Finally, we have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt to the maturity date in December 2026. Further enhancing our overall liquidity is our strong cash flow profile. Over the last 12 months ended September 30, 2020, cash flow from operations and free cash flow were impressive at $443 million and $397 million, respectively. Lastly, given our strong balance sheet and free cash flow generation, we have significant resources to drive further shareholder value as we execute on our long-term strategic priorities, and our approach toward capital deployment remains disciplined, balanced, and consistent. With that, I will now provide comments on our updated outlook for 2020. As a result of the higher power outage environment experienced thus far in the second half of 2020, along with the increased production rates for home standby generators expected in the fourth quarter, we are raising our full year 2020 guidance for revenue growth to approximately 10% to 12% versus the prior year. This compares to the previous baseline guidance of 5% to 8% growth and is now expected to be at the high end of our previous upside case scenario communicated last quarter when factoring in the additional 2% to 3% of revenue growth associated with a more severe outage environment. Net sales for residential products continue to outpace our expectations due to higher shipments of portable generators from the much higher power outage environment and aggressively ramping up our home standby generator production capacity to record levels. As a result, year-over-year growth for these products is now expected to be even more significant for the full year 2020 as compared to previous expectations, with the fourth quarter expected to increase sequentially compared to the third quarter. Another key driver to our increased revenue guidance is a higher level of shipments of aftermarket service parts as a result of the increase in power outage hours during the third quarter. Revenue growth for C&I products is still expected to be down significantly for the full year 2020 versus prior year, but is moderately better relative to prior guidance. And fourth quarter is also expected to increase sequentially compared to the third quarter. This overall guidance assumes no further deterioration from additional waves of the COVID-19 pandemic. We're also raising our adjusted EBITDA margin guidance for the full year 2020 to be approximately 22.5% to 23%, which is an increase from the 21.5% to 22% previously expected. This improvement is driven by higher operating leverage and lower discretionary advertising and promotional costs, given the favorable demand environment. Operating and free cash flow generation for the full year 2020 is expected to remain strong with the conversion of adjusted net income to free cash flow still anticipated to be approximately 90%. Depreciation expense is forecast to be approximately $35 million in 2020 versus the $33 million to $34 million previously guided. In addition, share-based compensation expense is also expected to be slightly higher at $19 million to $20 million compared to the $18 million to $19 million previously guided. The remaining guidance items provided in previous earnings calls are not expected to change. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.
Operator, Operator
Please be reminded that you can only ask one question and one follow-up. Your first question comes from the line of Tom Hayes from Northcoast Research. Your line is open.
Tom Hayes, Analyst
Thanks. Good morning, gentlemen.
Aaron Jagdfeld, President and CEO
Good morning, Tom.
York Ragen, Chief Financial Officer
Hi, Tom.
Tom Hayes, Analyst
I was wondering if you could talk a little bit, maybe, about the Enbala acquisition. It sounds like a great piece to your complete solutions. So I'm just wondering, kind of, how you see that fitting into that solution set to how you take it to market, any other color you could provide would be great.
Aaron Jagdfeld, President and CEO
Yes, that's a great question, Tom. This acquisition involves a small startup that we are excited to add to our portfolio. Enbala, which means energy balance, consists of a fantastic team with backgrounds in the utility sector and experience from various startups. This company is focused on maximizing the potential of our existing assets, such as the over 2 million home standby generators we currently have. These generators represent a significant amount of potential power, but they are largely underutilized, operating only a few times a year. We believe Enbala's technology can help enroll assets like our generators or energy storage systems into their platform, allowing us to aggregate these resources for utilities and grid operators. This is particularly relevant as we integrate more renewable energy sources, which can create variability and make power supply less stable compared to traditional power plants. Grid operators face challenges like unexpected drops in wind generation or spikes in demand due to weather conditions. The capacity to complement the grid with decentralized assets is a promising area that is expected to expand, particularly as renewable energy mandates become more prevalent. Many states are moving toward requiring higher percentages of power generation from renewable sources, and we see Enbala as a crucial step in transitioning from being primarily a manufacturer of generators to a broader energy technology solutions provider. The technology and talent from Enbala will be instrumental in helping us advance in this direction.
Tom Hayes, Analyst
I appreciate the color. And maybe just as a quick follow-up. Regarding the backlog of the home and standby unit. Just wondering if you could quantify, was there any impact to the Q3 revenue if you guys just had such a backlog?
Aaron Jagdfeld, President and CEO
Well, the Q3 revenue was dramatically up. In fact, orders, we looked at home standby orders. They were about 2.5 times greater than they were the year before. It was massive, we have never seen anything like that. As we talked in the prepared remarks, we have quite a backlog that we ended the quarter with, and that’s only continued to grow here in Q4. We’ve been hitting record outputs in our production environment despite the headwinds of component challenges and manning challenges around the pandemic that are making that difficult. We're achieving record outputs in Q4 here. We've actually brought some additional capacity online at another factory here in Wisconsin. I also mentioned in the prepared remarks we’re in sight for our selection process for another facility, a full second site that will dramatically increase production for home standby, probably coming online sometime in mid-next year, needing to ramp throughout the back half of the year. But that backlog is eye-popping. The good news is this; people have home improvement projects. Our experience historically tells us demand is relatively sticky. Once an order comes in, a dealer takes a down payment, or we start the process of getting permits and the dealer can also do some preparatory work ahead of having to put the generator down. Lead times are extended right now and probably will remain that way for the foreseeable future.
Tom Hayes, Analyst
Thanks. Appreciate the color.
Aaron Jagdfeld, President and CEO
You bet.
Operator, Operator
Your next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Please go ahead.
Jed Dorsheimer, Analyst
Hi. Thanks and congrats on a fantastic quarter.
Aaron Jagdfeld, President and CEO
Thanks.
Jed Dorsheimer, Analyst
I have two questions. The first is quite straightforward. Regarding lead times on the residential side, since you have expanded your dealer network, lead times have increased from eight weeks to 16 weeks in many cases. As we look ahead to 2021, and while I'm not seeking guidance, it seems that the backlog could significantly counterbalance what we generally anticipate in terms of normal seasonal trends. I also have a follow-up question.
Aaron Jagdfeld, President and CEO
Yes, that's right, Jed. To illustrate my point, consider the aftermath of Hurricane Sandy. In 2011 and 2012, we experienced several significant storms, with Sandy being the most impactful, which helped expand our dealer network and increase our backlog. We concluded 2012 with what we believed was a substantial backlog at the time, but it will seem small compared to our current projections for the end of this year. This situation really interrupted the usual seasonal patterns in the home standby business. Typically, Q1 is the slowest quarter for this category, as colder winter months make installations more challenging, leading to a drop in demand. Weather conditions are generally milder during this time, and it isn't hurricane season. Given that our backlog is expected to remain high, Q1 will rely heavily on weather conditions. If winter is particularly harsh, installations may be delayed until the ground thaws. However, we are experiencing strong demand in certain areas of the Southeast, South Central, and the West, where installations can continue smoothly from January through March. You're absolutely correct; this will significantly alter the usual seasonality we see in the business.
Jed Dorsheimer, Analyst
Got it. And so just as a follow-up, completely separate topic. But as you mentioned the increase in the renewable, as well as that on the 26 kilowatt, for example, on the standby and the PowerView Home app that you have. I'm wondering if you could articulate the monetization plans around the increased level of data and intelligence that you're now going to be getting from a microgrid or a supply-demand perspective that you may have. How should we think about that?
Aaron Jagdfeld, President and CEO
Yes, it's very exciting, Jed, and I believe we're just at the beginning of this journey. The concept of treating an asset that has traditionally been seen as insurance is new. People typically buy a home standby generator to safeguard their home and family from power outages. In the residential market, the decision often involves emotional rather than financial considerations, as the return on investment for these products isn't significant. Sure, you might save the contents of a freezer or possibly benefit from a discount on homeowners insurance, which is becoming more accepted. However, it's challenging to establish a payback model that extends beyond the peace of mind factor. Looking ahead, we believe there’s potential for these products to be marketed differently. We're exploring how we sell our power cell storage systems, which initially focused on ROI but has shifted more towards resiliency. We see an opportunity to further monetize backup power. While I can't provide a detailed answer right now, we're considering models such as a Power Purchase Agreement where a third party owns and operates the generator, allowing homeowners to pay a monthly fee and receive a credit on their power bill. Ultimately, different formats will emerge. We're actively engaging with several utility companies and grid operators to define what that model should be, and details will become clearer as the market and incentive structures evolve. I expect that by 2021, we can offer more specific guidance, particularly regarding the Enbala segment, where the revenues are linked to software.
York Ragen, Chief Financial Officer
Enables us to do more things.
Aaron Jagdfeld, President and CEO
Exactly. It's an enabler for us. As this enabler takes root, I believe we will have clearer ideas on how to monetize it. The chance to sell more equipment simply because it changes the product category from just providing peace of mind to one that can be monetized for homeowners, offering reduced energy costs or participation in a virtual power plant-type program, is exciting.
York Ragen, Chief Financial Officer
Same thing for C&I.
Operator, Operator
We have our next question from the line of Philip Shen with ROTH Capital. Your line is open.
Philip Shen, Analyst
Hey guys. Thanks for the questions.
Aaron Jagdfeld, President and CEO
Hey, Phil.
Philip Shen, Analyst
I wanted to explore a couple of key topics in more detail. First, regarding the new site location, can you share when you expect to finalize your decision on where it might be? Also, could you provide a short list of potential locations? Additionally, you mentioned that the increase in capacity isn't quite double, so I assume it's around 70% to 80%. Following up on the slower season, typically seen in the first half of the year, is it possible that you may experience no slow season at all this year, where the exit run rate of Q4 volume could carry into Q1 and Q2?
Aaron Jagdfeld, President and CEO
Yes, I'll address the first part of your question, Phil, and then let York discuss the seasonality. We are currently assessing a number of locations for manufacturing. The majority of our production in the U.S. is based in Wisconsin, where we operate six factories and have a strong appreciation for the state. However, our customers are located further west and to the south, so we're considering sites in Wisconsin but also looking at Northern Texas and the Carolinas. We expect to make a decision in the next 30 to 60 days, as we want to negotiate locally to familiarize ourselves with regional regulations. Our goal is to have the new facility operational by mid-year next year and fully ramped up by the end of the year. We've already placed orders for machine tooling that require longer lead times, and that outlines our approach to increasing capacity. Now, regarding utility utilization, over to you, York.
York Ragen, Chief Financial Officer
Yeah, in terms of seasonality for next year, while we're not giving guidance for next year, our backlog is significant now. We're going to continue to evaluate what that looks like at the end of the year and entering next year. From a production standpoint, you're right. We’ll be producing full speed throughout all of next year, meaning we won't have that lull in the first quarter and building into the second quarter and then maxing out on the second half.
Philip Shen, Analyst
Great. Thanks for that color. Really helpful. As it relates to any pinch points in the manufacturing, are you constrained on any of your inputs at all, engine blocks or anything like that? And then shifting to clean energy, with the success that you guys are seeing in the marketplace based on some of the checks that we've done, are you possibly going to be able to deliver on more than 125-megawatt hours of storage in 2020? At one point, you guys had a range of $125 million to $150 million, but I just wanted to understand if you have some upside there? Thanks.
Aaron Jagdfeld, President and CEO
Thank you, Phil. The supply chain is tight. We are actively collaborating with all suppliers to enhance their output levels, but they face similar challenges as we do with manpower. Managing factories in the current COVID-19 environment is difficult and adds complexity that complicates supply chain operations. Currently, we are in a stable position, but we need to keep working with suppliers to increase maximum capacity in the long term, which means the supply chain must also adapt. In challenging situations, we might consider adding new suppliers or alternative sources. We are managing this situation on a daily basis. Regarding clean energy, we are optimistic about the V-shaped recovery that is being discussed in the industry. We experienced a strong third quarter and it seems to be gaining momentum in the fourth quarter. Looking back a year, we've increased our revenues from $10 million to around $1.15 million as per our previous guidance. Achieving this in a year, alongside the prospects of our new product pipeline, excites me. Our teams are working diligently, and Russ Minick, who leads our energy sector, has effectively guided the team.
York Ragen, Chief Financial Officer
And we anticipate turning profitable in Q4, which is another plus.
Aaron Jagdfeld, President and CEO
Yes, September was our first month of profit in that business, and Q4 is going to be nicely profitable as well. We anticipate accelerating off that as we’ve laid out previously.
Operator, Operator
We have our next question from the line of Mark Strouse with JPMorgan. Your line is open.
Mark Strouse, Analyst
Good morning. Thank you very much for taking our questions.
Aaron Jagdfeld, President and CEO
Good morning.
Mark Strouse, Analyst
In an effort to completely beat a dead horse, I'd like to go back to capacity. Can you just kind of give some color on how you came up with that 70% to 80% expansion? Is there a target utilization rate that you're going for? And I guess, how much wiggle room do you foresee leaving yourself before you are looking for a third site?
Aaron Jagdfeld, President and CEO
It's a great question, Mark. The way we think about sizing a factory and this new site, we want to size it to keep utilization in the 80% range. We traditionally see risk of equipment shutdown and overtime when you exceed that level. So sizing it, we want a factor that gives us some room for seasonal demand. The $70 million to $80 million that we called out as an increase is a function of that 80% utilization assumption. We'll be keeping this market in mind, preventing any issues that could arise from demand that exceeds current supply. That’s how we’ve come to those conclusions. But, of course, if demand increases, we’ll be talking about a third facility down the line.
Mark Strouse, Analyst
Okay. That's very helpful. Thank you. And then just a quick follow-up, York. Are you able to say, what percentage of the increase in the guidance for this year was organic versus the acquisitions?
York Ragen, Chief Financial Officer
The acquisitions were relatively small to the increase in the guide. If we went from 5% to 8% to 10% to 12%, it was not even 1%.
Aaron Jagdfeld, President and CEO
Not even a full percent.
Operator, Operator
We have our next question coming from the line of Brian Drab with William Blair. Your line is open.
Brian Drab, Analyst
Hi, good morning. Obviously, very impressive results. I was just wondering on the capacity expansion. Can you talk at all about how much it will cost to set up this facility? And then, I guess, if you're saying around 80% expansion, we're talking about a facility that can do something like $800 million in revenue. That’s the ballpark for the capacity? I'm trying to get a sense for what the return on investment is for this expansion.
Aaron Jagdfeld, President and CEO
It’s a great question, Brian, and one that we don’t make any decision around here unless we’re looking at the return that we can get for the money that we invest. The home standby category is unique and special for us. It’s very difficult to come up with any kind of investment number that we don’t get a great return on given the profiles and growth rates of those products. Some of the spending is still open on whether we’ll lease or own the facility, but until it’s all pinned down, it would be premature to give any kind of a number. Typically, we guide those capital spending budgets at around 2% to 2.5% of revenues. Next year, we’ll probably be in that 2.5% to maybe 3%. We’re not talking about hundreds of millions here for a new facility; it’s something much less than that.
Brian Drab, Analyst
I didn't have any prior knowledge, but I assume you're in the $50 million range or lower, and that you can generate a few hundred million in EBITDA from this facility. It appears that the return on invested capital is exceptionally high. I was attempting to gauge that softly.
York Ragen, Chief Financial Officer
Great return.
Aaron Jagdfeld, President and CEO
The ROI is excellent.
Brian Drab, Analyst
It seems like it's well over 100%. I'll follow up with two more later on that. Can you quickly comment on the C&I? I know that rental CapEx is down for the year, but are there trends that are improving? Does that bode well for growth on easy comps for C&I in 2021?
Aaron Jagdfeld, President and CEO
The C&I business, actually, the stationary C&I business, kind of our legacy C&I business is actually decent. It was better than we thought it was going to be in the quarter. But mobile just continues to struggle, the mobile equipment sector. From everything we've seen in the marketplace and talking to our customer base, we're pretty much in line with everybody else. It's an industry-wide issue with fleet utilization rates and capital spending pullback by the large nationals. We're eagerly watching them to understand their guidance for next year on spending to discuss this with them now. I think, based on everything I've seen, if it's a recovery next year, it's a back half recovery, in my opinion. There could perhaps be acceleration if there's some significant infrastructure aid that hits earlier in the process. But until that happens, I think 2021 will be a recovery year, likely in the back half of the year.
Operator, Operator
You have your next question from the line of Ross Gilardi with Bank of America. Your line is open.
Ross Gilardi, Analyst
Hey, good morning guys. Thanks for squeezing me in the end.
Aaron Jagdfeld, President and CEO
Good morning, Ross.
Ross Gilardi, Analyst
I just was wondering, is there any pricing opportunity here beyond the norms? I mean, you're sold out, the lead times are extended, you dominate the market here. Is that something that could generate some upside for you? Just like what's your pricing philosophy in the cycle market?
Aaron Jagdfeld, President and CEO
It's a great question, Ross. We have two angles on pricing to discuss. One is the normal seasonal discounting patterns that we effectively haven't needed to apply; by avoiding discounting, we are achieving better pricing. Affordability remains important in the home standby segment. The second aspect of pricing is that we continue to introduce products that help us increase the average selling price, which we achieved with the introduction of the 24-kilowatt machine. Interestingly, homeowners benefit from savings at the per kilowatt rate while installation costs remain approximately the same. We have adjusted some pricing through new product introductions and reduced discounting. As we develop our 2021 plan, we will consider pricing in light of potential cost challenges that may arise. At this point, I wouldn't say we will or won't adjust pricing until we have assessed all the factors.
Ross Gilardi, Analyst
I want to ask about your distribution. Your presence has significantly grown, especially in California, but as you highlighted, demand is widespread. I believe there were 300,000 people without power in Oklahoma recently, and you've seen Midwest storms affecting ice states, including Utah. Do you have distribution in all these areas to capitalize on that demand? Are you planning any investments, even with third-party distribution, to make sure you’re maximizing opportunities since demand seems to be everywhere beyond the typical hotspots for Generac?
Aaron Jagdfeld, President and CEO
That's the unique thing about this business, Ross. I've seen this before with Generac; when you have events happening, whether an ice storm in Oklahoma, demand rises in areas of the country we don’t normally serve. Initial surges often come from contractors, retailers, and electrical wholesalers, so our omnichannel distribution strategy is essential. The dealer channel is the best way to acquire this product for homeowners to make the process as pain-free as possible. However, new markets will require us to build awareness. We’ve been working to build distribution in California, and adding more dealers, educating inspectors and other regulatory authorities has been critical for us here, considering many have never written a permit for a generator before. We will be making investments in distribution training to improve our operational efficacy.
Operator, Operator
We have our next question from the line of Jeff Hammond with KeyBanc. Your line is open.
Jeff Hammond, Analyst
Hey, good morning, guys.
Aaron Jagdfeld, President and CEO
Good morning, Jeff.
York Ragen, Chief Financial Officer
Hi, Jeff.
Jeff Hammond, Analyst
So my questions are on the CE side of the business. Just, I think you talked about a 30% attach rate on new solar installs. Can you just talk about what you think the long-term opportunity is? And then, just kind of update us on where you are in terms of introducing something that could go at the retrofit side?
Aaron Jagdfeld, President and CEO
So the attachment rate first of all, it has blown past all our expectations. In terms of the 30% rate, it surprised many in the market. Where it could go long-term? There are projections out there that suggest a 50% attachment rate may be possible. Some of our customers are over 60% when they’re in strategic markets where net metering isn't as favorable. We work to ensure that the economics justify a storage system as being essential to solar energy systems. The retrofit market has potential. There are a couple of million rooftops with solar set up already. We’ve got new product offerings shooting for next year that will reduce complexity and ease a customer's ability to retrofit systems.
Jeff Hammond, Analyst
Okay, great. Thanks guys.
Aaron Jagdfeld, President and CEO
Thanks Jeff.
Operator, Operator
We have our last question from the line of Tommy Moll with Stephens. Your line is open.
Tommy Moll, Analyst
Good morning and thanks for taking my questions.
Aaron Jagdfeld, President and CEO
Hey Tommy.
Tommy Moll, Analyst
I want to follow-up on the home standby business. So, this has been a great year. It sounds like with backlog increasing to new record levels next year shaping up as well. A lot of the commentary around capacity indicates that you're confident. So my question is, what have you seen change, in terms of the medium-term demand outlook here? I suspect this isn't just a response to the pandemic; there’s a broader base and more durable improvement in this market.
Aaron Jagdfeld, President and CEO
No, it's something we’re reflecting at a high level in our boardroom. The words we’re using are: Are we at a tipping point? We’re approaching about 5% penetration of single-family homes $100,000 or more in value – 53 million homes in total as our market. By the end of the year it will represent only about 5%. That means 95% still don't have the product. With the trends, specifically, the impact of the pandemic has certainly accelerated long-standing issues, like telecommuting. If we had faced the pandemic ten years or five years ago, it would have been much more difficult to cope. In order to operate and enable a home to be a workplace, classroom, gym, or shop, a power source is crucial. The increasing experience of outages indicates that, where power was once just nice to have, the situation is growing into a necessity.
Operator, Operator
We have no further questions at this time. I will now turn the call back over to Mike Harris.
Mike Harris, Vice President of Corporate Development and Investor Relations
We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2020 earnings results with you in mid-February of next year. Thanks again, and goodbye.
Operator, Operator
This concludes today's teleconference. You may now disconnect.